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Client Testimonial Rules Should Be Facebook and LinkedIn Friendly... But They're Not!

By Rita Raagas De Ramos November 8, 2018

The SEC’s rules on the use of testimonials are grossly out of date and don’t take into consideration how consumers use social media, advisors believe.

The Advertising Rule within the Investment Advisers Act of 1940 prohibits advertisements that refer – directly or indirectly – to any testimonial concerning the advisor or any advice, analysis, report or other service provided by the advisor.

The rule badly needs updating, according to Karen Barr, president and CEO of the Investment Adviser Association.

“Because of the varied and broad interpretation placed by the SEC on the testimonial rule, there are a lot of barriers to using social media,” she said at a media briefing during the Schwab Impact 2018 conference in Washington, D.C. last week.

The Advertising Rule prevents any endorsement of any advisor or firm on Facebook or LinkedIn, for example, according to Barr.

“You have to worry about people liking your firms’ Facebook or LinkedIn page – or your own Facebook or LinkedIn page. It really puts a damper on social media for investment advisors,” she said.

“We’re hopeful that the SEC will make the rules more principles based, a little less rigid, and really let the investment advisers enter the modern age,” she added.

In 2014, the SEC’s Division of Investment Management released some guidelines on the use of testimonials in response to demand for clarifications from advisors.

At that time, the SEC acknowledged social media has facilitated the consumer’s ability to research and conduct their own due diligence on current or prospective service providers.

“We’re hopeful that the SEC will make the rules more principles based, a little less rigid, and really let the investment advisers enter the modern age.”
Karen Barr
Investment Adviser Association

The guidance noted that the term “testimonial” is not defined in its rules, but the Commission has “consistently interpreted” that term to include a “statement of a client’s experience with, or endorsement of, an investment adviser.”

The SEC said the use of testimonials is misleading. “By their very nature, they emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable,” according to the guidance.

The SEC forbids the use of testimonials by an investment advisor in advertisements “because the testimonial may give rise to a fraudulent or deceptive implication, or mistaken inference, that the experience of the person giving the testimonial is typical of the experience of the adviser’s clients,” the guidance adds.

In September, the SEC settled with Overland Park, Kan.-based Creative Planning and its president and majority owner Peter Mallouk for $250,000 over alleged distribution of prohibited client testimonials. The firm, which oversaw around $36.2 billion as of July 23, 2018, allegedly distributed hundreds of advertisements on the radio that contained prohibited testimonials, according to the SEC.

Last year the SEC announced it was stepping up scrutiny of how RIAs tout themselves in marketing materials, issuing a risk alert that highlighted common violations of the Advertising Rule.

The SEC’s Office of Compliance Inspections and Examinations identified the use of client testimonials by RIAs on their websites, social media pages and in other media as being among the most frequently occurring compliance issues.

Also last year, self-regulator Finra rolled out new guidance notes to help advisors understand how to use social media -- its third on social media and digital communications since 2013. It clarifies that unsolicited social media comments aren’t testimonials — unless advisors endorse the comments by "liking" or "sharing" them.

Finra’s guidance on social media and websites follows a similar pattern in determining when advisors “adopt” third-party materials and comments. By linking to outside content such as text or video, for example, advisors adopt that content.

The results of the most recent Putnam Investments survey about the use of social media by advisors, published in April, show that social media is changing advisor-client relationships. Last November, Putnam surveyed 1,014 U.S. financial advisors who have had retail clients for at least two years.

“Advisors reported that it has improved both professional and personal relationships with their clients, thanks to more frequent communication and an easier exchange of information,” according to Putnam.

Around 83% of the advisors surveyed said social media has helped shorten the time required to convert a prospect into a client. Approximately 46% of the advisors surveyed consider themselves social media experts, but only 24% have had training by a hired third-party specialist.