The Securities and Exchange Commission has released updated guidance on its Marketing Rule, addressing two frequently asked questions — one on how fees can be used to calculate net performance, and another on paid testimonials and endorsements.
The first question involves the fees advisors use to calculate net performance — that is, performance after fees — when they advertise.
According to a footnote to the Marketing Rule, when advisors plan to charge a higher fee to the ad’s intended audience than the “actual fees” that have been charged, they must use a “model fee,” reflecting the anticipated fee, in the calculation.
Some advisors in this situation have interpreted that footnote “to categorically require the presentation of net performance calculated using a model fee and to prohibit the presentation of net performance calculated using actual fees," the FAQ states.
The new guidance clarifies that this is not the case.
The SEC "is basically saying firms can take either approach for model fees — actual or anticipated — as long as the disclosures are correct," Amy Lynch, president and founder of FrontLine Compliance, told ThinkAdvisor Friday in an email.
SEC examiners "will view this issue on a facts and circumstances basis," Lynch continued. "This is generally good for firms, but it also leaves a lot to interpretation for the examiners which means different examiners will have different approaches. One firm may receive a deficiency while another will not."
As the FAQ notes, in the SEC staff’s view, "whether the use of actual fees violates the general prohibitions depends on all of the facts and circumstances of a specific advertisement, including, but not limited to, relevant disclosures."
Advisors "may use various means to illustrate the effect of differences between actual fees and anticipated fees on performance," according to the FAQ.
Testimonials and SRO Orders
The Marketing Rule prohibits an advisor from paying for an endorsement or testimonial from a person they know, or should have known, has been subject to a “disqualifying event” within the past 10 years.
“Such an event includes the entry of any final order by a self-regulatory organization ... based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct,” the FAQ states.
For testimonials and endorsements, “the guidance confirms that certain SRO final orders do not automatically disqualify compensated endorsers if specific conditions are met,” Tiffany Duncan-Magri, senior regulatory advisor at Smarsh, told ThinkAdvisor Tuesday in an email.
Specifically, the updated FAQ addresses what to do "when the SRO has not barred or suspended the person or prohibited the person from acting in a capacity in connection with the disqualifying conduct," Lori Weston, head of Compliance at STP Investment Services, a global provider of technology-enabled investment operations, fund administration and compliance solutions, added in another email.
In short, according to the guidance, SEC staffers won’t recommend enforcement action against an advisor paying for a testimonial or endorsement from such a person, as long as:
- The sole reason the person giving the testimonial or endorsement is an ineligible person (as defined in the marketing rule) is the SRO’s final order
- The SRO did not expel or suspend the person from membership, bar or suspend the person from association with other members, or prohibit the person from acting in any capacity
- The person is in compliance with the terms of the SRO’s final order, including paying any fines
- For 10 years following the date of the final order, any advertisement containing the testimonial or endorsement discloses that the person providing it is subject to an SRO order, and includes the order, or a link to the order.
A Need for Clarity
The new FAQ guidance follows a risk alert issued by the SEC in December, warning that examiners had found widespread Marketing Rule compliance gaps around advisors' use of testimonials, endorsements and third-party ratings.
“Industry members across the board have been seeking further clarity on the Marketing Rule and I expect are pleased to see these new FAQs issued," Valerie Mirko, leader of Armstrong Teasdale’s Securities Regulation and Litigation practice area, told ThinkAdvisor Friday in another email.
"Both the model fees FAQ and the disqualification FAQ show us that IM staff is razor focused on addressing long-standing uncertainty through reasonable and thoughtful guidance," she said.
Further FAQs are expected, she said, given the marketing rule is among the SEC's top exam priorities for 2026.
Credit: Diego M.Radzinschi/ALM
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