Advertising Rules for Investment Advisers
Investment advisers must follow strict rules regarding advertising to ensure communications are fair, accurate, and not misleading. The SEC's Marketing Rule fundamentally changed the advertising landscape for investment advisers.
SEC Marketing Rule (Rule 206(4)-1)
The SEC adopted a comprehensive new marketing rule in December 2020, with mandatory compliance beginning November 4, 2022. This rule consolidated previous advertising and solicitation rules into a single framework.
Definition of Advertisement
An "advertisement" includes:
- Traditional Marketing: Any communication disseminated by any means to more than one person that offers advisory services
- Compensated Testimonials/Endorsements: Any testimonial or endorsement for which an adviser provides compensation
General Prohibitions
| Prohibited Conduct | Description |
|---|---|
| Material Misstatements | Untrue statements of material fact |
| Material Omissions | Leaving out facts necessary to prevent misleading |
| Misleading Statements | Statements likely to deceive or mislead |
| Unsubstantiated Claims | Statements without reasonable basis |
| Cherry-Picking | Selectively presenting favorable results |
| Misleading Implications | Making statements that imply untrue facts |
| Fair/Balanced Failure | Not presenting risks alongside benefits |
Testimonials and Endorsements
Key Definitions
Testimonial: A statement by a current client or private fund investor that:
- Describes their experience with the adviser
- Directly or indirectly solicits new clients
- Refers potential clients to the adviser
Endorsement: A statement by a non-client that indicates:
- Approval or support of the adviser
- Recommendation of the adviser's services
- Description of experience with the adviser
Required Disclosures
| Disclosure Element | Requirement |
|---|---|
| Client Status | Clearly disclose whether promoter is a current client |
| Compensation | Disclose if promoter is being compensated (cash or non-cash) |
| Conflicts of Interest | Disclose material conflicts that could affect credibility |
| Written Agreement | Required for compensation over $1,000 (de minimis exception) |
Oversight Requirements
Advisers using testimonials/endorsements must:
- Have a reasonable basis to believe disclosures are being made
- Oversee compliance with marketing rule requirements
- Maintain policies and procedures for supervision
Performance Advertising
Presentation Requirements
| Performance Type | Requirements |
|---|---|
| Net Performance | Must always be shown; the primary requirement |
| Gross Performance | Only permitted if net performance is also shown |
| Extracted Performance | Must include total portfolio performance |
| Hypothetical Performance | Strict conditions apply |
Hypothetical Performance
Hypothetical performance (model or backtested results) may only be shown to:
- Investors who the adviser reasonably believes can evaluate the methodology
- Must be accompanied by criteria used to generate results
- Cannot imply results represent actual trading
One-, Five-, and Ten-Year Returns
When showing performance over time periods:
- Must show 1, 5, and 10-year returns (or since inception if shorter)
- All periods must end at a consistent date (typically most recent quarter-end)
- Annualized returns required for periods over one year
Predecessor Performance
Can be used if:
- Substantially similar strategy and advisory personnel
- Records supporting performance are available
- Clear disclosure of the relationship
Third-Party Ratings
Requirements for Using Ratings
- Rating methodology must be disclosed or available
- Date of the rating must be shown
- Questionnaire or survey must have been designed fairly
- Cannot be misleading in presentation
Recordkeeping Requirements
| Record Type | Retention Period |
|---|---|
| All advertisements | 5 years from last use |
| Performance calculation support | 5 years |
| Third-party rating questionnaires | 5 years |
| Testimonial/endorsement disclosures | 5 years |
On the Exam: The SEC Marketing Rule is frequently tested. Know that testimonials are now permitted (a major change from prior rules), but only with proper disclosures. Remember that net performance must always be shown—gross performance alone is prohibited.
Key Takeaways
- The 2022 Marketing Rule modernized adviser advertising requirements
- Testimonials and endorsements are now permitted with required disclosures
- Performance must be shown net of fees; gross only allowed with net
- Hypothetical performance has strict limitations
- All advertisements must be retained for 5 years
Under the SEC Marketing Rule, testimonials in investment adviser advertising are:
Performance advertising by investment advisers must:
A written agreement is required for a testimonial or endorsement when compensation exceeds:
17.2 Social Media & Electronic Communications
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