Once again, technology has leapfrogged regulation. The rise of social media has compelled the SEC to clarify and update rules written when the media landscape was more black and white – as in newsprint.
The rule in question is 206(4)-1(a)(1) of the Investment Advisers Act of 1940, the “testimonial rule.” It prohibits investment advisors from using client endorsements in their advertising. Testimonials are inherently misleading, the SEC previously ruled, because they selectively use favorable comments while editing out the unfavorable.
Fast forward to the age of Yelp and other user-generated review sites, where opinions both negative and positive flow freely and often vociferously. Consumers increasingly turn to review sites and online communities for help in selecting everything from a car to a restaurant, or even a doctor or lawyer. So why not an investment advisor?
Of course, review sites are not entirely immune to deception and manipulation – which is what worries the SEC. That’s what led to the latest guidance on the testimonial rule as it applies to social media. The SEC ruled that advisors may refer to favorable comments in their advertising, provided the comments originated on an independent site where both positive and negative views are freely aired. The advisor cannot exert any influence on the site, such as paid advertising, nor can it offer any favors to the client, such as a fee discount, in exchange for a favorable review.
Miguel Rodriguez leads Advent’s social media program. In his role, Miguel is responsible for Advent’s social presence including Twitter, Facebook, LinkedIn, YouTube, and Advent’s blog. Follow Miguel on Twitter.