LinkedIn Compliance: Are Recommendations Testimonials?

LinkedIn chocolates by Nan Palmero

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.

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LinkedIn Compliance: Are Recommendations Testimonials?

One Response

  1. Does it matter that we are not the ones posting it?

    I’m with an RIA. I just ran into this because I got an email today with an endorsement of specific skills on my profile. I hid the endorsements and started writing an email to the guy that sent them. I wanted to thank him and explain why I couldn’t use them. That’s how I found this article – I was looking for specific info on why I couldn’t keep them.

    I get that the rule says we can’t “directly or indirectly, . . . publish, circulate, or distribute any advertisement” with a testimonial. And I get that a LinkedIn profile that I created could be considered an advertisement. But, I did not add the content about the endorsement. My connection did. As far as I can tell, I had nothing to do with directly or indirectly publishing circulating or distributing his endorsement. Because the content on a LinkedIn profile can have more than one author I wonder: could it be possible that endorsements or recommendations be considered separate from the “advertisement” portion of the profile?

    What if I get an endorsement or recommendation while I’m on vacation – it sits on my profile for a week before I get a chance to hide it. Or, let’s say I see the email about the endorsement and intend to hide it, but I neglect it for a month or two. Are these violations? If so, is it a violation because I did not hide it? What about the hours the endorsements were there before I checked my email today? Not hiding something and directly or indirectly publishing circulating or distributing something don’t seem to be the same thing. Hiding endorsements or recommendations happens after someone else has published one.

    Perhaps one would argue that adding skills to one’s profile is indirectly publishing an endorsement because it enables people to endorse you on those skills. If that were true then simply having a LinkedIn profile at all might be considered indirectly publishing a testimonial because doing so allows others to write recommendations. Should it be illegal for RIAs to have LinkedIn pages?

    I may be wrong, but I believe the original intent of the rule is to prevent fraudulent or misleading advertising to protect the public. Hiding endorsements and recommendations appears to be removing information that could actually be helpful to the public, which appears to be why LinkedIn introduced those features. I suppose that allowing endorsements and recommendations could enable some people to make overgenerous or even fraudulent statements about advisors – but they would still be statements of one’s connections, not the advisor (unless the advisor creates the recommendation by pretending to be someone else). In my non-lawyer opinion endorsements and recommendations on LinkedIn should be ok. Whether one’s connections are real people or advisors are somehow connecting with themselves might be a snag, but I think these are separate issues.

    November 7, 2012 at 5:13 pm #

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