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SEC Enforcement Action Against Leonard S. Schwartz: Testimonials, Social Media, and the Advisers Act of 1940

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In looking at the recent enforcement action by the Securities and Exchange Commission ("SEC") against Create Your Fate, LLC, let's first consider these two recent publications by governing bodies concerning the use of testimonials contained in internet or social media marketing efforts:

First, in March 2014, the Division of Investment Management published a guidance update on how the Investment Advisers Act of 1940, as amended ("Advisers Act"), applies to the use of social media by investment advisers and investment adviser representatives ("IAR").

The guidance update clearly established that an investment adviser or an IAR is prohibited from inviting clients to post public testimonial content directly on their website, blog, or social media account that could be considered an advertisement.

In a September 2017 Risk Alert, the Office of Compliance Inspections and Examinations ("OCIE") reported that advisers had published client endorsements of the advisers, and OCIE cautioned that such marketing practices would likely be considered prohibited testimonials.

Use of websites and social media for such purposes was specifically mentioned in the Risk Alert.

Crossing the Line - Leonard S. Schwartz and Create Your Fate, LLC

The SEC recently initiated five separate proceedings for improper use of social media and the internet against two SEC-registered investment advisers, three IARs, and a marketing consultant involving violations of the Testimonial Rule under the Advisers Act .

Four of the five matters implicate a registered investment adviser in activities associated with hiring marketing consultant Create Your Fate, LLC, operated by Leonard S. Schwartz, to solicit testimonials from clients for marketing activities on their websites, Google, and social media sites, including YouTube, Yelp, and Facebook, under a service titled "Squeaky Clean Reputation."

Videos produced by Create Your Fate contained statements by clients that they had profited from the investment advisers' services and that the firms' services had provided them with income, security, and peace of mind.

The SEC's July 10, 2018 Administrative Proceeding specifically states, "By publishing client testimonials on the internet, the investment advisers violated, and Schwartz caused violations of Section 206(4) of the Advisers Act and Rule 206(4)-1(a)(1) thereunder."

Without admitting or denying the SEC's ruling, parties involved have agreed to the entry of cease-and-desist orders and to pay sizable civil penalties.

(Read the SEC's official press release on the enforcement action for more details - click here.)

Testimonials and Social Media Marketing - There Are No Exceptions to the Regulations

Testimonials in advertisements are deemed inherently misleading, and the Advisers Act prohibits registered investment advisers from including them in advertisements.

While the term testimonial is not specifically defined in the codes that were violated, precedent exists that includes statements of a client's experience with, or endorsement of, an investment adviser.

When we consider the two recent clarifications provided by regulatory bodies that we mentioned in the opening of this post, we see the loop close - the context of social media does not change the fact that using convincing statements by clients regarding their experiences with a firm is off limits for investment advisors.

(Read more about other common non-compliance issues involving Rule 206(4)-1 of the Investment Advisers Act or Advertising Rule here.)

Compliance With the Regulations Is Clearly Required

The lesson to be learned from this case is a straight forward one - testimonials, or otherwise convincing statements, by client investors regarding profits or services are strictly prohibited.

Such marketing practices must be avoided, or consequences, up to and including enforcement, could result.

Registered investment advisers should thoroughly examine their marketing policies and procedures to be sure they comply with the Advisers Act and that all advisers are informed that the restrictions outlined by the SEC and those found in the Advisers Act fully apply to social media and internet marketing.

Investment Adviser Marketing Compliance - We're Here to Help

Should you need further guidance on marketing, advertising and/or social media usage, or help ensuring your policies and procedures are keeping within regulatory constraints, Jacko Law Group (JLG), PC, can help.

Learn more about the services we offer here.


See Rule 206(4)-1(a)(1) of the Advisers Act.

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