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What’s in a Like? | Adoptions and testimonials

January 5, 2012

What does it mean when you click the “like” button on a social media site? The answer depends on who you’re asking.

Facebook says that it’s “making a connection.”

FINRA calls it an “adoption.”

And now we know that the SEC considers it a “testimonial.”

In a Risk Alert issued January 4, 2012, the SEC’s Office of Compliance Inspections and Examinations explains that:

use of the ‘like’ feature on an investment adviser’s social media could be deemed to be a testimonial if it is an explicit or implicit statement of a client’s or clients’ experience with an investment adviser or an investment adviser representative.

Which makes them problematic, since under SEC regulation, testimonials are not allowed in advertising under any circumstances.

Implications for the investment industry

So what do the regulatory interpretations mean for the investment industry?

As we noted in our first blog post on the subject of  “likes,” FINRA’s approach makes it risky for anyone working for an investment adviser to “like” content. In FINRA’s eyes, if you “like” a page or a post, you’re effectively providing a seal of approval – or at least some assurance that its content isn’t false or misleading. Since this type of “entanglement” creates liability risk, most large investment advisers completely prohibit use of the “like” button for anything business-related.

On the flip side, the SEC’s approach makes it next to impossible for an investment firm to be “liked”. In fact, any kind of positive comment from someone who may be or once was a client may fall afoul of the testimonial rule. Firms may have to choose between closing down all interactive features or permitting only negative comments to be posted. Doesn’t seem like much of a choice to me!

Why it’s a problem

FINRA and the SEC obviously have the right motivation: they want to protect investors from a small number of bad actors – and, as the new kid on the block, social media merits special attention. As the co-chief of the SEC’s Enforcement Division noted when announcing a recent enforcement action, “Fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes.”

Unfortunately, the stringent regulations may end up hurting investors in the long run by inhibiting the flow of information. A case in point: the investment professionals who are members of NICSA are unable to “like” our Facebook page. That means that they won’t automatically see our posts in their news feed – which means that won’t see our updates on regulatory issues, compliance best practices or industry trends – information that can help them better serve investors.

Like it or not, social media is changing the way the world communicates. The investment industry needs to keep pace – but that will be difficult without more nuanced regulation and supervision of social media activity.

  1. January 5, 2012 12:58 pm

    Very well said. The regulators still haven’t figured this one out. Yes, they need to protect us from bad actors. But FINRA and the SEC’s divergent approaches are going to gum up with works. They need to huddle and come up with a workable solution.

  2. January 8, 2012 3:55 pm

    Oh dear. Not good.

  3. January 9, 2012 8:42 am

    Why focus so much on “Like” which is a fairly weak tool and apparently off limits. If you want to reach your readers with the latest, do something old-fashioned like an email blast or use Twitter. Lots of finance firms across the country are using social media, often helped by compliance specialists who have developed software to monitor and control users. I have written about a couple of cases:

  4. January 9, 2012 9:09 am

    Sure there are other social media. But the beauty of Facebook is that so many people spend time on it.

  5. January 9, 2012 10:04 am

    And the “Like” button is the corporate-page counterpart of the “Friend” button. Click the Like button on a corporate page, and new posts on that page automatically get added to the news feed on your personal page. It’s an easy way to stay up to date.

    But, because of FINRA’s position on Likes, associates of financial services firms aren’t allowed to Like any business-related pages — cutting them off from an increasingly important source of information. See my earlier blog post on this subject:

    Now, the SEC seems to be saying that client use of the Like button is problematic as well — because if a client Likes a financial service company’s Facebook page it could be the equivalent of a forbidden testimonial advertisement. (Note that any kind of positive user-generated content may generate the same sort of SEC concern.)

    That means that investors may not be able to access information in the format that’s most convenient for them. It also makes it very difficult to establish any kind of user ratings for financial services.

    The end result is a reduced flow of information — and that can’t be good for investors.

  6. January 13, 2012 4:19 pm

    The key question raised by this beautifully written post: has the SEC just barred advisors (and the broader industry) from using Facebook entirely?

    (Sorry, but neither Twitter nor any combination of social media platforms, much less email, comes close to Facebook’s reach, at least today.)

    Our thoughts here, on Google+

    More briefly, I think the language in the SEC’s alert provides leeway for allowing this particular use of “like” functionality. But at this point, SEC will have to do it, and in the meantime B/Ds are free to interpret the alert as conservatively as they want to–and that they will, because most of them see themselves not as asset managers but as risk managers.

    Maybe an easier line of attack is to persuade Facebook to change the name of the button for company follows. Or can Facebook be hacked or customized to make the button say “Follow”?

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