SEC OKs use of third-party social-media endorsements

Investors will be able to read testimonials about a prospective financial adviser online, much the way they now read restaurant reviews in deciding where to dine, according to guidelines issued last week by the Securities and Exchange Commission.
The SEC Division of Investment Management published the guidelines, which industry experts said should encourage more advisers to use social media to promote their firms.
Under the guidelines, advisers can publish public comments about their services that are posted on independent websites as long as they include both positive and negative reviews.
Posting comments on a financial adviser’s website from independent review sites, such as Yelp or Angie’s List, is permissible if the adviser has no connection to or influence over the third-party site and the adviser publishes all the comments, unedited.
The guidance shows that SEC regulators “realize the world is changing” and are trying to adapt rules written during the Great Depression to the Internet era, said Steve Nadel, a partner at law firm Seward & Kissel.
“They SEC put a lot of thought into [the guidance],” Mr. Nadel said. “They clearly consulted with people in the social media space who understood that area.”
The fact that the SEC has provided more details on social-media compliance may give advisers greater confidence to use Facebook, LinkedIn, Twitter and other sites for business rather than just research.
“It’s been more of a passive, educational resource,” Mr. Nadel said. “They may revisit and potentially expand how they use social media.”
Jennifer Openshaw, president of Finect, a compliant social-media platform for advisers and other professionals, also sees the SEC guidance as a source of encouragement for advisers to become more active online.
“This is a positive step forward for the industry,” she said. “It’s a world not to be ignored.”
The SEC guidance didn’t answer every question an adviser might have about using social media, but it was explicit about reviews that are posted there. The SEC warned that advisers shouldn’t try to influence how they’re portrayed on those sites, if they want to link to them on their own web pages.
Advisers would violate the SEC’s testimonial rule if they drafted or submitted comments to a third-party review site, paid others to submit favorable comments to the site or suppressed, edited or manipulated the order in which the commentary was presented.
“The investment adviser may publish only the totality of the testimonials from an independent social-media site and may not highlight or give prominence to a subset of the testimonials,” according to the SEC guidance, which was provided in a Q&A format.
The SEC testimonial rule prohibits advisers from using client endorsements in their advertising.
Investment advisers can publish testimonials from an independent review website in a “content-neutral manner,” such as chronological or alphabetical order, according to the guide.
Adviser also can publish testimonials that include a mathematical average of the comments on the site.
“This rule would appear to put advisers in the clear regarding third-party review sites, such as Yelp, presuming that the adviser really does not have any affiliation to the site, and cannot control the comments posted (e.g., by trying to delete negative comments while allowing positive ones to remain),” Michael Kitces, director of research at Pinnacle Advisory Group, wrote on his blog, Nerd’s Eye View.
The SEC is trying to ensure that potential clients get the full picture of an advisory firm, Ms. Openshaw said.
“If you’re the end investor, you’ve got to know the good and the bad,” she said.
Finect recently released an online survey of 232 people that showed that half the respondents said that they want to communicate with advisers through social media but either can’t find them there or assume that they don’t use the medium.
According to the guidance, a “community” or “fan” page established independent of an investment adviser wouldn’t violate the testimonial rule, but the SEC strongly cautioned advisers about putting a hyperlink to the site on their own web pages because it might violate the ban on testimonials in advertisements.
The guidance also clarified that the SEC no longer considers non-investment commentary in advertising — such as that about an adviser’s religious background or community activity — a violation of the testimonial rule.

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