In March 2014, the Securities and Exchange Commission (“SEC”) issued guidelines concerning the ability of registered investment advisers to use social media to disseminate testimonials or advertisements featuring public commentary about the adviser. The SEC issued these guidelines in response to increased demand from customers for independent commentary or reviews of service providers, including registered investment advisers. Currently, Section 206(4)-1(a)(1) of the Investment Advisers Act of 1940 (“Advisers Act”), known as the “Testimonial Rule,” prohibits any investment adviser from engaging in any act, practice or course of business that the SEC defines as fraudulent, deceptive or manipulative. Specifically, section 206(4)-1(a)(1) states “[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice or course of business . . . for any investment adviser registered or required to be registered under the [Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.” Prior to issuing the guidelines, the SEC took the position that advertisements with testimonials were misleading because they emphasized comments and activities favorable to the adviser and ignored those that were unfavorable. In the recently issued guidelines, the SEC analyzes what constitutes a “testimonial,” which although not defined in the Adverse Act, may include public commentary made by a client about his or her experience with, or endorsement of, an investment adviser or a statement made by a third party about a client’s experience with, or endorsement of, an investment adviser. The guidelines emphasize that an adviser’s publication of an article by an unbiased third party regarding the adviser’s performance is not a testimonial, unless it includes a client endorsement. The determination of whether advertisements on social media constitute a prohibited testimonial is extremely fact specific. The SEC guidance assists investment advisers in developing policies and practices for participating in social media without violating SEC rules regarding public commentary in testimonials. Advisers should consult guidelines before posting advertisements or testimonial on social media. The guidelines can be accessed here: http://www.sec.gov/investment/im-guidance-2014-04.pdf
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