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Advisors Getting It Wrong on Advertising Rules

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As they explore new digital channels to promote their practices, advisors continue to struggle with compliance regarding federal and state advertising regulations, a former state official cautions.

In an online presentation this week, former Michigan Securities Examination Manager Chad Hartwick outlined some of the challenges advisors face in producing effective advertising that remains compliant with applicable regulations.

The explosive growth in interactive platforms such as Facebook, LinkedIn and Twitter has muddied the compliance picture considerably, particularly when it comes to the outright ban on using client testimonials in a firm's advertising, according to Hartwick, who now works as a consultant with Lexington Compliance, a division of RIA in a Box.

"Advisors cannot use testimonials in their advertisements, and this is an area where social media really comes into play, because this is where, as a regulator, when you find violations of this part of the advertising rule, they typically happen in social media," Hartwick says.

Hartwick notes that the term "testimonial" is left undefined in SEC and state regulations, and that authorities will make a determination based on the "facts and circumstances" surrounding the commentary -- "two of our favorite words as a regulator," he jokes.


In the SEC's most recent guidance on the subject of testimonials, the commission noted that "the staff has consistently interpreted that term to include a 'statement of a client's experience with, or endorsement of, an investment advisor.'"

But Hartwick cautions that the SEC and state regulators -- which are generally closely aligned in this area -- cast a wide net in their definition of what constitutes advertising and in the prohibition on testimonials, and suggests that advisors take steps to disable interactive features such as the endorsements on LinkedIn. He also advises firms to include, when possible, a disclaimer explaining that the firm does not take endorsements on its social profiles.

"You want to try to avoid those circumstances and those situations," Hartwick says. "You don't want to invite clients to post commentary directly, and if commentary is being posted to your social media sites, then you want to be able to review those and obviously remove anything that could be construed as a testimonial."

Hartwick by no means discourages advisors from engaging in social media as a promotional channel, though he stresses that those sites bring a unique set of compliance concerns, including the requirement that all advertising be archived in such a way that it can be handed over to an examiner who is reviewing the firm's books and records.

And there are certain activities prohibited by the advertising rules that apply in equal measure to social and traditional media. One of those is the restriction on referring to past, specific recommendations the advisor has made, something that the casual, quick-hit nature of a platform such as Twitter might seem to encourage.

"What we don't want to see in social media is to have you tweet, 'Well, hey, look at Apple computer today. I recommended it six months ago and now it's up 50%,'" Hartwick says. "That's a past specific recommendation, and obviously you can't do that."


The ban on past specific recommendations is conditional, Hartwick says, though the barriers to compliance are forbidding. Advisors wishing to promote a past recommendation must also publicize a host of other information, including all the other recommendations they made in at least the past year. They also must note the price the security was selling at when the recommendation was made and its current price.

"There's a litany of information that you have to provide when you want to state a past recommendation," Hartwick says. "You have to be able to furnish this list, and, as you can guess, well, that's very troublesome. That's a lot of work all because I wanted to talk about a past specific recommendation."

Further, Hartwick notes the restriction on misleading or exaggerated claims. The SEC specifically bars advisors from claiming that a product or service is free unless it "will be provided without any obligation whatsoever." But more broadly, when examiners review a practice's advertising file, they will look for "unwarranted or flamboyant language," according to Hartwick.

Commonly called "fluff advertising," statements touting an advisor as, say, the best in the state, are not likely to sit well with regulators.

"That's a subjective statement unless you were actually rated No. 1   by an independent rating agency," Hartwick says.

"You don't want to use those types of statements. Everything needs to be factual," he adds. "Some regulators will allow you a certain amount of some fluff advertising, but it's a fine line between when you have fluff advertising and you've crossed a line to now fraudulent advertising."

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