NASAA Series 63Communication with Customers and ProspectsHard
A state-registered investment adviser (IA) firm uses social media to engage with clients and promote its services. The firm posts general market commentary and links to its blog. Under the Uniform Securities Act, which of the following is TRUE regarding the use of testimonials on the IA firm's social media?
- ATestimonials are permitted if they are balanced with negative reviews.
- BTestimonials are allowed if they are from accredited investors only.
- CTestimonials are permitted if they are unpaid and include a disclaimer.
- DTestimonials are generally prohibited for state-registered IAs.
Show answer & explanationAnswer & explanation
Correct answer: D. Testimonials are generally prohibited for state-registered IAs.
Under the Uniform Securities Act, state-registered investment advisers are generally prohibited from using testimonials in their advertisements, including social media. The rationale is that testimonials may be biased, misleading, and do not provide a complete picture of client experience, potentially influencing prospective clients unduly.
Why the other options are wrong
- A. Attempting to balance testimonials does not circumvent the general prohibition against their use by state-registered IAs.
- B. The prohibition applies regardless of the client's accreditation status.
- C. The prohibition extends to both paid and unpaid testimonials, and disclaimers do not cure the fundamental issue for state-registered IAs.
IA Testimonial Prohibition (USA)
The Uniform Securities Act generally prohibits state-registered investment advisers from using testimonials in their advertisements, including on social media, due to their potential to be misleading or biased.
- Applies to state-registered IAs; federal rules (SEC) have recently changed.
- Prohibition covers all forms of advertising, including social media.
- Rationale: testimonials can be biased, non-representative, and misleading.
Memory trick: No Praises, Just Facts for IAs.