From the SEC’s perspective, testimonials about investment advisers are misleading for the same reason as cherry picking: because testimonials present positive information without the context of offsetting negative information. See “How Can Hedge Fund Managers Market Their Funds Using Case Studies Without Violating the Cherry Picking Rule? (Part Two of Two)
,” Hedge Fund Law Report, Vol. 6, No. 47 (Dec. 12, 2013). Rule 206(4)-1 under the Investment Advisers Act of 1940 (Act), accordingly, prohibits the use of testimonials by investment advisers. However, that rule was drafted to cover a static media landscape consisting of print, television and radio; the rule is an imperfect fit with social media, a dynamic, ubiquitous and increasingly commercial channel. Not surprisingly, the SEC has received a regular clip of questions over the past several years about how the prohibition on testimonials applies to statements about an investment adviser on social media websites. Last month, the SEC’s Division of Investment Management addressed some of those questions in a Guidance Update. This article describes the Guidance Update, focusing in particular on the principles in the Guidance Update most relevant to hedge fund managers. This article concludes with the HFLR’s thoughts on the limited utility of the Guidance Update for hedge fund manager marketing. See also “Understanding the Regulatory Regime Governing the Use of Social Media by Hedge Fund Managers and Broker-Dealers
,” Hedge Fund Law Report, Vol. 5, No. 47 (Dec. 13, 2012).