When does a click constitute an endorsement?

May 13, 2011 — 1:08 PM UTC by Les Abromovitz, Columnist


Let’s face it. I sometimes act like a guy who needs to be dragged into the 21st century. While that may be true, I’m hoping it is genuine compliance concerns that are making me very cautious about the use of Facebook and other forms of social media used by Registered Investment Advisers (“RIAs”).

Applying an old advertising rule to new technology

During an examination of an RIA’s use of social media for marketing purposes, regulators will be applying Rule 206(4)-1 under the Investment Advisers Act of 1940, or similar state rules, to technology that changes each day. Advertising rules and regulations prohibit the use of testimonials, as well as any content that is false or misleading in any way.

In some cases, applying that standard to social media is relatively easy. I saw an RIA’s LinkedIn site that was filled with testimonials and other non-compliant content. An RIA owes a duty to hide that content from public view. See: Advisor Tested: How LinkedIn can truly build your business and not just feed your ego.

Thumbs-up or thumbs-down on the Like button

Facebook issues are more difficult to resolve. One issue is whether clicking the “Like” button on an RIA’s Facebook page will be construed by regulators as a testimonial. In April 2010, Facebook changed its terminology from “Become a Fan” to “Like.”

In a discussion of this issue, one attorney at NCS argued that the individual was giving the Facebook page a thumbs-up, not the advisory firm. It remains to be seen if regulators will make that distinction. The SEC or a state regulator may decide that you can’t engage in any activities on Facebook that would not be permitted in a traditional advertisement. The problem, however, is that traditional advertisements, such as those found in newspapers and magazines, won’t necessarily reach a growing portion of the population. To reach younger prospective clients, RIAs will need to rely on social media.

Even if regulators accept that “Like” isn’t a testimonial, there will undoubtedly be content restrictions imposed on the use of social media when the SEC provides guidance on this topic. The SEC recently conducted a sweep exam to determine how RIAs are using social media, which is usually a prelude to words of wisdom from the Commission.

FINRA published excellent guidance for using social media, but that regulatory notice is more valuable to registered reps than RIAs and Investment Adviser Representatives (“IARs”). (http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120779.pdf) That regulatory notice does not address whether terminology such as “Like” constitutes a testimonial. This issue won’t necessarily apply to broker-dealers, because they are permitted to use testimonials if they are accompanied by specific disclosures.

Conservative versus aggressive choices

Essentially, there are two options for RIAs. One is to be very conservative, which I tend to be, and not use Facebook at all. A riskier approach is to move forward but to make a good faith effort to stay true to the intent of the advertising rule. This means enacting policies and procedures to make certain that the RIA is limiting the risks to investors arising from the use of Facebook. While you may not believe there is a risk, the SEC may decide that social media poses a threat to prospective clients and investors.

Although disclosures are almost never the remedy for an RIA advertisement containing a testimonial, it might help in situations where questions exist as to whether a particular word or phrase falls in that category. For what it’s worth, here is language that a firm might build upon:

Clicking the Like button does not constitute a testimonial for or endorsement of our advisory firm, any associated person, or our services. Clicking the Like button is merely a mechanism to circulate our Facebook page. “Like” is not meant in the traditional sense. In addition, postings must refrain from recommending us or providing testimonials for our firm. Because the SEC and state securities laws prohibit testimonials, any such postings are subject to swift removal.

Depending upon the content of the Facebook page, a number of other disclosures may be necessary.

Aside from adding robust disclosures, an RIA’s Facebook page must avoid marketing hype, specific recommendations, and language that might be construed as a guarantee. RIAs must also make certain that Investment Adviser Representatives aren’t using their personal Facebook page to market the firm’s advisory services.

Ultimately, regulators may use a facts and circumstances test to determine if an RIA’s Facebook page violates advertising rules. Rather than just looking at the Like button, regulators will weigh whether an RIA is using Facebook and other forms of social media in a misleading manner. If so, regulators aren’t going to like you.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.

Mentioned in this article:

NCS Regulatory Compliance
Consulting Firm
Top Executive: Mark Alcaide, COO/Partner

Share your thoughts and opinions with the author or other readers.


Ric Lager said:

May 13, 2011 — 3:38 PM UTC

It might be an intersting study for RIA’s and advisers to track which new clients they open advisory relationships with came to them through social media. A second characteristic of new clients to study is if the ones who came to them through social media were “young” or “old” investors. Maybe we will be surprised to find that social media can attract all age groups of investors who look for advice.

Ric Lager

<a href="http://www.lagerco.com/lager-company-about-us/" rel="nofollow">Guidance for your 401k Retirement Account At Work</a>


Bill Winterberg said:

May 14, 2011 — 6:10 PM UTC

I’ll be bold and state that the SEC will not provide guidance on this topic to registered advisers in the next twelve months.

With so many new requirements imposed by Dodd-Frank, the SEC has its hands full implementing those policies and procedures. I believe the Commission does not view the gray areas such as the “Like” button on Facebook as a high priority item for guidance or enforcement.

Bill @ <a href="http://fppad.com" rel="nofollow">FPPad.com</a>


Sarah Carter said:

May 15, 2011 — 5:35 PM UTC

We’ve taken the main three social networking sites, Facebook, LinkedIn and Twitter and reviewed FINRA 10-06, applying the features within the sites, to the guidance note, as to what RIA’s should be doing with features and content.



Scott Peterson said:

May 24, 2011 — 7:28 PM UTC

The SEC will never “decide that social media poses a threat to prospective clients and investors.” That would be shouting at the wind. They didn’t try to ban email and they won’t ban social media. They will adapt.

The SEC sweep letters that surfaced toward the end of last year focused upon the need for firms to have social media communications policy in place, including guidance on personal use of social media by employees, a training program, supervision, archiving, and in-house disciplinary actions for misuse.

Using a disclosure statement such as the one you suggest, Les, makes a lot of sense until the SEC — sometime in the future — comes out with their own FINRA-like guidance.

Scott Peterson www.signalboostfinancial.com


Les Abromovitz said:

May 25, 2011 — 2:31 PM UTC

Ric, Bill, Sarah, and Scott make excellent points. I believe the SEC will step in when an RIA gets caught orchestrating a campaign to have clients post favorable comments on the firm’s Facebook page or sends tweets that are purposefully misleading. I expect that we will see an enforcement action to send the message that even though the SEC hasn’t provided guidance regarding social media, the Commission will punish conduct that clearly violates Rule 206(4)-1.

Les Abromovitz, www.ncsonline.com


Scott Peterson said:

May 25, 2011 — 2:41 PM UTC

I agree, Les. Orchestrating a campaign to have clients post favorable comments on Facebook or Twitter most probably will be considered soliciting testimonials. A no-no any way you slice it.

Scott Peterson www.signalboostfinancial.com

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