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Regulation and Compliance > Federal Regulation > SEC

7 Advertising Don’ts Under New SEC Marketing Rule

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The Securities and Exchange Commission has modernized rules relative to RIA advertising and solicitation activity (known as the new “Marketing Rule”). The new Marketing Rule is set forth under Rule 206(4)-1, but Rule 206(4)-3 (which addressed payments to solicitors) has been rescinded.

The new Marketing Rule was approved in December 2020 and became effective on May 4, 2021. Advisors were given an 18-month transition period to develop policies and procedures for compliance with the new Marketing Rule, related recordkeeping requirements and Form ADV updates.

As of Nov. 4, compliance with all provisions of the Marketing Rule are required for SEC-registered firms. State-registered RIAs must remain vigilant to ascertain whether and when states will follow the SEC and implement similar changes.

The SEC has added Item 5.L. to Form ADV Part 1A. This section requests information regarding advisor advertisements and presentation of performance results ​— a reference to specific investment advice, hypothetical performance, predecessor performance, testimonials, endorsements or third-party ratings.

Item 5.L. also seeks information regarding cash and noncash compensation in connection with the use of testimonials, endorsements and third-party ratings. Advisors will be required to update responses to Item 5.L. in their annual updating amendment. Nonetheless, we recommend that RIA firms consider making appropriate Form ADV revisions prior to Nov. 4 to avoid potential regulatory scrutiny.

New Ad Definitions, Use of Testimonials

The SEC modified the “advertisement” definition to include any direct or indirect communication to more than one person that offers the advisor’s services with regard to securities to prospective clients or investors in a private fund advised by the RIA. There is an exception: When hypothetical performance material is presented, an advertisement is defined to include a communication to just one person.

The advertising definition also applies to communications offering new advisory services to current clients or to private fund investors. This definition expressly excludes several items, including one-on-one communications with a single person or household (when that communication does not contain hypothetical performance information).

Second, the definition generally includes any endorsement or testimonial for which an advisor provides cash and noncash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).

Significantly, the Marketing Rule allows for the use of testimonials (client statements regarding the RIA’s services that serve to approve the advisor’s business and are intended to encourage the direction of business to the advisor’s firm) and endorsements (such as statements from non-clients, which encourage prospective clients to engage with the RIA).

The use of testimonials and endorsements comes with various disclosure requirements, including disclosure of material information in relation to (direct or indirect) compensation arrangements and applicable conflicts of interest.

Advisors should be aware that lead generation firms, referral programs and other platforms that tout advisors, and serve to direct business to an advisor, will likely be considered endorsers.

What Not to Do

The Marketing Rule also contains seven general prohibitions that apply to all RIA advertisements, including testimonials and endorsements:

1. An advertisement may not include any untrue statement of a material fact or omit 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.

2. An advertisement may not include a material statement of fact that the advisor does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC.

3. An advertisement may not include 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 advisor.

4. An advertisement may not discuss potential benefits to clients or investors connected with, or resulting from, the advisor’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits.

5. An advertisement may not include a reference to specific investment advice provided by the advisor where such investment advice is not presented in a manner that is fair and balanced.

6. An advertisement may not include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced.

7. An advertisement may not be materially misleading.

The SEC provided numerous examples of advertisements which may not meet the “fair and balanced” standard. The last standard serves as a catch-all provision to address advertising that does not specifically violate the first six general prohibitions, but is otherwise presented in a manner that misleads the reader.

(Image: Adobe Stock)


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