Advertising Limitations for Investment Advisers on Social Networking Sites

While FINRA has a very strict limitation on advertisements focusing on procedures, investment advisers have a principles driven approach to limitations on advertising.

To start, an advertisement is any communication addressed to more than one person that offers (1) analysis concerning a security, (2) any information to used in making a determination to buy to sell a security, or (3) any investment advisory service with regard to securities. That means bulk emails, television ads, radio ads, websites, and social networking sites are advertisements. If you label yourself as an investment adviser in your Facebook profile, Twitter profile, or blog information, those sites are advertisements. Even if you use them solely for personal purposes, they may be considered an advertisement if you mention securities or offer your services.

Given the broad definition of advertisement, you should just assume that your activity on a social networking site is an advertisement.

Let’s focus on the things you can’t do in an advertisement and then come back to how they affect an investment adviser’s use of the internet and social networking sites. These all come from the general prohibition on fraud under Section 206 of the Investment Advisers Act.

First, you can’t have “any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.” That means no recommendations on LinkedIn or other social networking site. That means you would need to moderate your blog comments and delete any that seem like a testimonial or recommendation.

Second, you can’t refer to past specific recommendations of securities. However, you can separately provide a separate detailed list of all past recommendations over at least the past year, with name of the security, the date recommended, and the price at which it was recommended. You also need to include a legend that past performance is not an indication of future performance. That means you can’t advertise your past success. Effectively, you can’t cherry-pick your best performing securities recommendations. You also need to disclose all material facts necessary to avoid unwarranted inference.

Third, you can’t advertise a graph, chart, formula, or other device for use in determining which securities to buy or sell or when to do so.

Fourth, you can’t offer any report, analysis, or other service for free, unless it is actually entirely free and without any condition or obligation.

Fifth, your advertisement can’t have any untrue statement or material fact or otherwise be false or misleading.

In looking at these principles, you can’t communicate something on a web 2.0 site that you could not put in a newspaper advertisement.

There has not been any additional guidance from the SEC on the use of Web 2.0 by investment advisers.  In a speech last week, Mary Schapiro said that the SEC “hasn’t come to a resolution on the new technology.” That alone may shy investment advisers away from using web 2.0 and social networking sites.


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3 Responses to Advertising Limitations for Investment Advisers on Social Networking Sites

  1. Ben Gurwitz March 15, 2010 at 11:11 am #

    I have read quite a bit about social networking and specifically Linked In recommendations. I was curious what your thoughts were on something like Yahoo, Google, or Angie’s list reviews in relation to 206(4).

    • Doug Cornelius March 15, 2010 at 12:04 pm #

      The difference with those sites is that you can’t control them and you don’t sponsor them. That’s different than sites you control and that are effectively part of your marketing.

      I’m not sure what to do if someone posts something that is obviously untrue or that would be a problem if posted on a site that you do control. I look to a newspaper analogy for guidance. You can’t control what the newspaper says about you. The article could be wrong and violate the law if you had put it in a press release. If you talk to a reporter, you need to address the compliance issues. If you write a letter to the editor in response, you need to deal with the compliance issues. But you can’t prevent a third party from saying something about you.

      A word of caution would be to not encourage recommendations and certainly don’t post anything in those review sites unless you treat it like the rest of your promotional materials, including the compliance and approval procedures.

      At least that is my take. You should check with your lawyer and compliance people for their take on your particular situation.


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