RIA Family of Companies

Compliance Fines – Client Testimonials on Yelp & Social Media

By Cory Roberson, Principal at RIA Review, RIA Consults, FIN Community
August 11, 2018.  Last month, the Securities and Exchange Commission (“SEC”) charged two SEC-investment advisory firms, three investment advisor representatives, and a marketer with violations to its “Testimonial Rule” (ref. Rule 206(4)–1(a)) due to the groups alleged misuse of advertising on social media platforms.


In the claim, the SEC accused the advisors of hiring a marketer to solicit client testimonials and publish them on various platforms and/or on its own websites.  The testimonials, featured on sites such as Yelp and YouTube, included references to the services offered by the firms.

Violations come with heavy fines

The verdict came with a cease-and-desist order and civil penalties in the amount of $35,000 for the marketing firm, $15,000 each for the three advisory firms, and $10,000 each for the representatives. 

Notably, the marketing firm received the largest fine as the commission deemed the third-party as having the biggest financial liability in the case.  With that said, it is important to note that firms shouldn’t rely on marketing agencies for advertising unless they are versed on compliance rules.

SEC’s Advertising Guidelines revisited

Rule 206(4) -1 of the Investment Advisors Act of 1940 (and similar state guidelines) prohibit firm’s from directly using client testimonials in its advertising materials.

An advertisement, as defined by Rule 206(4)-1, can include a: newsletter, website, podcast, webinar, presentation, letter, graph, formula, announcement, press release, publication, or any other materials that are addressed to more than one person. 
The advertising rule focuses on four areas:

Materials featuring a client endorsement:  Rule 206(4)-1(a)(1) prohibits advertisements that “refer, directly or indirectly, to any testimonial concerning the adviser or any advice, analysis, report or other service rendered”;

Example: “XUA Advisors really knows how to make me a lot of money over a short time period.  Their services will assuredly help anyone like me on the road to aggressively grow their portfolio.”  --Client Fred Flintstone.

References to a past profitable trade:  Rule 206(4)-1(a)(2) prohibits an adviser from displaying “past specific recommendations … that were or would have been profitable to any person”.

Example: “On May 1st, we made Client A 30% on of our recommendation to buy XYZ stock at $30 following the company’s earnings report in February. We exited at $39 for a sweet profit.  Let’s see how we can provide you with similar trading opportunities.”

Materials that can be construed to buy/sell a specific security:  Rule 206(4)-1(a)(3) prohibits advertisements claiming that “any graph, chart, formula or other device can by itself determine whether to buy or sell a security”;

Materials with misleading statements:  Rule 206(4)-1(a)(4) prohibits any statements that reference services (advice, reports, or analysis) as free or without charge, unless offerings are such.

Examples of misleading statements can also include: (1) referencing professional designations that have lapsed on a Part 2B supplement (see report on “touting initiative), (2) inflating assets under management on a firm website, and/or (3) making representations that the firm is registered in certain jurisdictions.

Ref:  https://www.sec.gov/ocie/announcement/risk-alert-advertising

How to avoid testimonial violations on Yelp (or other social media platforms)? 
Let’s look at guidance released by the SEC’s Division of Investment Management on social media. 

Guidance: Case Studies (Q & A):

Q1:  Can an advisor publish commentary that may include a summary of the client’s experience?
A.  No.  The SEC would likely deem this as a “testimonial rule” violation.

Q2:  Can an advisor post public commentary from a third-party (e.g. Yelp) onto its website?
A.  No. That is a likely violation if/when the firm asks clients to post testimonials or choose to reference these comments to its own advertising mediums.  With that said, the SEC doesn’t have a problem when clients choose to post material (without involvement from advisor) on sites like Yelp.

Q3:  What are other examples of client testimonials that can hold an advisory firm liable?
A.  Ads authored by an advisory firm or marketing campaigns by a third-party used to solicit testimonials (ref. cease-and-desist order).

Q4:  Can an advisor post results from a third-party ranking system onto its site?
A.  Yes. If the results include: (1) Time period of ranking, (2) Methodology used, and (3) criteria for its analysis (ref. “Touting Initiative”).


Should our firm become apprehensive about having a Yelp account?

Over the last few years, we received many concerns from advisors who have a Yelp account.  The consensus was that many of its clients had inadvertently posted a recommendation about the advisor’s services on its profile without their knowledge.

There are no prohibitions from opening a Yelp account to advertise your business.  As seen in the guidance, the SEC has not recommended enforcement against firms whose clients (on their own accord) have posted testimonials on a social media sites.  With that said, advisors should not influence clients to make endorsements/testimonials or post them on the firm's website.   

Generally, sites like Yelp will not remove client testimonials as our attempts to achieve this feat proved futile in the past.   Why---Yelp is not held under the SEC Advisors act, and as such, clients can choose to post recommendations on those sites (under FTC’s guidelines). 

As a reminder, do not encourage, endorse, nor pay for any client testimonials.

Client testimonials for broker-dealers and hybrid firms (FINRA)

Broker-dealers

Under FINRA Rule 2210 “Communications with the public”, client or expert testimonials are allowed if it is based upon a valid opinion of services or investment strategies offered by the brokerage firm. 

Aspects of the rule include the following:

Testimonials concerning a technical aspect of investing must be made by persons with the knowledge and experience to form a valid opinion.

Retail communications, which include a testimonial about investment advice or performance, should include a statement such as: “past performance or experience of others is not a guarantee of future success.”

And lastly, a disclosure is required if a brokerage firm pays more than $100 for testimonials.

Hybrid firms (broker-dealers and investment advisors)

Broker-dealers, who are also investment advisory firms, should consider avoiding testimonials unless it can prove that the brokerage testimonials are not tied with the other business, clients, or services.  This will be a hard feat to prove if activities are intertwined.  Avoid them if/when necessary.

Compliance Webinars: Learn More about compliance topics

To advance the customization of compliance programs, we launched a training video series (including “advertising guidelines”) as a part of our compliance management system at RIA Review.  

RIA Review is a documentation-based solution to help boutique investment advisors to maintain an internal compliance review program. Sign up at: https://RIAreview.com



Our Premium and Premium Plus users will have access to our recorded webinar library that contains insight on compliance rules issued by the: Securities & Exchange Commission (“SEC”), Office of Compliance Inspections & Examinations, Division of Investment Management, FINRA, state securities agencies, and the North American Securities Administrators Association (NASAA).


Our Mission: “Serving the Investment Community to Make a Social Impact

Investment Advisor/Compliance/Broker Dealer

Cory Roberson is Principal of RIA Review, a compliance and document management portal (www.riareview.com) - 130+ users and growing.  

He is also Principal of RIA Consults -Roberson Consults Group), a consulting firm providing compliance, operations, and business development services for registered investment advisors and next-gen fintech entrepreneurs (www.riaconsults.com).  To date, RIA Consults worked with more than 160 SEC & State advisors clients across the US (including a few in Europe).  Our integration division, RegConsults helps to mitigate compliance issues for other Fintech businesses.  

RegTech Products, a compliance tech notifications portal featuring RIA and other regulatory Products (SaaS/IaaS -beta) – http://regtechproducts.com

FinTech/RegTech/Crypto/Impact

Fin Community is a member rewards and business listing network featuring providers in the FinTech, RegTech, Crypto and Blockchain communities (website coming soon).  https://FINcommunity.io

As a social entrepreneur, through his mission-driven arm SoCap Missions (http://SoCapmissions.com), he provides business support group sessions and has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.

No comments:

Powered by Blogger.