April 17, 2019 / 5:05 PM / 9 months ago

IA BRIEF: SEC weighs FINRA’s approach to testimonials in seeking to modernize ad rule

NEW YORK(Thomson Reuters Regulatory Intelligence) - U.S. Securities and Exchange Commission’s policy makers are considering ways to modernize its rules on investment-adviser advertising, and looking to an industry self-regulator as a potential model.

A trader stands in front of a projection of spot prices prior to Britain's Chancellor of the Exchequer, Alistair Darling, delivering his pre-budget speech, on a trading floor in London December 9, 2009.

They agency is exploring the Financial Industry Regulatory Authority’s (FINRA’s) approach to the use of testimonials in broker-dealer adverting, Paul G. Cellupica, chief counsel of the SEC’s division of investment management, told the Practising Law Institute’s “SEC Speaks” conference in Washington this week.

FINRA allows the use of testimonials with certain restrictions and disclosures, but if the SEC were to adopt anything close to it, it would certainly open additional avenues to adviser advertising.

In addition, the SEC is also exploring ways of incorporating the use of social media and distinguishing advertising appropriate for certain types of client.


The SEC's Rule 206(4)-1{here} prohibits advertising practices that are fraudulent, deceptive or manipulative.

The rule defines an advertisement as any communication addressed to more than one person and any notice or communication that offers advisory services about a security, as well as other specified services.

Therefore, an advisory firm’s marketing campaign, bulk emails, television and radio commercials, websites, business cards, electronic newsletters and social networking sites are usually considered ads.

The rule contains specific prohibitions against the use of testimonials concerning the adviser or its services, the use of past specific recommendations without certain conditions, representations that could be used to make trading decisions without prominently disclosing any limitations, and any advertisement that contains a statement to the effect that any report, analysis or report is free, unless it really is.


A testimonial is a statement of a client’s experience with, or endorsement of, an investment adviser.

The SEC rule prohibits investment advisers from publishing, circulating or distributing any advertisement that 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 the investment adviser.

A testimonial may include a client’s stated satisfaction with the adviser or an internal firm survey highlighting the firm’s approval level. The SEC considers them inherently misleading because they highlight favorable client experiences while ignoring unfavorable ones.

The prohibition of testimonials is often debated, especially in the context of the increased use of social media. In 2014, the SEC issued guidance{here} in the form of nine questions and answers, primarily focused on the use of third party review sites and whether it would trigger a testimonial violation. The guidance included specific examples opening the door to using Yelp, FourSquare or a similar site that offers a business review feature, granted certain conditions are achieved.

The use of a third party review site may not be a testimonial if the review site is independent of the adviser, the commentator’s ability to comment is not restricted and all comments good and bad are viewed publicly.

For example, a link to the website Yelp with both bad and good reviews listed, and in no particular order may be allowed under the rule.

However, firms must be careful not to tweet, share or “like” a specific third party testimonial as this may be considered a testimonial.


FINRA takes the opposite approach and allows broker dealers and its representatives to use customer testimonials, in some circumstances with proper disclosure.

FINRA Rule 2210{here} governs broker-dealers’ communications with the public, including retail and institutional investors.

For compliant use, a broker dealer’s testimonial concerning a technical aspect of investing must be made by a person that has knowledge and experience to form a valid opinion.

In addition, any retail communications or correspondence containing a testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following:

—The fact that the testimonial may not be representative of the experience of other customers.

—The fact that the testimonial is no guarantee of future performance or success.

—If more than $100 in value is paid for the testimonial, and the fact that it is a paid testimonial.

FINRA also attempted to clear up industry confusion about regulatory requirements when a third party makes comments on a social media site. In regulatory notice 17-18{here}, FINRA said a firm would not be responsible for the advertising rules (such as supervision or the content of the comment) associated with it.

However, if the firm “liked” or is involved in the development of the content then the firm is considered to have adopted it, and now responsible for it, and all rules would pertain.


Cellupica said the SEC has highlighted that the current advertising rule does not distinguish between types of clients. For example, there are retail clients and high net worth clients with very different monetary tolerances and levels of sophistication.

He may be suggesting that there could be different rules or regulations based on what type of client the adviser’s advertising is targeted towards. This would be especially helpful for private fund advisers, as they are usually dealing with the more sophisticated investors.

Lastly, Cellupica said the SEC is looking to incorporate the use of social media. This topic would overlap with any changes in the testimonial rule, but may also give some guidance on the use of other aspects of social media outlets.


An update to the current advertising rule would not only open certain avenues of advertising for investment advisers, but also bring some coordination between SEC and FINRA rules. Many firms and individuals are dually-registered, and changes may help reduce confusion going forward.

*To read more by the Thomson Reuters Regulatory Intelligence team click here: http//:bit.ly/TR-RegIntel

(By Jason Wallace, Regulatory Intelligence, in San Diego)

This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - and initially posted on Apr. 12. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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