RIA Compliance Blog
On July 10, 2018, the Securities and Exchange Commission published five Orders Instituting Administrative and Cease-and-Desist Proceedings against two registered investment advisers, three investment adviser representatives, and Leonard S. Schwartz, a marketing consultant. The Orders allege that the respondents violated the Investment Advisers Act’s Testimonial Rule (275.206(4)-1(a)(1)). The SEC also alleged that another investment advisory firm, Romano Brothers & Company (“Romano Brothers”), violated the Testimonial Rule by posting two videos on YouTube featuring client testimonials. The Testimonial Rule provides that investment advisers and their representatives are forbidden from publishing, circulating, or distributing advertising materials that directly or indirectly refer to client experiences about the investment adviser and its services. The SEC considers publication of client testimonials fraudulent because testimonials typically present a biased evaluation of an investment adviser’s services.
The SEC’s Orders allege that Schwartz, an investment adviser named HBA Advisors, LLC (“HBA”), and three investment adviser representatives, Jaime Enrique Biel, William M. Greenfield, and Brian S. Eyster violated the Testimonial Rule when they retained Schwartz to solicit testimonials from the firms’ and representatives’ clients. According to the SEC’s Orders, Schwartz and his company, Create Your Fate, LLC, sent emails to clients whom HBA and the representatives selected. If a client responded with a testimonial, the testimonial would be published on a social media website.
The SEC’s Orders allege that the investment advisers and representatives violated the Testimonial Rule by engaging in the following actions:
- Romano Brothers posted a video on YouTube which featured 27 client statements describing those clients’ positive experiences with Romano Brothers. The client statements included a description of the income, security, and peace of mind those clients received from the Romano Brothers’ service.
- HBA and Biel, with Schwartz’s help, solicited statements from HBA clients which described those clients’ experiences with HBA and further directed clients to post these testimonials on Yelp.com.
- Greenfield, with Schwartz’s help, published client statements that Schwartz solicited on Facebook and Google. These statements provided that Greenfield was trustworthy and had helped clients obtain investment returns.
- Eyster, with Schwartz’s help, solicited statements from more than 80 clients regarding their experience with Eyster. When Eyster received the statements from clients, he published them on Yelp.com and posted videos containing testimonial statements on YouTube and Google. These testimonials described Eyster’s services, such as statements that Eyster was knowledgeable and that one could expect future returns as a result of working with Eyster.
Each of the SEC’s Orders compels the investment advisers, investment adviser representatives, and Schwartz to pay civil money penalties. Schwartz agreed to pay a $35,000 civil money penalty, HBA and Romano Brothers each agreed to pay $15,000 civil money penalties, and Biel, Greenfield, and Eyster each agreed to pay $10,000 civil money penalties.
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