Is Your Advertising Prohibited?

Given this limited definition of advertisement, one would reasonably assume that a client testimonial stating absolutely nothing about an investment advisor’s advisory services would fall outside the scope of the prohibition. For example, it would seem reasonable that clients’ statements about an investment advisor representative having general industry knowledge or high moral character would not violate the ban on testimonials, since they do not seem to involve any analysis, advice or service related to securities. However, there are published no-action letters and SEC releases that challenge this assumption and evince the SEC’s intent to prohibit practically any testimonial advertisements that even mention an investment advisor.

Examples of SEC Interpretation

In the SEC’s 1995 no-action letter regarding Gallagher and Associates Ltd., an investment advisor providing only financial planning services sought no-action relief relative to publishing comments from his clients about his “religious affiliation or general moral character; community service; trustworthiness and ethical character; diligence and attention to details; ability to listen and be sensitive to client needs; knowledge of investing, insurance and tax strategies (but never with reference to attained return on investment); and prudence and judgment.”

The SEC denied no-action relief based on the fact that the rule prohibits the use of testimonials “of any kind.” This denial ignores the concept that such statements fall outside the ambit of Rule 206(4)-1(b)’s definition of advertisement since they barely relate (if they relate at all) to advice regarding securities or investment advisory services.

To the SEC’s credit, perhaps the trigger point was the proposed statements about this investment advisor’s “knowledge of investing,” since that could potentially involve “any other investment advisory service with regard to securities.” However, the published no-action letter simply concludes with little explanation that the proposed use would constitute an impermissible testimonial.

In a CIGNA Securities no-action letter, the SEC denied no-action relief for the proposed use of written statements from financial planning (and not investment management) clients “to the effect that such persons are, in fact, satisfied clients.” The requesting party stressed that the underlying purpose of 206(4)-1 is to address the “basic concern and potential abuse” relating “to the manner in which traditional investment advisors portray and advertise their track records.” The requesting party further argued that “Rule 206(4)-1, which was adopted to deal with potential abuses by traditional investment advisors, should not be applied in a mechanical fashion to a fundamentally different kind of activity [i.e., financial planning] that does not involve the same potential abuse.” Once again, the SEC ignored these key distinctions and simply determined that the proposed statements would constitute impermissible testimonials.

Following this logic, Advisers Act Release No. 1490, issued in May 1995 against Louis Corujo, establishes that from the SEC’s perspective, signed quotes from satisfied financial seminar participants that described how the seminar benefited the participants also constitutes the use of testimonials. Again, the link between such signed quotes and the definition of advertisement is questionable at best, especially considering that it would be practically impossible to provide individualized investment advice in that setting. However, the SEC clearly reads the testimonial prohibition broadly enough to encompass these quotes as well.

In light of the above, investment advisors should think twice before publishing any advertisement that could potentially constitute a testimonial advertisement in the mind of the strictest possible regulator applying the broadest possible definitions. In all likelihood, such statements should be avoided at all costs.

— Read “Where FINRA, SEC and NASAA Are Really Focusing This Year” on ThinkAdvisor.