Tag: testimonials

Beware of Social Media Consultants

The Securities and Exchange Commission packaged together five separate settled proceedings against registered investment advisers, investment adviser representatives, and a social media consultant for violations of the Testimonial Rule the use of social media and the internet.

If you get a pitch from someone to increase your firm’s presence in search results ask that person if they can gather up reviews from clients to publish. Read the rest of this post and we will revisit what to do with the answer.

SEC Rule 206(4)-1(a)(1) states that:

It 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.

When it adopted the rule, the SEC stated that, in the context of investment advisers, it found that testimonial “advertisements are misleading; by their very nature they emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable.” The staff has stated that the rule forbids the use of a testimonial by an investment adviser in advertisements “because the testimonial may give rise to a fraudulent or deceptive implication, or mistaken inference, that the experience of the person giving the testimonial is typical of the experience of the adviser’s clients.”

But marketing consultant Leonard S. Schwartz and his company Create Your Fate, LLC ignore the rule and looked for investment advisers as clients.

The first victim went unnamed in the SEC Order. Schwartz reached out to the clients of “Adviser A” and solicited testimonials. Schwartz then published some of those testimonials on “Adviser A”‘s Facebook page and Twitter feed. He also sprinkled in some videos on YouTube. “Adviser A” realized there was a problem, sent Schwartz information on the Testimonial Rule and asked for the testimonials to be deleted.

Schwartz continued the practice with other investment advisers: Greenfield, Eyster and Biel.

I would guess that the last three did not ask Schwartz to remove the testimonials as “Adviser A” did.

There is additional guidance form the SEC on social media. You can’t stop third parties from providing ratings on your firm on Yelp or other services. But if you control the page and publish the content, that’s prohibited. Recommendations posted by the adviser or its employees are strictly prohibited. Similarly, an adviser can’t pay for recommendations or offer discounts to clients to post commentary.

So if your marketing consultant/social media consultant/ search results consultant says to go ahead and solicit those reviews. Stop right there and show the consultant the door. It’s clear that publishing reviews of your firm is very problematic. Any “yes” answer with out a careful analysis of the SEC’s marketing rules and Testimonial Rule can lead to trouble.

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The SEC Endorses Yelp for Investment Advisers

yelp

Investment Advisers and the Securities and Exchange Commission have been struggling with the use of social media. Advisers see it as a way to communicate with clients and potential clients. The SEC sees it as an area ripe for fraud. Both are right.

The SEC has stuck fast to rules on advertisements when it comes to social media. The SEC does not care if the social media sites cannot meet the control and record-keeping standards. The SEC does not care if it’s hard to meet the standards. Clearly, the SEC is focused on investor protection in this area. The features of social media sites keep changing so it’s hard to keep the features in line with the SEC requirements.

But the SEC listens to the complaints and keeps releasing guidance in this area. The SEC released Investment Management Guidance 2014-4 that provides some additional guidance on the intersections of testimonial and social media sites.

Rule 206(4)-1(a)(1) prohibits the use of testimonials in an investment adviser’s advertisements. The SEC considers the publication of testimonials to be inherently misleading because “they emphasize the comments and activities favorable to the investment adviser and ignore those which are unfavorable”.

The SEC did make an exception for third party rankings. See DALBAR.

The new guidance merely points investment advisers to the prior guidance on testimonials and tries to add some context to the use of social media sites. I think most advisers will not find much good news in the guidance.

In looking through the questions and answers I only see Yelp and its copycat sites being allowed by the guidance. I assume many thought the guidance would be an endorsement of Facebook pages, but that feature seems to fall outside the acceptable areas allowed by the guidance.

A Facebook page is controlled by the publisher (the adviser) and is therefore not an independent site. The SEC requires the social media site to be independent. Others may see some wiggle room in allowing ratings on a Facebook page for investment advisers. I think you need to be very cautious because the feature and controls on Facebook pages change rapidly and inconsistently.

That leaves Yelp and its copycats that rate businesses. I already see a few ratings of investment advisers in Boston.

The Guidance points out that recommendations posted by the adviser or its employees are strictly prohibited. Similarly, an adviser can’t pay for recommendations or offer discounts to clients to post commentary.

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Ratings and Fund Managers

Investment advisers, and therefore fund managers once they register as investment advisers, are limited in how they advertise. Section 206 of the Investment Advisers Act already prohibits fraud, deception or manipulation, regardless of whether the fund manager is registered. Once registered, Rule 206(4)-1 imposes additional restrictions on advertising that the SEC has determined would be fraudulent deceptive or manipulative.

The first item on the list of restrictions is testimonials. This prohibition reflects the concern that the experience of one customer is not necessarily typical of the experience for all customers.

To some extent this also covers third party ratings since they are relying on the testimonials of clients. If you have a good rating you may want to include that rating as part of your fundraising materials. That means you are indirectly including a testimonial in your advertising and are staring squarely at the prohibitions in the advertising rule.

However, the SEC has recognized that the distribution of unbiased third-party ratings may not be fraudulent. In a 1982 No Action Letter to New York Investors Group, Inc., the SEC allowed the investment adviser to include an article from a financial publication that “lauds the Company/ and or the Company president’s success in picking stocks that do well under both favorable and unfavorable market conditions.”

The SEC ruled that “an article by an unbiased-third party concerning an investment adviser’s performance, however, is not a testimonial unless it includes a statement of a customer’s experience or endorsement. ” While clarifying that the article is not a testimonial, it is still an advertisement.

The more detailed discussion about the use of ratings is in a 1998 No Action Letter to DALBAR, Inc. The company conducted a survey to measure the effectiveness of investment advisers and their representatives.  Based on the survey, DALBAR would assign a numerical ranking. Since the investment adviser was paying for the survey, presumably they would want to publish a good result to attract more clients. That means the ratings would be part of an advertisement.

The SEC said that the DALBAR rating is a testimonial because the rating carries an implicit statement of clients’ experiences. The DALBAR rating is testimonial, made indirectly.

But the SEC turns around and and blesses the DALBAR rating, granting the sought after “we would not recommend enforcement action.” The SEC lists these factors:

  • DALBAR rating does not emphasize the favorable client responses or ignore the unfavorable responses.
  • The rating represents all or a statistically significant sample of an adviser’s clients.
  • The client questionnaire has not been prepared to produce any pre-determined results.
  • The client questionnaire makes it easy for a client to give negative or positive responses.
  • DALBAR does not perform any subjective analysis of the survey results, but merely assigns numerical ratings after averaging client responses.
  • DALBAR is not affiliated with any advisers.
  • DALBAR charges a uniform fee, paid in advance.
  • Survey results clearly identify the percentage of survey participants who received each designation and the total number of survey participants.

While the SEC blesses the DALBAR rating system, they took the opportunity to point out that an adviser’s use of the rating in their advertisement materials could still be a violation of Section 206(4) and Rule 206(4)-1(a)(5). The SEC provided some guidance that advisers should consider when using a DALBAR or similar rating:

1. Whether the advertisement discloses the criteria on which the rating was based;

2. Whether an adviser or IAR advertises any favorable rating without disclosing any facts that the adviser or IAR knows would call into question the validity of the rating or the appropriateness of advertising the rating (e.g., the adviser or IAR knows that it has been the subject of numerous client complaints relating to the rating category or in areas not included in the survey);

3. Whether an adviser or IAR advertises any favorable rating without also disclosing any unfavorable rating of the adviser or IAR (or the adviser that employs the IAR);

4. Whether the advertisement states or implies that an adviser or IAR was the top-rated adviser or IAR in a category when it was not rated first in that category;

5. Whether, in disclosing an adviser’s or IAR’s rating or designation , the advertisement clearly and prominently discloses the category for which the rating was calculated or designation determined, the number of advisers or IARs surveyed in that category, and the percentage of advisers or IARs that received that rating or designation;

6. Whether the advertisement discloses that the rating may not be representative of any one client’s experience because the rating reflects an average of all, or a sample of all, of the experiences of the adviser’s or IAR’s clients;

7. Whether the advertisement discloses that the rating is not indicative of the adviser’s or IAR’s future performance; and

8. Whether the advertisement discloses prominently who created and conducted the survey, and that advisers and IARs paid a fee to participate in the survey.

If you are using third-party ratings as part of your fundraising materials, DALBAR presents you with a laundry list of things you can and cannot do with those ratings.
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Client Lists and Private Fund Managers

Section 206 of the Investment Advisers Act prohibits fraud, deception or manipulation, regardless of whether the fund manager is registered. Once registered, Rule 206(4)-1 imposes additional restrictions on advertising that the SEC has determined would be fraudulent deceptive or manipulative.

The first item on the list of restrictions is testimonials. This prohibition reflects the concern that the experience of one customer is not necessarily typical of the experience for all customers.

Merely including a list of client names is not a testimonial, but could still be considered fraudulent. You can see that in the example of Reservoir Capital Management. Reservoir provided prospective clients a client list, which Reservoir described as “representative,” that consisted of the names of eight institutional investors. In the SEC’s view this created the impression that a substantial portion of Reservoir’s client base was institutional clients. The truth was that no more than fifteen percent of Reservoir’s assets under management were assets of institutional clients.

A list of all clients would unlikely to be considered a testimonial in violation of the rule. Once you start producing a partial list, the SEC gets considered that the inclusion or exclusion of clients on the list could be fraudulent or manipulative.

The SEC offered some additional guidance on including a partial list of clients in a 1993 No Action Letter to Denver Investment Adviser Associates. They came up with three conditions that need to be satisfied:

1. You can’t use performance based criteria in determining which clients to include in the list

2. The client list has a disclaimer similar to this: “It is not known whether the listed clients approve or disapprove of the adviser or the advisory services provided.

3. The client list includes a statement disclosing the objective criteria used to determine which clients to include in the list.

For a fund manager, the funds are the clients. However, I could easily see how this limitation could be taken the next step to investors in the funds.

Also keep in mind that the fact that a particular customer or consumer is a client could be considers nonpublic personal information, making it subject to Regulation S-P. Several states prohibit an investment adviser from disclosing a client’s identity
without consent.

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FTC Guidelines Are In Effect

Today is a the day. The FTC’s recent updates to its Guides Concerning the Use of Endorsements and Testimonials in Advertising are now in affect.

To comply with the Guides, individuals (bloggers, users of social media) must disclose every “material connection” or relationship they have with an advertiser.

How to comply with the changes?

  • Disclose whenever you have a relationship with an advertiser, product or company.
  • Disclose when you are discussing a product or anything of value that you received for free or at a special discount. You can be a fan but as soon as you’ve received something of value, you need to disclose what you’ve received when writing about it.
  • Disclose where you work when you mention your employer, its competitors, or its industry in a blog post, tweet or comment online.

How do you make a disclosure? It’s very simple.

  • “I work for Company A.”
  • If Company B sends you Item B hoping that you review, disclose in the review that you got Item B for free.
  • If Company C pays the way for to participate in a customer event you might write: “I’m a Company C customer and they paid for my travel to attend this event.”

It’s no big deal. It’s the honest and ethical thing to do.

It may even work in your favor. Others will realize that you’re cheap advertising and send you more free stuff.

By the way, I don’t receive any advertising dollars or endorsements in connection with ComplianceBuilding.com. I generate a few dollars of affiliate income from links to products on Amazon. Much of that goes to the PTO affiliate account for my kid’s elementary school.

I occasionally get some free stuff to review. When I do, I’ll let you know when I write about it. [See this morning’s review of Enterprise 2.0.]

Feel free to send that new BMW for me to review. I will happily post an honest review.

Compliance and Recommendations on Social Networking Sites

View Doug Cornelius's profile on LinkedIn

I am an enthusiast of social networking sites and web 2.0. But I realize they have limitations and dangers. I have been very concerned about the Recommendations feature in LinkedIn. That feature allows any of your connections on LinkedIn to post a recommendation or endorsement about you that appears on your profile page.

At first, that seems great. Since the one view of LinkedIn is that it operates as an online resume, posting recommendations is a smart feature. But what if you are in a regulated industry? Many professions have limitation on what they can say in advertisements and what they can say about their services.

I took a look at how recommendations are regulated for investment advisers and for lawyers. Two areas that affect me the most.

If you a registered investment adviser, you are subject to Rule 206(4)-1:

a. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act for any investment adviser registered or required to be registered under section 203 of the Act, directly or indirectly, to publish, circulate, or distribute any advertisement:

(1) 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. . .

It looks like recommendations are prohibited in an “advertisement.” The definition of “advertisement” is broad:

b. For the purposes of this section the term advertisement shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.

Is your LinkedIn profile an “advertisement” under this rule?  If you state that you offer investment advisory services on your LinkedIn profile, then I think it is an advertisement. So you should not have recommendations.

What about lawyers? The first problem is that every jurisdiction has a different set of rules about attorney advertising. You need to take a look at the rules in your jurisdiction.

First look to the ABA Model Rule 7.1:

A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. A communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading.

Under this rule, you could have a recommendation as long as does not have a material misrepresentation and is not misleading. That gets you into gray areas very quickly.

This is just a model rule. Every state is different. For example, Arkansas[Rule 7.1 (d)], Florida [Rule 4-7.2(c)(1)(J)], Indiana [Rule 7.2(d)(3)], South Carolina [Rule 7.1(d)], and Wyoming [Rule 7.2(h)] all explicitly prohibit any kind of testimonial in attorney advertising. Nevada, Pennsylvania, California, Louisiana, Missouri, New York, Oregon, South Dakota, Texas, and Virginia have limitations on what can be said in a testimonial or a disclaimer that needs to be present.

What do I think? Keep recommendations off your LinkedIn profile.

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