Key Takeaways
- The SEC Marketing Rule (2022) replaced the previous advertising and solicitation rules.
- Testimonials and endorsements are NOW PERMITTED with proper disclosures.
- Performance advertising must show 1, 5, and 10-year returns NET of fees.
- Hypothetical performance requires extensive disclosures and is only for certain investors.
- Social media is subject to the same rules as other advertising.
- Third-party ratings must meet specific criteria to be used in advertising.
- All advertising must be fair, balanced, and not misleading.
- Written agreements required for paid promoters (except de minimis compensation).
Advertising and Client Communications
The SEC Marketing Rule, effective November 4, 2022, modernized investment adviser advertising rules by combining and replacing the previous advertising rule and cash solicitation rule.
Definition of Advertisement
Under the Marketing Rule, an "advertisement" includes:
- Any communication that offers investment advisory services
- Any communication regarding performance made to more than one person
Excluded Communications
| Exclusion | Reason |
|---|---|
| Live oral communications | Not considered advertising |
| One-on-one communications | Direct client communications |
| Response to unsolicited request | Client-initiated |
| Hypothetical in one-on-one | If explaining specific strategy |
General Prohibitions
All advertisements must avoid these prohibited practices:
| Prohibition | Description |
|---|---|
| Untrue statements | No false statements of material fact |
| Material omissions | Cannot omit material facts |
| Cherry-picking | Cannot select favorable periods unfairly |
| Misleading implications | Cannot imply unlikely outcomes |
| Guarantee of results | Cannot promise specific returns |
| Unfair comparisons | Cannot use materially misleading comparisons |
Testimonials and Endorsements
Major Change: Now Permitted
The Marketing Rule permits testimonials and endorsements with proper safeguards.
Definitions
| Type | Definition |
|---|---|
| Testimonial | Statement by current client about experience with adviser |
| Endorsement | Statement by non-client indicating approval or recommendation |
| Promoter | Person giving the testimonial or endorsement |
Required Disclosures
When using testimonials or endorsements:
| Disclosure | Requirement |
|---|---|
| Client status | Whether promoter is a current client |
| Compensation | Whether promoter was compensated |
| Amount of compensation | If material, the compensation amount/arrangement |
| Conflicts of interest | Any material conflicts |
Written Agreement Required
Must have written agreement with promoter UNLESS:
- Promoter is an affiliate of the adviser
- Compensation is de minimis ($1,000 or less in past 12 months)
Bad Actor Disqualification
Compensated promoters are prohibited if subject to:
- Statutory disqualification under securities laws
- SEC or state order barring association
- Certain criminal convictions
Performance Advertising
Gross vs. Net Performance
| Type | What It Shows | Rule |
|---|---|---|
| Net performance | Returns after deducting ALL fees and expenses | REQUIRED in most cases |
| Gross performance | Returns before fees | May show ONLY IF net is also shown |
Time Period Requirements
When showing performance:
| Requirement | Details |
|---|---|
| Standard periods | Must show 1, 5, and 10-year returns (or since inception) |
| Consistent presentation | Same methodology for all periods |
| Clear and prominent | Net returns must be at least as prominent as gross |
| End date | Must be the most recent practicable date |
Prohibited Practices
- Cherry-picking favorable time periods
- Using different methodologies for different periods
- Showing gross without net
- Omitting material facts about performance
Hypothetical Performance
Definition
Hypothetical performance includes:
- Model performance - Results of model portfolios
- Backtested performance - Applying strategy to historical data
- Target/projected returns - Expected future performance
Requirements for Use
| Requirement | Description |
|---|---|
| Policies and procedures | Must have written compliance policies |
| Relevance | Must be relevant to recipient's situation |
| Disclosures | Explain hypothetical nature and limitations |
| Not to retail investors | Generally prohibited for general audience |
Third-Party Ratings
May use third-party ratings in advertisements if:
- Rating is not paid for by adviser
- Based on objective criteria
- Clearly displayed methodology
- Rating is current (or date prominently disclosed)
- Adviser has reasonable basis to believe criteria is legitimate
Social Media
Same Rules Apply
| Platform | Rule |
|---|---|
| LinkedIn, Twitter/X, Facebook | Subject to all advertising rules |
| Posts, comments, likes | May constitute endorsement |
| Third-party posts | Adviser responsible if they "adopt" or "entangle" |
Adoption and Entanglement
Adviser may be responsible for third-party content if:
- Adviser explicitly approves the content
- Adviser controls the content
- Adviser compensates for the content
- Adviser materially contributes to the content
Recordkeeping
| Requirement | Details |
|---|---|
| Retain all communications | Including social media |
| Archive capability | Must be able to retrieve |
| Duration | 5 years (first 2 at principal office) |
Supervision and Review
Pre-Use Approval
| Communication Type | Review Required |
|---|---|
| Advertising | Principal pre-approval |
| Sales literature | Principal pre-approval |
| Correspondence | Post-review sampling acceptable |
Recordkeeping Requirements
Must retain:
- All advertisements disseminated
- Questionnaires used to evaluate investors
- Documentation supporting testimonials/endorsements
- Performance calculation records
Exam Tip: The 2022 Marketing Rule permits TESTIMONIALS with proper disclosures. Performance must show 1, 5, 10-year returns NET of fees. Paid promoters need WRITTEN agreements (unless de minimis).
Under the SEC Marketing Rule, investment adviser testimonials are:
When advertising investment performance, an adviser must show returns for:
An adviser wants to show gross performance in an advertisement. Under the Marketing Rule:
A written agreement with a promoter is required unless:
14.2 Advisory Contracts
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