By Cory Roberson, Principal at FIN Compliance 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”).
Visit the complete SEC guidance for interpretations here
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.
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”
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FIN Compliance (FinCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), RegTech Products is a product notification portal for product offerings in financial service markets.
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Impact
SoCap Missions (socapmissions.com) provides business support group sessions. In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.
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