SEC Releases Guidance On Testimonials In The Age Of Social Media

SEC Releases Guidance On Testimonials In The Age Of Social Media
By U.S. Government [Public domain], <a href="">via Wikimedia Commons</a>

Investment firms have to be careful with how they present themselves to the public. There’s a fine line between touting your skill and making unrealistic promises, and anyone who goes too far is likely to get a visit from the Securities and Exchange Commission. One rule meant to clarify what’s acceptable is the ban on testimonials, because they could give the impression that one client’s positive experience will be true for everyone, but in the age of retweets, likes, and open Facebook Inc (NASDAQ:FB) groups the line had gotten a little blurred.

The SEC has now released guidance on how to make sure that investment advisers won’t inadvertently get themselves into trouble just by engaging in social media.

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Social media is fine if the firm doesn’t interfere

The main rule for engaging in social media is that investment advisers shouldn’t be able to influence which comments are presented to the public. If a happy client decides to post a glowing comment on your Facebook page, that’s great, but if an unhappy client dogs your company just beneath that you have to leave it up or delete both. Picking and choosing between comments is what will get you in trouble. Encouraging some clients (or even worse, giving some clients an incentive) to write comments is also a no-no under the new rules.

There are a few other restrictions that could complicate the situation. The SEC guidance says that commentary should be viewable on a real-time basis, which shouldn’t be that hard to do these days, but it also requires that “the independent social media site allows for the viewing of all public commentary,” (emphasis theirs).

The reason social media is so complicated in contexts like this is that there isn’t a clear line between public and private comments. If a client restricts Facebook Inc (NASDAQ:FB) comments to friends of friends, they can hardly be called private, but a random person checking the firm’s Facebook page won’t be able to access them. It’s hard to imagine that the SEC would implicate the investment firm in a case like this, but it might mean that firms will need different policies for dealing with different types of social networks.

Investment advisers need to avoid material connections: SEC

The SEC guidance also requires that there be no material connection between the investment firm and the social media site. Investment advisers may need to be careful how they interact with social media sites that they are heavily invested in, but they also have to be careful where they advertise. If there is a connection between advertising dollars and the tone of independent commentary that gets presented to users, it would violate the new testimonial rules.

Finally, the SEC recognizes that people might start their own groups or web pages espousing a particular fund (yes, Warren Buffett has fan pages on Facebook), but investment advisers are warned to be careful about linking to such a page because it could violate the rule against testimonials.

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