Just over a year ago, the Securities and Exchange Commission settled charges against two advisory firms, several individual adviser reps and a marketing consultant for allegedly violating the nearly six-decade-old Testimonial Rule that prohibits client testimonials. Combined, the two firms paid civil penalties of $40,000 and the individuals paid $10,000 each.
According to the SEC release, the firms and individuals violated the rule by hiring a marketing firm with an interesting service called
Squeaky Clean Reputation to solicit testimonials from their clients and post the clients' statements on various social media websites.
One of the RIAs also published two videos containing client testimonials on its website and on YouTube. The other firm solicited emails from its clients to post testimonials on its Yelp webpage, resulting in favorable client comments, such as an account of how the firm helped one client purchase "unique investments" and protected the client's investments from risk, while other clients said the firm was trustworthy, helped them generate significant returns and made them feel more secure about retirement.
As a consequence, the firms and their associates ran afoul of not only the Testimonial Rule, but also 2014 commission guidance that had loosened the rule a bit by allowing limited use of unsolicited client testimonials in third-party social media. The SEC Enforcement Division found the advisers had pushed the envelope a little too far in this case.
Ironically, around the same time as the settlements, SEC staff began to seriously consider updating the aging Testimonial Rule, which technically addressed only newspaper, radio and television ads. Finally, on Nov. 4, the SEC came out with major proposed amendments that promise big changes to the way investment advisers can advertise their services in the future.
Other professional fiduciaries — doctors and lawyers — have for many years been able to post testimonials from satisfied clients under state ethics rules, and it's very likely investment advisers will join their ranks in the near future.
However, the SEC is not likely to condone car dealership or Labor Day furniture clearance-type ads. In what it calls a departure from the old rule, the proposal would adopt
a new principles-based approach that is more adaptable to changing technology and methods of communicating.
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As fiduciaries, registered investment advisers are prohibited from making false or misleading statements in their advertisements. They also have a duty to provide objective and prudent advice to their clients. The proposed amendments would add an obligation to take
a fair and balanced approach to their client communications.
Significantly, the proposal would expand the scope of the rule by changing the definition of an advertisement. It would include certain communications that offer or promote a firm's advisory services to one or more persons, versus the current definition that covers communications to 10 or more people.
The challenge for all advisory firms will be to ensure that their routine communications do not cross the line, even subtly, by selectively touting the firm's exceptional service or solid investment returns.
Ditto with client testimonials. While testimonials are permitted for the first time under the proposal, advisers are strictly prohibited from
"cherry-picking," meaning they cannot showcase only favorable results while omitting not so favorable commentary "in a manner that is not fair and balanced."
For example, the release notes that singling out one favorable testimonial for use while ignoring a host of complaints about the adviser's services by others is likely to result in a deficiency letter after an SEC exam, or worse.
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The proposal does offer some exceptions to its broad definition of an advertisement. One-on-one meetings and telephone conversations are excluded, as well as unscheduled public speaking in which the adviser does not rely on prepared storyboards, slides or a script.
Unsolicited requests from investors for information are also excluded as long as the adviser answers only direct questions that do not involve investment performance or promotes other services not addressed by the investor.
There are many other complex areas and nuances to the conditions in the proposed rule that are noted in the 507-page release — far too many to be addressed in a single column. But the release does include numerous examples of what is and isn't permitted.
So be forewarned. Amendments to the Testimonial Rule are now out for public comment. If adopted as proposed, advisers will be able to greatly expand their marketing efforts by soliciting favorable statements from their clients for the first time since 1961.
But there are certain to be limitations, record-keeping requirements, and other guardrails designed to protect investors. Advisers will need to become well-versed on the details before jumping headlong into an aggressive new testimonial-laden marketing campaign.
Along with the new freedom in advertising will come new areas of accountability.
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Blaine F. Aikin is executive chairman of Fi360 Inc. and Cefex.
