The staff of the SEC’s Division of Investment Management (the “Staff”) issued IM Guidance Update No. 2014-4 discussing how a registered adviser or its investment advisory representatives (“IARs”) may use public commentary about them that appears on independent, third‑party social media sites without violating the general prohibition against testimonials in advertisements set forth in Rule 206(4)-1(a)(1) under the Investment Advisers Act of 1940 (the “Testimonial Rule”). In a question and answer format, the Guidance Update reviews the circumstances under which such social media commentary may be used in adviser advertisements that are themselves broadcast through social media or the internet by “hyperlinking, posting, live streaming, tweeting, or forwarding or any similar public dissemination” (all such broadcasts being referred to as “Republication”). In general terms, the Guidance Update provides that “[w]hen an investment adviser or IAR has no ability to affect which public commentary is included or how the public commentary is presented on an independent social media site; where the commentators’ ability to include the public commentary is not restricted; and where the independent social media site allows for the viewing of all public commentary and updating of new commentary on a real-time basis, the concerns underlying the testimonial prohibition may not be implicated.”
The Guidance Update presents the following three principal conditions for Republication to comply with the Testimonial Rule:
- the independent social media site provides content that is independent of the investment adviser or IAR;
- there is no material connection between the independent social media site and the investment adviser or IAR that would call into question the independence of the independent social media site or commentary; and
- the investment adviser or IAR publishes all of the unedited comments appearing on the independent social media site regarding the investment adviser or IAR.
In addition to explaining these conditions, the Guidance Update also addresses various aspects of social media that may implicate the Testimonial Rule such as the ability to sort comments, averages of commenter ratings, inclusion of subjective analysis of public commentary, presentation of friends or contacts on an adviser or IAR social media site, adviser advertising on third party social media sites, and third party community or fan sites. The Guidance Update also discusses the circumstances under which an adviser’s non-social media advertisements may refer to public commentary on independent third party social media sites. The Guidance Update notes that even if an advertisement uses third party social media commentary without raising concerns under the Testimonial Rule, the advertisement must still comply with the broad anti-fraud provisions of Rule 206(4)‑1(a)(5) under the Advisers Act.
The Guidance Update includes a background discussion of SEC and Staff positions on the Testimonial Rule and announces that the Staff “no longer takes the position, as it did a number of years ago, that an advertisement that contains non-investment related commentary regarding an IAR, such as regarding an IAR's religious affiliation or community service, may be deemed a testimonial violative of [the Testimonial Rule].”