photo by Jason Howie
A decade is not an unusually long time to wait for regulatory guidance, especially on topics that are not bright lights on the political radar. Even in our day-to-day lives, 2004 may not seem all that distant.
But shift the context and things look different. In April 2004, Facebook (at the time “Thefacebook”) was a whopping two months old and was only available to students at Harvard, Columbia, Stanford and Yale. LinkedIn had launched less than a year prior, and was still years away from entering the mainstream. Twitter was barely a sparkle in its creators’ eyes; the world’s first tweet wouldn’t appear for another two years. Gmail was brand-new and invite-only. There was no YouTube.
Suddenly 2004 seems much farther away.
The Securities and Exchange Commission is finally catching up. Last week, the commission’s staff issued new guidance for financial advisers who use, or have clients who use, various third-party websites and social media platforms. Until now, registered investment advisers (including my firm’s RIA affiliate) have had to create their own social media compliance policies largely without clearly defined boundaries regarding how the SEC expected us to use these new communications channels.
The recent update focused on one of the two major rules RIAs worry about when using social media: the general prohibition on “testimonials” in the investment adviser’s advertising. The commission’s longstanding position is that The Investment Advisers Act of 1940 prohibits advisers from quoting or circulating testimonials, which are not defined by the law, but have long been taken to encompass a description of a client’s experience or an endorsement of an adviser’s skills. The SEC believes testimonials are inherently misleading because advisers will usually cite only good experiences or positive outcomes, giving potential clients a lopsided view of the adviser’s success.
Before social media, testimonial rules neatly applied to marketing, and they were reasonably clear-cut. But in the world we now inhabit, being “liked” or marked as somebody’s “favorite” doesn’t always mean that you are actually someone’s favorite or even that you are particularly liked. Moreover, investment advisers don’t always have control of whether a third party talks about them online, let alone control over what that third party might say.
Until now, RIAs have mainly addressed the intersection of the testimonial rule and online reviews or discussions through common sense and consistency. Our firm, for example, has long had policies in place about social media use; these policies evolve as sites and social networks change and guidance emerges.
The new SEC guidance is not carte blanche. The testimonial rule is still in place. But for advisers who worried about nonemployees discussing their business on a site like Yelp or Angie’s List, the SEC has drawn a clear distinction. If the site is not affiliated with the adviser, and displays both good and bad feedback with no way for the adviser to remove or alter the latter, the adviser need not worry, and can even direct potential clients to such reviews as long as all reviews are included. You cannot quote a positive Yelp review, but you are allowed to say “Check us out on Yelp.”
Further, the SEC has clarified that if a client likes the adviser so much she chooses to make a fan page, on Facebook for example, that’s not the adviser’s worry (though the adviser should remain wary of linking to such a site from its own website or social media accounts). As long as RIAs are diligent in controlling the accounts that they can, such as their firm’s company Facebook page or website, they no longer need to patrol the Internet, looking for potential testimonials on third-party sites and asking posters to remove them. Their own sites, and their own employees, are advisers’ main purview.
I think this guidance is practical and sensible. The SEC’s focus on communications and advertising that RIAs authorize or purchase seems reasonable, not to mention more realistic than expecting advisers to control what unrelated individuals write on independent platforms. Rather than having to explain over and over to professional contacts in different industries that though they mean well, they can’t endorse investment-related skills on LinkedIn, advisers can concentrate on making sure their own employees know better and leave it at that.
The SEC also clarified that lists of people who like or follow a social media account do not count as “endorsements” - which is good, because many social media channels don’t let you conceal such lists. As long as RIAs do not try to claim that everyone who follows them is a client or supporter, they should be in the clear, even if clients want to be among those friends or followers.
Jennifer Openshaw, president of Finect, said the guidance “is a positive step forward for the industry.” She suggested it might be a source of encouragement for investment advisers to be more proactive online. Michael Kitces, author of the blog “Nerd’s Eye View,” wrote that the new rules “follow a logical path to determining whether certain social media actions could constitute testimonials,” though he observed that a great deal of ambiguity remains.
Others still urge erring on the side of caution, including Yasmin Zarabi, the vice president of Legal & Compliance for Hearsay Social, who wrote that “In general, advisors should avoid soliciting client feedback in a way that may frame a Facebook like or a third-party post as a testimonial.” Zarabi encourages advisers to avoid LinkedIn endorsements entirely, exercise caution when linking to third-party sites, and include disclaimers on social media accounts in an effort to avoid any potential appearance of violating the guidelines. Clearly, given the range of reaction, the SEC’s recent guidance is merely a step in the right direction.
Earlier in this post, I mentioned two major rules RIAs worry about when using social media for business. Besides testimonial rules, social media raises concerns about communications rules too. Advisers are required to maintain records of communications with investment clients and other parties. The new guidance does not address recordkeeping on social media. Can an adviser engage in communication via Facebook timeline posts and comments, or via direct messaging on social networks that offer it? The new guidance does not speak to this issue at all.
Trade publications recently quoted an official at the SEC’s Investment Adviser Regulation Office saying: “Broadly, firms that communicate through social media must retain records of those communications covered by the record-keeping rule. It’s really the content that’s determinative rather than the form of communication used.” But are advisers effectively forbidden from communicating with clients on social media? If not, are they required to keep screenshots of substantive discussions (which are probably inappropriate for such platforms anyway) and friendly banter alike? The rules are not clear, and the SEC staff will probably have to revisit the social media issue to deal with such concerns in the not-too-distant future.
We can’t expect the SEC staff to stay on top of every new technology and communications channel, so we are best served by regulators who base their guidance on common sense and common principles that RIAs can apply to new situations as they arise. Last week’s release does exactly that, taking a sensible and reasonable approach in applying old rules to new technology. Staying on this path will be good for the public, the industry and the SEC itself, whatever may come in the next 10 years.