Imagine if each of the “Big Three” social media sites hosted a party. Twitter would wear a wrinkly T-shirt and Facebook would have on a hoodie. Meanwhile, LinkedIn would sport a shirt-and-tie. It is no secret that LinkedIn is the most professional of the “Big Three.” But financial advisers beware: there is a significant stumbling block unique to LinkedIn compliance. Despite its usefulness as a networking tool, a “recommendation” on LinkedIn looks and smells a lot like a testimonial. As you may already know, a testimonial of a RIA is something the SEC explicitly forbids. The likeness of LinkedIn recommendations to SEC-defined testimonials then raises the question: are recommendations considered testimonials? The short answer: yes.
What the law says (circa 1940)
First, let’s explore the regulation concerning testimonials, specifically Rule 206(4)-1(a)(1) of the Investment Advisers Act of 1940. This rule states that a RIA’s actions “directly or indirectly, to publish, circulate, or distribute any advertisement [. . .] which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser” is illegal. In short, an advertisement that includes a testimonial of the RIA is against the law. But this law was written in 1940, meaning it needs to be translated to today.
The regulation applied to today
So, how does this 1940 law apply to LinkedIn recommendations? First we must address what this law means by “advertisement.” Essentially, the SEC views an advertisement as a public statement made to more than one person. Thus, a newspaper ad is considered an advertisement just as a LinkedIn profile is. Both are public and feature qualified statements about a service or product to all of one’s connections.
Next, what about the term “testimonial”? Well, the SEC has never explicitly defined the term testimonial. But, the Office of Compliance Inspections and Examinations’ offers some guidance. It states that the SEC staff historically interprets a testimonial to be “a statement of a client’s experience with, or endorsement of, an investment adviser.” This means that any statement that describes the financial adviser’s services would be viewed as a testimonial or endorsement. Thus, a LinkedIn recommendation is a testimonial.
Recommendations threaten LinkedIn compliance
Given the updated definitions of “advertisement” and “testimonial,” it is clear why a recommendation is in violation of SEC regulation and threatens LinkedIn compliance. A recommendation is publicly available on your LinkedIn profile and features statements about your services, meaning a recommendation is an advertised testimonial. This violates Rule 206(4)-1(a)(1). You can still accept recommendations from others, but you must hide the recommendation. Hiding the recommendation will make it private and prevent it from becoming a “advertisement,” ensuring compliance. Although there is no litigation specifically addressing testimonials on social media, the bottom line remains the same: a LinkedIn recommendation should be avoided by RIAs.
So, as you enter the party and shake LinkedIn’s hand, remember that there are house rules. Principally, avoid recommendations. Otherwise, enjoy the good food and company LinkedIn has to offer. Just remember to circle the room; you never know who you might meet.