SEC guidance to permit investor testimonials

04 Apr, 2014

Testimonials from investors on social media praising investment managers could be permitted following recently published guidance from the Securities and Exchange Commission (SEC).

The SEC announced that public commentary on independent social media sites would not constitute advertising and therefore would not breach Rule 206(4)-1(a)(1) of the Investment Advisors Act. Investment managers would, however, violate the advertising rules if they asked clients to write favourable testimonials on their own websites or social media sites. 

Steven Nadel, partner at Seward & Kissel in New York, said the guidance was indicative that regulators had recognised the significance of social media. “Regulators have evolved and we welcome this guidance. Testimonials from clients on social media will help managers develop their brands in this increasingly competitive environment,” said Nadel.

The guidance from the SEC comes as it relaxed hedge fund advertising and marketing restrictions as mandated under the JOBS Act. While the two initiatives are not related, they do complement each other and will be helpful for managers to develop their businesses.

“The SEC guidance means managers will not need to worry about breaching US securities laws if a client posts a positive testimonial about them, but managers must abide by the SEC's clear guidance relating to when they may re-use such testimonials,” said Nadel.

Social media sites such as LinkedIn, Twitter and even Facebook are likely to be beneficiaries of the JOBS Act as capital hungry managers increasingly use these websites to boost investor interest in their businesses.  In the near-term, some managers are at least improving their websites – in November 2013, a $100 million California-based manager called Topturn Capital became the first hedge fund to post an advert on its homepage.

However, there are a number of pitfalls to the JOBS Act. The JOBS Act does not change the fact that hedge funds can manage money on behalf of accredited investors only, defined by the SEC as individuals with at least $1 million in investable assets. There is also a possibility the SEC will increase this $1 million threshold, which was set more than a quarter of a century ago, to take into account for inflation.

There are a number of other regulatory stumbling blocks preventing managers from embracing marketing and advertising initiatives. All solicitation material must be passed to the SEC which would make managers more susceptible to regulatory action, something which could discourage firms from either using social media or posting performance data on their homepages. 

Excitement more broadly about the JOBS Act has been somewhat muted. Just 1% of hedge fund managers intend to advertise their vehicles because of the JOBS Act, while approximately a quarter said they would adopt a “wait and see” approach, according to a survey by Aksia. Seventy-three per-cent of hedge funds told the Aksia study they would not take advantage of the JOBS Act’s liberalised advertising and marketing rules.

SECSeward & KisselJOBS ActAksia