By Masha Goncharova and Simon Riveles
In response to growing interest among investment advisers to communicate to clients through social media, the SEC staff has been establishing new informal guidelines on proper social media use. New parameters set forth this spring limit the scope of client testimonials and now allow advisers to provide required cautionary legends via hyperlinks, making it easier to communicate on platforms with character limits, such as Twitter.
The March Update concluded that endorsements containing non-investment related client commentary on social media may be considered a violation of the Testimonial Rule under the Investment Advisers Act of 1940. Advisers have already been facing logistical issues with the new guideline, since a client providing a LinkedIn recommendation or Facebook “Like” is expressing an impermissible testimonial. The SEC did not list any specific social media site names in the update.
Under the update, advisers are still authorized to engage in the public commentary section of their social media site so long as they do not manipulate the forum, including indirectly authoring comments, restricting comments or ordering them in a certain way.
Testimonials on third-party sites such as Yelp or Angie’s List are permitted so long as the third-party site is independent from the investment adviser and no material connection exists between the two.
In April, the SEC issued new Compliance and Disclosure Interpretations (C&DI) to address concerns that the nature of platforms like Twitter, which limit character count, restrict the adviser’s ability to include cautionary legends required by the SEC in all communication. It is now permissible to provide the legends via an active hyperlink in case of text limitations on the social media platform.
The new cautionary legend guideline applies to a number of permitted communications, including press releases (Rule 134), business combinations (Rule 165), investor prospectuses (Rule 433), tender offers (Rules 13e, 14d) and proxy solicitations (Rule 14a).
According to the new C&DI, third parties who share or re-transmit (including “re-tweeting”) an adviser’s posts will not be held accountable to the same hyperlink regulation as long as “the third party is neither an offering participant nor acting on behalf of the issuer” and “the issuer has no involvement in the third party’s transmission.”
Many questions remain for the SEC as investment advisers face the logistical implications of these new regulations. The main question to be resolved is defining to which specific social media platforms these guidelines apply. The parameters also do not address whether advisers may include the third-party ratings in their sponsored advertisements without including the corresponding public review. Further remaining clarification is needed in whether to include a hyperlink in a series of Tweets.
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