The New Marketing Rule: General Guidelines for Advisors

Last December, the Securities and Exchange Commission (SEC) passed a new Marketing Rule to (finally) modernize the patchwork guidance previously offered to investment advisers regarding testimonials, endorsements, and third-party ratings in marketing promotions. The rule went into effect in May and after an 18-month transition period, the compliance date is set for November 2022.

While there may be hesitation to wade into these uncharted waters, planning ahead, and understanding the rules of the “game” can overcome any potential compliance missteps or worse, appearing “overly salesly” in your approach.

The framework is straightforward, but deserves a thorough review before creating your strategy. Here are some general instructions to keep in mind.

  1. Every piece will need to comply with the Seven General Prohibitions and include the necessary disclosures in light of the type of advertisement utilized. The necessary disclosures requires both attention to the content of the disclosure and the format of the disclosure (e.g., the disclosure must be made in a certain format and cannot simply be linked to or footnoted).
  2. The general prohibitions state prohibits an advertisement from:
    1. Including any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading.Example:   An undisclosed relationship or compensation agreement between the firm and the party giving the testimonial, endorsement, or third-party rating. Everyone knows your mom thinks you are great, but it should be obvious from the testimonial that it she was the person giving the statement so that readers are able to come to their conclusions.  The same is true regarding business partners, employees, other family members, and key vendors.  Use common sense.
    2. Including a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC.Example: Making a statement that the particular strategy beat its benchmark without keeping the requisite information that supports the statement in your files.  Or stating that your firm’s Chief Investment Officer is considered a pioneer or “world-renowned” expert investing in digital assets.
    3. Including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser.Example: Making a statement that the investment adviser’s strategies have never had quarter with negative returns.  The statement could be technically correct, but if the adviser has only been in business since 2020 could potentially create an erroneous inference that the client’s principal is safe or risk-free.
    4. Discussing any potential benefits to clients or investors connected with or resulting from the investment adviser’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits.Example: Cherry picking the firm’s best strategies in its marketing materials and hiding the poorly performing strategies from view.  Alternatively, showing the strategies’ positive performance but burying the disclosures 60 pages into the pitchbook.
    5. Including a reference to specific investment advice provided by the investment adviser where such investment advice is not presented in a manner that is fair and balanced.Example: Distributing an advertisement to your clients that references the great call you made on TSLA or Gamestop but failing to include the other securities you thought had hit bottom and which underperformed significantly.
    6. Including or excluding performance results, or present performance time periods, in a manner that is not fair and balanced.Example: A fact sheet that depicts performance that, for some reason, only depicts strategy performance depicting your firm’s performance in a good light.  The 1-, 5-, and 10-year mandatory time periods fixes many of these problems, but the classic examples we see are frequently characterized by “weird” timeframes.
    7. Being materially false or misleading. This is a catchall category that tries to capture “icky” marketing practices that may not fall directly under any of the categories, but are nonetheless viewed as potentially misleading.Example: Hiding the necessary disclosures from the client.  For example, in a video recording, not permitting the clients to review the disclosures or providing them in a format that is impossible to read (e.g., size 5 font, or in light yellow coloring on a white webpage).
  3. Determine if the advertisement is a 1) general advertisement or 2) a testimonial, endorsement, or third-party rating.
    1. Advertisement: An “advertisement” is defined under the Marketing Rule as any “any direct or indirect communication an investment adviser makes to more than one person, or to one or more persons if the communication includes hypothetical performance, that offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser.”
    2. Testimonials, endorsements, and third-party ratings or rankings are included in the second prong of the definition of “Advertisement”
      1. Testimonials: any statement by a current client about the client’s experience with the investment adviser or their supervised persons.
      2. Endorsements: any statement by a non-client that indicates approval, support, or recommendation of the investment adviser or its supervised persons. This includes the classic “solicitation” arrangements many advisers have established over the years but also opens the door for celebrity endorsements.
      3. Third-Party Rating: a rating or ranking of an investment adviser provided by a person not a related person and such person provides such ratings or rankings in the ordinary course of its business.  Think Google Reviews or the Better Business Bureau.
  4. Does the advertisement contain a statement about the adviser provided by a client or a non-client (even indirectly, e.g., the adviser references the third-party statement)?
    1. No, the piece is a general advertisement. Submit to compliance for approval.
    2. Yes, include a clear and prominent disclosure that the statement was made by a current client (testimonial) or non-client (endorsement).
  5. Is the person providing the testimonial/endorsement an employee or other affiliate of the adviser?
    1. No, move on to next step.
    2. Yes, provided the affiliation between the adviser and such person is readily apparent to or disclosed to the client or investor at the time the testimonial/endorsement is distributed and documented by the adviser, then the employee/affiliate testimonials and endorsements are not subject to the disclosure requirement or written agreement requirements discussed in the subsequent steps, but remains subject to the disqualification and general adviser oversight requirements.
  6. Does the investment provide compensation over $1,000 for the statement? Note that the compensation includes both direct and indirect cash and non-cash compensation, including checks, directed brokerage, awards, gift cards, and reduced advisory fees.
    1. No, move on to next step.
    2. Yes, disclose material terms of compensation arrangement and ensure that the firm has a written compensation agreement between the party making the statement and the firm. In addition, there should be a layered disclosure linking to a detailed description of the written compensation arrangement
  7. Are there any other material conflicts of interest between the promoter making the statement and the adviser? Situations that may be material conflicts of interest include friends and family of the adviser and vendors with financial interests in the adviser.
    1. No, move on to the next step
    2. Yes, provide a brief, clear and prominent disclosure of any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from their relationship with the adviser.In addition, the Marketing Rule also requires additional disclosure to the recipients of testimonials and endorsements regarding the material terms of the compensation arrangement (if any), including a description of the compensation provided or to be provided, directly or indirectly, to the person for the testimonial or endorsement; and a description of any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from the adviser’s relationship with such person and/or any compensation arrangement.
  8. Is the person providing the paid testimonial or endorsement an ineligible person at time the testimonial/endorsement was given? Under the Marketing Rule, an “ineligible person” is a person who is subject to an SEC opinion or order barring, suspending, or prohibiting the person from acting in any capacity under the federal securities laws or to any one of many enumerated “disqualifying events.” The definition extends to employees, officers, directors, general partners, and elected managers of an ineligible person. The Marketing Rule includes a ten-year lookback period across all “disqualifying events,” which aligns with disciplinary disclosure reporting on Form ADV Part 1A.
    1. No, you may submit the marketing piece to compliance for approval.
    2. Yes, you cannot use the testimonial/endorsement.
  9. Does the third-party rating or award meet the following requirements?
    1. The firm must have a reasonable basis for believing that any questionnaire or survey used in preparation is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result; and
    2. The advertisement must clearly and prominently disclose the
      1. Date on which the rating was given and the period upon which the rating was based.
      2. Identity of the third-party that created and tabulated the rating; and
      3. If applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.
  10. Has compliance confirmed the following?
    Disclosures will be delivered at the time the statement is disseminated and are clear and prominent (this may mean getting creative with clear and prominent disclosure requirements on social media)

    1. For written pieces, must be at least as prominent as the statement and appear close to the associated statement
    2. For video clips or audio recordings, provide disclosures in a written format when disseminated, as a banner framing the video or have the disclosures read aloud during the recorded statement
    3. To oversee compliance, the adviser should implement a process to provide promoters with disclosures, review promoter activity and/or include requirements in their written agreements for the use of disclosures
    4. Yes, the advertisement using the testimonial or endorsement may be used.

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We recognize that this is a lot of new information, but the amount of thoughtful consideration put into this framework shows real progress that can only benefit advisers. After a prolonged drought (keep in mind the last guidance on marketing for investment advisers was passed back in 1961), advisers finally have the approval to share the positive feedback that they receive from their clients and partners.  And considering that a significant percentage of new business for RIAs still come from referrals, what better way to showcase your work than through a testimonial or an endorsement?

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