On July 10, 2018, the SEC settled enforcement actions brought against two SEC-Registered Investment Advisers (RIAs), three Investment Adviser Representatives (IARs), and a marketing consultant, for their involvement in violating the Testimonial Rule using social media and the Internet.

Rule 206(4)-1(a)(1) under the Investment Advisers Act sets forth what types of advertisements are prohibited. The rule prohibits express or implied testimonials. Although the word “testimonial” is not defined in Rule 206(4)-1, it has been interpreted as being a statement of a client’s experience with or endorsement of an investment adviser.

The three IARs hired the marketing consultant to solicit testimonials from their clients, which were then published on various social media platforms such as YouTube, Google, Facebook, Twitter and Yelp. The SEC also discovered that one of the RIAs published two videos, which contained client testimonials, on its website and YouTube. All of the testimonials related to the RIA or representatives of the firm, as well as the advice and services they rendered to their clients.

One of the marketing consultant’s services, ironically called “Squeaky Clean Reputation,” represented that the firm’s program was “100% compliant for investment advisers.” The consultant continued to make that claim, even after being warned that RIAs are not permitted to utilize advertisements containing testimonials.

Although Rule 206(4)-1 was promulgated long before social media became available, its prohibitions apply to advertisements on Google, Facebook, and other platforms. Among other words of praise for these RIAs and IARs, they were described as being trustworthy and knowledgeable. One was described as providing a high level of service and as having generated significant investment returns for the client. Another testimonial praised the RIA for giving the client access to unique investment opportunities and protecting the client’s investments from risk. One of the RIA’s Yelp page contained statements from professionals who said they were comfortable referring clients to the firm, because the adviser had helped them to increase the value of their investments.

These advisers were aware of the Testimonial Rule but apparently went forward in spite of it. Their policies and procedures clearly prohibited them from using testimonials in advertisements.

The SEC imposed sanctions on these RIAs and IARs for violating the Testimonial Rule. They were ordered to cease and desist from using testimonials in advertisements and were required to pay civil money penalties. The marketing consultant was also sanctioned.

A summary of these enforcement actions, and links to each case, can be found HERE.


About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.

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