A new risk alert from the Securities and Exchange Commission underscores its focus on ensuring advisors are compliant when using client testimonials, stemming from deficiencies examiners have seen so far, according to one observer.
“Here we are, this far into the year, and we’re still seeing a number of testimonials without disclosures,” said Brian Thorp, the founder and CEO of Wealthtender. “It’s reiterating that they’re not kidding, and to be prepared.”
The commission’s marketing rule took effect in May 2021, with its final compliance date hitting late last year. The rule dictates when and how advisors can use testimonials and endorsements in advertising, as well as the kind of portfolio performance metrics firms can use to sell themselves and their services.
The rule has remained the top concern for compliance officers throughout the industry for several years, according to surveys from the Investment Adviser Association.
This week’s risk alert reiterated the commission is looking for “reasonably designed” policies when using testimonials in marketing.
But this time exam staff stressed it was also “conducting focused examinations” into testimonials and endorsements, including whether disclosures are provided and whether “ineligible persons” have been knowingly compensated for testimonials.
An “ineligible person” is a person or entity subject to a “disqualifying SEC action” or other event, including some felony convictions, according to a white paper from the law firm Morgan Lewis.
Thorp said advisors could trip themselves up when providing disclosures of what he calls "the three Cs,” meaning whether the endorser was a client, compensated or had conflicts.
Thorp said some firms were “taking a gamble” by soliciting reviews on platforms like Yelp and Google Reviews, where disclosures were harder.
“By virtue of not having those platforms designed to incorporate those disclosures, that’s a lot for a firm to take on,” he said.
Firms can also run into trouble if those reviews include untrue statements, whether through malice or by mistake. In that case, the advisor has far less recourse to have the review taken down.
“If unsolicited reviews show up on Google by clients on their own volition, that’s never been an issue,” Thorp said. “The question becomes if an advisor solicited that review, have they entangled that review?”
In a previous interview with WealthManagement.com, the outgoing head of the SEC’s Asset Management Unit, Dabney O’Riordan, said the industry should expect the commission to eventually "send a message" with significant charges when the appropriate offender is found, and not necessarily levy a series of smaller fines for low-hanging infractions.
“From the SEC’s perspective, firms have had a long time to work on this, to figure things out and ask questions and to get them answered,” she said.