The SEC is finally allowing financial advisors to use testimonials. But beware, the language in the new SEC rule about advertising is confusing.
The SEC has approved changes to the advertising rule for financial advisors, seeking to create a new, single rule to cover electronic communications and social media. The new rule will be effective 60 days after publication in the Federal Register and the compliance date has been set for 18 months after that effective date, the SEC said.
“This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors,” said SEC Chairman Jay Clayton in a statement.
According to Investment News said, “The new rule replaces the advertising rule, which was adopted by the Securities and Exchange Commission in 1961, and a rule on payments to solicitors established in 1979. The previous regulations centered on written communications, television and radio advertising. The newly approved rule contains principles-based provisions that can apply to online outreach, such as adviser marketing over social media.”
Karen Barr, president and CEO of the Investment Adviser Association, said the commission incorporated a number of requests made by the IAA – “including permitting advisors to market themselves through social media and other modern means.”
According to Financial Advisor IQ, “the SEC will allow advisors to use testimonials and endorsements in marketing, so long as they satisfy certain disclosure, oversight, and disqualification provisions, the regulator said.
Among other requirements, advisors using testimonials need to disclose if the person providing the testimonial is an actual client, and if they are being compensated for making the testimonial. The final rule will also permit the use of third-party ratings in advertisements, so long as the advisor provides disclosures and fulfills other criteria pertaining to the preparation of the ratings.”
In a later article, the publication said that the ad rule’s ambiguity could hinder use by advisors. Advisors using testimonials must “consider the context and totality of information presented such that it would not reasonably be likely to cause any misleading implication or inference. General disclaimer language (e.g., “these results may not be typical of all investors”) would not be sufficient.”
On the one hand, the SEC does not expect firms to include a negative review alongside every positive one, but on the other hand, it says that a general disclaimer for a positive review is not sufficient. The use of third-party rankings under the new rule could be another “tripwire” for advisors.
The article also points out that while the SEC rule doesn’t directly apply to the near 17,500 state-registered advisors, it will have an indirect impact on them.
At this point in time, you may want to tread carefully until the SEC issues further clarifications.