Expanded definition of “advertising”
- Offers investment advisory services pertaining to securities to prospective clients or investors in a private fund that an investment adviser advises; or
- Offers new investment advisory services pertaining to securities to current clients or private fund investors.
Seven general advertising prohibitions found in the new Marketing Rule
- Making untrue statements and omissions of a material fact that are necessary to avoid misleading the investor;
- Making unsubstantiated material statements of fact;
- Including content that may cause untrue or misleading implications or inferences to be drawn concerning a material fact;
- Discussing potential benefits without a fair and balanced discussion of material risks or limitations;
- Referring to specific investment advice provided by the RIA and not presenting it in a fair and balanced manner;
- Presenting performance returns or presenting performance time periods in a manner that is not fair and balanced; and
- Using content that is otherwise materially misleading.
Testimonials and endorsements are permitted if certain conditions are satisfied
- Indicates approval, support, or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons;
- Directly or indirectly solicits any current or prospective client or investor in a private fund for the investment adviser; or
- Refers any current or prospective client of, or an investor in a private fund advised by, the investment adviser.
- About the client or investor’s experience with the investment adviser or its supervised persons
- That directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or
- That refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.
- Disclosure. Advertisements must clearly and prominently disclose whether the person giving the testimonial or endorsement is a client and is being compensated. The person giving the testimonial or endorsement is referred to as the ‘promoter’.
- Oversight and Written Agreement. An RIA that uses testimonials or endorsements in an advertisement must oversee compliance with the Marketing Rule. An RIA must enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser or receives de minimis compensation. To qualify as de minimis compensation, the payment must be $1,000 or less during the preceding twelve months. Non-cash compensation must also have a value of $1,000 or less.
- Disqualification. The SEC believes that compensated testimonials and endorsements present a heightened risk for conflicts of interest and misleading investors. Therefore, the Marketing Rule will prevent RIAs from using compensated testimonials and endorsements made by certain “bad actors” and other ineligible persons. Compensated testimonials and endorsements include traditional referral and solicitation activities. Disqualification provisions are not applicable to uncompensated testimonials and endorsements.
The SEC has expressed concern in the past about third-party ratings being misleading. The Marketing Rule stipulates that an RIA may include a third-party rating in an advertisement, as long as the adviser forms a reasonable belief that the rating clearly and prominently discloses certain information.