Investment Advisers and the Securities and Exchange Commission have been struggling with the use of social media. Advisers see it as a way to communicate with clients and potential clients. The SEC sees it as an area ripe for fraud. Both are right.
The SEC has stuck fast to rules on advertisements when it comes to social media. The SEC does not care if the social media sites cannot meet the control and record-keeping standards. The SEC does not care if it’s hard to meet the standards. Clearly, the SEC is focused on investor protection in this area. The features of social media sites keep changing so it’s hard to keep the features in line with the SEC requirements.
But the SEC listens to the complaints and keeps releasing guidance in this area. The SEC released Investment Management Guidance 2014-4 that provides some additional guidance on the intersections of testimonial and social media sites.
Rule 206(4)-1(a)(1) prohibits the use of testimonials in an investment adviser’s advertisements. The SEC considers the publication of testimonials to be inherently misleading because “they emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable”.
The SEC did make an exception for third party rankings. See DALBAR.
The new guidance merely points investment advisers to the prior guidance on testimonials and tries to add some context to the use of social media sites. I think most advisers will not find much good news in the guidance.
In looking through the questions and answers I only see Yelp and its copycat sites being allowed by the guidance. I assume many thought the guidance would be an endorsement of Facebook pages, but that feature seems to fall outside the acceptable areas allowed by the guidance.
A Facebook page is controlled by the publisher (the adviser) and is therefore not an independent site. The SEC requires the social media site to be independent. Others may see some wiggle room in allowing ratings on a Facebook page for investment advisers. I think you need to be very cautious because the feature and controls on Facebook pages change rapidly and inconsistently.
That leaves Yelp and its copycats that rate businesses. I already see a few ratings of investment advisers in Boston.
The Guidance points out that recommendations posted by the adviser or its employees are strictly prohibited. Similarly, an adviser can’t pay for recommendations or offer discounts to clients to post commentary.
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