For businesses of all types, posting positive reviews can be one of the most powerful means of attracting new customers.  Before individuals hire a company for a job, they want to know that others before them have had a good experience, and companies that have failed to get a sufficient number of good reviews are often screened out.

But before you set up a page to post good reviews or invite your current clients to do the same, recall from our previous post that unlike other businesses, robo-advisers are subject to Advisers Act Rule 206(4)-1 (the “Advertising Rule”), which generally prohibits the use of testimonials in advertising.

So what do we mean by “testimonials”?  Basically, we’re talking about statements by former or present clients that endorse the adviser or refer to a favorable investment experience with the adviser.  In addition to statements, “likes” and other means of endorsing a firm on social media can be considered testimonials. From the SEC’s point of view, testimonials are problematic because they may create an inference that all the adviser’s clients typically experience the same favorable results as the individual providing the testimonial.

While the letter of the Advertising Rule prohibits the use of testimonials, the SEC does not prohibit the adviser from using all communications that include favorable comments and allows the use of testimonials in some circumstances.  For example, the SEC has stated through no-action letters and formal guidance that it would permit:

• An adviser’s publication of an article by an unbiased third party regarding the adviser’s investment performance, unless it includes a statement of a client’s experience with or endorsement of the adviser;
• An adviser’s use of a rating by an independent third party, derived from client satisfaction surveys, provided certain conditions are met;
• The publishing of partial client lists, as long as the adviser did not use performance data to determine the makeup of the list and certain other disclosure is provided;
• Publication of all the testimonials about an adviser from an independent social media site on the adviser’s own website (a site is generally “independent” if the adviser cannot influence its content);
• The placement of an advertisement for an adviser on a third-party site, as long as (i) the site is independent, (ii) the advertisement is separated from any public comment section and (iii) advertising revenue does not influence which public commentary is included or excluded;
• An advertisement that includes a reference to a social media site (such as “see us on Facebook or LinkedIn”), without including specific testimonials from the site;
• Listing of “friends” or “contacts”, as long as they’re not identified as clients and the adviser does not imply that they have received favorable results from the adviser; or
• A third-party created “fan” or “community” site where the public may comment, but advisers should be careful when driving user traffic to such sites or publishing content from such sites, especially when the site is not independent of the adviser.

As you can see, determining whether a particular statement will be prohibited under the Advertising Rule can be complicated, so we encourage you to seek counsel if you’re considering the use of testimonials in your marketing strategy.  And on top of all that, as Josh mentioned last time, the SEC has proposed updates to the Advertising Rule, which, if adopted, would specifically allow testimonials under certain circumstances.  We are continuing to monitor these changes and will be sure to update you when they are final.  We thank you for reading and encourage you to return for our next post, in which Josh will discuss the Advertising Rule’s general prohibition against advertising that contains false or misleading statements.