The Investment Adviser Marketing Rule: An Analysis and Compliance Guide

This is a full-length article that originally appeared in the Washburn Law Journal.

I. Introduction

To replace what it has described as “an outdated and patchwork regime on which advisers have relied for decades,”[1] the Securities and Exchange Commission (“SEC”) amended the Investment Advisers Act of 1940 (“the ‘Act’”) with a new marketing rule, which became binding on SEC-registered advisers in November of 2022.[2] As part of the same initiative, the SEC also amended Rule 204-2 (the books and records rule) and the investment adviser registration materials (“Form ADV”).[3]

With the new investment adviser marketing rule, the SEC intended to modernize the Act’s approach to marketing, consolidate the old advertising and solicitation rules into one, and replace the former prescriptive approach with principles-based guidance.[4] Although the SEC adopted the original advertising rule in 1961, and the original solicitation rule in 1979, neither rule had been substantively updated since its adoption.[5] In the meantime, however, “advertising and referral practices have evolved. . . . the technology used for communications has advanced, the expectations of investors shopping for advisory services have changed, and the profiles of the investment advisory industry have diversified.”[6]

In recognition of these and other changes, the SEC adopted the new marketing rule, thereby introducing a sea change to the investment adviser regulatory landscape. To give just one example, prior to the new rule, it had been a foundational principle of investment adviser regulation that advisers could not use testimonials or endorsements in their marketing—this meant no online reviews and no website quotes from satisfied clients.[7] The prohibition was based on the SEC’s long-held rationale that third-party reviews may be a misleading, undue influence on investor decision-making.[8] But pursuant to the new marketing rule, investment advisers are now allowed to use testimonials and endorsements in their advertising.[9]

These and many other changes make the new rule an important development for investment advisers that has a direct day-to-day impact on their work and how they communicate with their actual and prospective clients. Notably, the marketing rule itself is six pages long, while the SEC’s Adopting Release is about 400 pages long.[10] The goal of this Article is to distill the key takeaways from the Adopting Release and other SEC guidance, to synthesize those takeaways with the plain meaning of the rule, and to hopefully provide advisers, attorneys, and researchers with a useful overview of the rule’s requirements, the reasons and history behind those requirements, and a roadmap for compliance.

II. An Overview of the Rule

Broadly speaking, the new marketing rule begins with certain general prohibitions that are drawn from the historic anti-fraud principles of the securities laws. It goes on to set forth specific requirements for advertisements that include testimonials and endorsements, third-party ratings, and various measures of actual and hypothetical performance. For readers to have a big-picture sense of the marketing rule, a brief overview of its key provisions appears below. While the summary of the rule in this section leaves out certain details, the rule’s precise requirements will be discussed later in this Article.

A. Defining Advertisement

The investment adviser marketing rule does not apply to every communication made by, or on behalf of, an investment adviser.[11] Rather, it applies to advertisements.[12] Thus, the starting point of any analysis under the marketing rule is to determine whether the communication at issue is in fact an “advertisement.” The rule defines the term advertisement in two prongs:

1. First Prong

Within the first prong, advertisement is defined as: “[A]ny direct or indirect communication an investment adviser makes to more than one person, or to one or more persons if the communication includes hypothetical performance, that offers the investment adviser’s investment advisory services . . . .”[13] In the first prong, the term “advertisement” does not include: “extemporaneous, live, oral communications”; information in a statutory or regulatory notice, filing, or required communication; or hypothetical performance that is provided in response to an unsolicited request or in a one-on-one communication to an investor in a private fund.[14]

2. Second Prong

Within the second prong, the definition of advertisement includes any endorsement or testimonial for which an investment adviser provides compensation.[15] This part of the definition has no carve-out for one-on-one communications or extemporaneous, live, oral communications, but it does carve out information contained in a regulatory filing or other required communication.[16]

B. General Prohibitions

The rule begins with seven general prohibitions, which are briefly summarized as follows:

1. Making an untrue statement of material fact or omitting a material fact necessary to make a statement not misleading;

2. Making a material statement of fact that cannot be easily substantiated;

3. Providing information that would cause an untrue or misleading inference about the investment adviser;

4. Discussing benefits to the client of the investment adviser’s services without discussing risks;

5. Referencing the adviser’s specific investment advice in a manner that is not fair and balanced;

6. Including or excluding performance results in a way that is not fair and balanced; and

7. Being misleading in any other way.[17]

C. Testimonials and Endorsements

As noted in the introduction, the new marketing rule now allows testimonials and endorsements—the distinction between the two being that the former is made by a current client, while the latter is made by a non-client.[18] To use testimonials and endorsements in advertisements, advisers must ensure that the advertisements clearly, prominently, and briefly disclose: (1) the testimonial was given by a current client or the endorsement was given by a non-client; (2) that compensation was given for the testimonial or endorsement (only if applicable); and (3) a brief statement regarding any material conflicts on the part of the promoter resulting from their relationship with the adviser.[19]

In addition to these “clear and prominent” disclosures, advisers must also disclose: (1) the material terms of any compensation arrangement with the promoter, including a description of the compensation; and (2) a detailed description of any material conflicts of interest on the part of the promoter stemming from the compensation arrangement or their relationship with the advisers.[20]

Advisers have a two-fold oversight and compliance obligation: (1) they must have a reasonable basis to believe that the testimonial or endorsement complies with the disclosure requirements set forth above; and (2) they must have a written agreement with any compensated promoter.[21]

The rule includes certain carve-outs from the testimonial and endorsement requirements. Most notably, partners, officers, directors, control persons, and employees of the adviser do not have to comply with the disclosure requirements if their affiliation with the adviser is obvious and documented at the time of the statement.[22] Likewise, testimonials and endorsements by registered broker dealers are exempt from certain requirements, and in certain enumerated circumstances, which will be discussed in more detail below.[23]

While advisers may generally provide compensation for testimonials and endorsements, the rule forbids compensating “ineligible persons” who are subject to a disqualifying event or SEC action.[24] This prohibition is subject to certain exceptions that are discussed in more detail below.[25]

D. Third-Party Ratings

Third-party ratings are allowed in advertisements if the adviser reasonably believes that the rating mechanism makes it equally easy to submit a negative or positive review.[26] The rating must include the date of the rating and the time period to which it applies, the identity of the party that compiled the rating, and if any compensation was given by the adviser for the rating.[27]

E. Performance

1. Gross and Net Performance

If an advertisement includes gross performance, then it must include equally-prominent net performance, calculated for the same period of time.[28] Also, any advertisement that sets forth performance results must include equally-prominent performance for the past one-, five-, and ten-year periods, or for the life of the portfolio if it has not existed for any one of those periods.[29]

2. Related Performance

An advertisement cannot include any performance of related portfolios (i.e., portfolios with similar investment policies, objectives, and strategies as those of the services being offered in the advertisement), unless it includes all related portfolios, except that they do not need to be included if their exclusion does not make performance materially higher or alter performance during the one-, five-, and ten- year time periods mentioned above.[30]

3. Extracted Performance

Advertisements can only include extracted performance from a subset of investments in the portfolio if the adviser offers to promptly provide the performance of the total portfolio from which it was extracted.[31]

4. Hypothetical Performance

Advertisements can only include hypothetical performance, such as model portfolios, backtests, and targeted or projected performance, if the adviser implements policies designed to ensure that the hypothetical performance is relevant to the financial situation and investment objectives of the intended audience, explains the criteria and assumptions used for the hypothetical performance, and explains the risks and limitations of relying on hypothetical performance.[32]

5. Predecessor Performance

Advertisements cannot include predecessor performance unless: the people responsible for that performance manage accounts for the advertising adviser; the referenced predecessor accounts are similar to the adviser’s current accounts, so that referencing them is relevant to investors; all predecessor accounts that were managed in a similar way are included, unless the exclusion does not lead to materially higher performance and does not alter presentation of the one-, five-, and ten-year periods mentioned above; and the advertisement prominently discloses that the performance results were from accounts managed at another entity.[33]

6. No SEC Approval

Performance advertisements cannot suggest that the advertisement was approved by the SEC.[34]

III. SEC Compliance Exams: A Focus on the New Rule

Before moving on to explore each provision of the rule in more detail, readers should note that the SEC has stated its intention to focus on the new marketing rule in forthcoming compliance exams. In a recent Risk Alert, the Division of Examinations specifically flagged the following examinable areas:[35]

• Written Policies and Procedures. “The staff will review whether investment advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent [Marketing Rule] violations by the advisers and their supervised persons . . . .”[36]

• Reasonable Basis to Substantiate Material Facts. “The staff will review whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements. The Marketing Rule prohibits advertisements that ‘[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.’”[37]

• Specific Requirements for Performance Advertisements. “The staff will review whether investment advisers are in compliance with performance advertising requirements in the Marketing Rule . . . .” These include prohibitions on: advertising gross performance without including net performance; advertising hypothetical performance without meeting specific disclosure and target-audience requirements; and advertising performance results without including certain specific time periods (one, five, and ten years).[38]

• Compliance with Books and Records Rule Amendments. The amended books and records rule requires investment advisers to create and retain “records of all advertisements they disseminate, including certain internal working papers, performance related information, and documentation for oral advertisements, testimonials, and endorsements.”[39]

• Compliance with Form ADV Amendments. “[T]he Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices. The staff reminds advisers of their obligations to accurately complete these questions in their next annual Form ADV amendment.”[40]

While implementing and evaluating compliance programs in light of the new marketing rule, advisers should be especially mindful of these examination focus areas.[41] Each area is discussed in more detail in this Article, with the exception of the amendments to Form ADV, since advisers and their counsel will become familiar with those amendments while completing the form itself (i.e., Form ADV consists of a series of questions and comes with detailed instructions to answer those questions, and thereby serves as its own roadmap for compliance).

IV. Larger Context and Analysis

From a big picture standpoint, the SEC has two goals in implementing the marketing rule. The first is to prevent misleading investors. As the SEC explains, “advertisements present risks of misleading investors because an investment adviser’s interest in attracting investors may conflict with the investors’ interests,” but the conflicted adviser is the one creating the content and design of the advertisement.[42] The marketing rule is intended to prevent potential harm to investors from misleading advertisements.[43]

The second major goal of the new rule is to prevent investors from assuming that the recommendations of solicitors are unbiased and neutral. Whether an adviser directly employs individuals to solicit new investors, or engages a broker dealer for the same purpose, the compensated person or entity has a financial incentive to recommend the adviser.[44] “Without appropriate disclosure, this compensation creates a risk that an investor would mistakenly view the recommendation as being an unbiased opinion about the adviser’s ability to manage the investor’s assets and would rely on that recommendation more than the investor would if the investor knew of the incentive.”[45] The solicitation components of the marketing rule are intended to disclose those conflicts.[46]

Bearing these two big picture goals in mind, let us explore the additional requirements and color provided in the SEC’s adopting release and its other guidance materials.

A. Written Policies and Procedures

As a starting point, advisers must implement written policies and procedures that are designed to prevent violations of the marketing rule.[47] As already noted, this is one of the SEC’s examination priorities:[48]

The new Marketing Rule is a significant change to a core examination review area for registered investment advisers (RIAs). As such, the Division will, among other things, assess whether RIAs have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the Marketing Rule.[49]

B. Definition of Advertisement

The marketing rule has a two-prong definition of the word “advertisement.”[50] The first prong “includes the kinds of communications traditionally covered by the advertising rule,” while the second prong “includes the kinds of activities previously covered by the cash solicitation rule.”[51] Both prongs are explained below.

1. First Prong

The first prong of the definition of advertisement applies to any communication that offers the adviser’s services to prospective clients or investors in a private fund advised by the adviser (“private fund investors”), or that offers new advisory services to current clients or private fund investors.[52] The definition of advertisement does not include communications designed to retain existing investors.[53]

i. Extemporaneous, Live, Oral Communications

Within the first prong only, the definition of advertisement does not include extemporaneous, live, oral communications, even if such communications are broadcast on radio, television, podcasts, or in press interviews.[54] The “extemporaneous” requirement means that the communications were not prepared in advance; prepared remarks and scripted speeches do not fall within the exclusion.[55] The communication must be “live,” which means that a recorded communication—which was an extemporaneous, live, oral communication at the time it was made—no longer qualifies under this exclusion if the adviser subsequently distributes the recording.[56] By the time of distribution, the adviser would have had the opportunity to review the content, make edits, etc.[57] Finally, this exclusion only applies to oral communications and does not apply, for example, to a chat message exchange happening in real time.[58]

ii. One-on-One Communications

Within the first prong only, the definition of advertisement does not include one-on-one communications, unless they include hypothetical performance.[59] Note, however, that even a communication regarding hypothetical performance is not an advertisement if the communication is in response to a request from an investor or is made to a private fund investor.[60]

The SEC notes that a communication that appears to be to one person, but is really a mass email targeting many people, is an advertisement, as is a “duplicated insert” that is slotted into otherwise personalized communications.[61] Advisers should implement “compliance policies and procedures that are reasonably designed to determine whether a communication nominally directed to a single person is actually a communication to more than one person, or contains duplicated inserts as part of that communication.”[62]

iii. Communications Made by the Adviser

The term advertisement applies to all “direct and indirect” communications made by the adviser, including advertising materials given by an adviser to intermediaries (e.g., consultants, other advisers, and promoters). “Those advertisements are indirect communications,” the SEC explains, “because they are statements provided by the adviser for dissemination by a third party.”[63]

While it becomes a fact-specific inquiry to determine whether a communication is made by the adviser, a communication is certainly made by the adviser where the adviser participated in its creation or dissemination, the adviser authorized the communication, or the communication was prepared by a “related person” as defined in Form ADV.[64]

If a communication was prepared by the adviser’s marketing firm, then it is likely a communication of the adviser, unless the marketing firm did not act on the adviser’s comments or made unauthorized changes.[65] Likewise, if an adviser provides marketing materials to a fund-of-funds/feeder fund, which provides the materials to investors, then they are the adviser’s materials, except that the adviser would not be responsible for the fund-of-fund’s unauthorized edits or changes.[66]

In other circumstances, third-party information may be attributed to the adviser—specifically, if an adviser adopts third-party content or becomes entangled in third-party content.[67] An adviser adopts third-party information when it endorses or approves the information by, for example, sharing content prepared by a third-party in the adviser’s own materials.[68] An adviser becomes entangled in third-party content if the adviser aids in the preparation of the content.[69] In both cases, the third-party content is treated as the adviser’s own content.

iv. Social Media

These concepts also apply to social media. The SEC explains that, if an adviser involves itself in the comments, endorses or approves comments, or edits posted comments, then those comments are attributed to the adviser[70]:

For example, if an adviser substantively modifies the presentation of comments posted by others by deleting or suppressing negative comments or prioritizing the display of positive comments, then we would attribute the comments to the adviser (i.e., the communication would be an indirect statement of the adviser) because the adviser would have modified third-party comments with the goal of marketing its advisory business.[71]

The SEC does allow advisers to edit comments to remove profanity, offensive or defamatory statements, spam, etc. based on neutral criteria that are documented in the adviser’s policies, as long as such edits are not intended to favor or disfavor the adviser.[72]

By contrast, if the adviser allows the comments to be posted, but does not engage with them, then they are not attributed to the adviser: “For example,” notes the SEC:

[P]ermitting all third parties to post public commentary to the adviser’s website or social media page would not, by itself, render such content attributable to the adviser, so long as the adviser does not selectively delete or alter the comments . . . . even if the adviser has the ability to influence the commentary but does not exercise this authority.[73]

The SEC cautions that an associated person’s personal social media activity may fall within the definition of an advertisement if it would be difficult for an investor to distinguish the communication from a communication of the adviser.[74] The SEC explains: “If the adviser adopts and implements policies and procedures reasonably designed to prevent the use of an associated person’s social media accounts for marketing the adviser’s advisory services, we generally would not view such communication as the adviser marketing its advisory services.”[75] The SEC recommends that advisers which prohibit such communications conduct periodic training, obtain attestations, and periodically review content that is publicly available on associated persons’ social media accounts.[76]

v. Brand Content, General Educational Material, and Market Commentary

Generic brand content, educational materials, and market commentaries, which are intended to raise the adviser’s profile but do not offer advisory services, are not advertisements—presuming they do not offer investment advisory services, which is a fact-specific analysis.[77] Thus, neither sponsoring an event where the adviser’s logo is displayed, nor publishing an educational or market analysis article would be an advertisement.[78] By contrast, an article is an advertisement if it begins with “general market commentary [but] concludes with a description of how the adviser’s securities-related services can help prospective investors.”[79]

vi. Information in a Statutory or Regulatory Notice, Filing, or Required Communication

The rule excludes from the definition of advertisement “[i]nformation contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication.”[80] However, if an adviser offers its advisory services in a regulatory filing in a way that is not “reasonably designed to satisfy its obligations under applicable law,” then that information is an advertisement.[81]

2. Second Prong

As noted above, the new marketing rule merges the old solicitation and advertising rules. The second prong of the definition of advertisement is intended to capture traditional solicitation activity.[82] It applies to any communication that is an endorsement or testimonial for which the adviser provides compensation, and does not carve out one-on-one communications or extemporaneous, live, oral communications.[83]

This prong of the definition only applies to compensated testimonials and endorsements; an uncompensated testimonial or endorsement would have to meet the first prong definition to be considered an advertisement.[84] Compensation includes non-cash compensation, which can create the same incentive as cash to recommend an adviser and should be disclosed to clients.[85]

i. Lead Generation, Referral Websites, and Paid Bloggers

According to the SEC, lead-generation and referral websites engage in activities that fall within the definition of endorsement.[86] Since these websites typically offer to match an investor with one or more advisers that compensate the website, the operators are engaging in solicitation activities.[87] Along the same lines, if an adviser pays a blogger for a review based on the number of new clients that the review yields, then the blogger is an endorser/solicitor.[88]

By contrast, the following activities are not endorsements, but are still advertisements:

[W]here an adviser pays a third-party marketing service or news publication to prepare content for and/or disseminate a communication, we generally would not treat this communication as an endorsement . . . . Similarly, a non-investor selling an adviser a list containing the names and contact information of prospective investors typically would not, without more, meet the definition of endorsement.[89]

ii. Information in a Statutory or Regulatory Notice, Filing, or Required Communication

As in the first prong, the second prong of the definition of advertisement excludes “information contained in a statutory or regulatory notice, filing, or other required communication” as long as the “information is reasonably designed to satisfy the requirements of the notice, filing, or other required communication.”[90]

iii. Promoters May Need to Register as Investment Advisers

The SEC explains that a promoter may “be acting as an investment adviser within the meaning of section 202(a)(11) of the Act.”[91] The SEC explains that this is a fact-specific analysis. “Investment adviser status and registration questions require analysis of the applicable facts and circumstances, including, for example, whether a person is ‘advising’ others within the meaning of section 202(a)(11) of the Act.”[92]

Likewise, the SEC observes that a promoter may also be acting as a broker dealer.[93] The SEC explains as follows:

To be clear, we are not making a presumption that a person providing an endorsement or testimonial meets the definition of investment adviser or broker- dealer and must register under the Act or the Exchange Act, respectively. Nor are we making a presumption that such person may or may not be an associated person of a registered investment adviser. Indeed, we agree that some promoters may meet the definition of associated person of an investment adviser depending on the facts and circumstances. Others may not. Under the final marketing rule, if an adviser determines that a person providing an endorsement or testimonial is an associated person, the adviser should have requisite control of such person.[94]

Promoters must also determine whether they are subject to Financial Industry Regulatory Authority (“FINRA”) rules or licensing requirements for individuals under state law.[95] “In some states,” the SEC notes, “a third-party solicitor will be subject to state qualification requirements to the extent state investment adviser statutes apply to solicitors.”[96]

3. Investors in Private Funds

Both prongs of the definition of advertisement include communications to private fund investors.[97] Private funds are defined as issuers that would be investment companies under the Investment Company Act, if not for sections 3(c)(1) and 3(c)(7), which exempt, respectively, investment companies with less than 100 accredited investors when there is no public offering, and investment companies with an unlimited number of qualified purchasers.[98] Private placement memoranda are not treated as advertisements.[99] Likewise, private fund account statements, transaction reports, and presentations about performance to existing clients are not advertisements.[100]

C. General Prohibitions

As noted above, a preliminary question under the marketing rule is whether a particular communication falls within the definition of the word “advertisement” at all—because the marketing rule applies to advertisements. Assuming it does, then we must follow the rule’s substantive requirements.

The marketing rule begins with a series of general prohibitions on false and misleading advertisements,[101] which reinforces the foundational principle that investment advisers are fiduciaries who owe their clients something “more than mere honesty and good faith alone.”[102] Justice Cardozo famously described this as “the punctilio of an honor the most sensitive.”[103] The general prohibitions “are drawn from historic anti-fraud principles under the Federal securities laws.”[104]

The standard to establish a violation of the marketing rule is negligence, rather than a higher scienter standard.[105] When assessing a violation, the SEC considers the “nature of the audience to which the advertisement is directed” as a “key factor in determining how the general prohibitions should be applied.”[106] Advertisements directed to retail investors need more and different information than advertisements directed to “sophisticated institutional investors.”[107]

The seven general prohibitions are as follows:

• "Making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;"

• "Making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC;"

• "Including 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 adviser;"

• "Discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;"

• "Referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;"

• "Including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced;" and

• "Including information that is otherwise materially misleading."[108]

In the subsections below, we explore each of these prohibitions in detail.

1. Prohibition 1: Making an Untrue Statement of Material Fact or Omitting a Material Fact Necessary to Make a Statement Not Misleading

Explaining that this prohibition depends on context, the SEC gives a few examples of advertisements that would run afoul of the prohibition:

• “[A]dvertising that an adviser’s performance was positive during the last fiscal year may be misleading if the adviser omitted that an index or benchmark consisting of a substantively comparable portfolio of securities experienced significantly higher returns during the same period.”[109] To avoid violating the rule, the adviser could include the index or benchmark in the ad.[110]

• “[I]t would be misleading for an adviser to compensate a person [for referring] investors to the adviser by stating that the person had a ’positive experience’ with the adviser when such person is not a client or private fund investor of the adviser for its advisory services.” How to avoid making such a statement misleading? “[T]he adviser could disclose that the experience does not relate to any advisory services.[111]

• “It would also be misleading for an adviser to use a promoter’s testimonial or endorsement that the adviser knows or reasonably should know to be fraudulent, misleading, or untrue, regardless of whether the adviser compensates the promoter,” such as an investor who claims he’s worked with the adviser for twenty years, when in fact it has been five years.[112]

• An adviser cannot claim a report, analysis, or service is free if it is not actually free and without conditions.[113]

• Depending on the included disclosures provided and extent to which an adviser actually provides investment advice solely based on such materials, “it may be false or misleading under this provision to represent, directly or indirectly, in an advertisement that any graph, chart, or formula can by itself be used to determine which securities to buy or sell.”[114]

2. Prohibition 2: Making a Material Statement of Fact that Cannot Be Easily Proven

Advisers must have a reasonable basis to believe that they can substantiate all statements of material fact.[115] As my colleague, Richard Ellenbogen of Potomac Law Group, likes to tell advisers who try to qualify advertisements with adjectives such as “top,” “leading,” “best,” or a similar descriptor: “If you can’t prove it, don’t say it.”[116] The rule memorializes Mr. Ellenbogen’s principle.

The SEC explains that the requirement does not apply to every material claim, but only to statements of material fact—opinions are not included.[117] Moreover, advisers do not need to maintain a file substantiating every statement of material fact in an advertisement.[118] They only need a reasonable basis to believe that they will be able to substantiate a material fact if called upon to do so.[119]

Advisers should be able to produce records to meet the substantiation requirement or implement policies that address how the requirement is met.[120] “If an adviser is unable to substantiate the material claims of fact made in an advertisement when the Commission demands it,” the SEC warns, “we will presume that the adviser did not have a reasonable basis for its belief.”[121] In multiple releases, the SEC has identified this requirement as one of its examination priorities.[122] As explained in its 2023 Examination Priorities release, the SEC will review whether “RIAs have a reasonable basis for believing they will be able to substantiate material statements of fact and requirements for performance advertising, testimonials, endorsements and third-party ratings.”[123]

3. Prohibition 3: Providing Information that Would Cause an Untrue or Misleading Inference About the Investment Adviser

Advisers cannot include information in advertisements that would be reasonably likely to cause an untrue or misleading implication or inference concerning a material fact.[124] Among other goals of this requirement, the SEC seeks to avoid having advisers cherry pick past investments or strategies and include favorable results, while omitting unfavorable ones.[125] A positive testimonial in an ad does not need to be balanced with a negative one to avoid creating a misleading inference, but the SEC does encourage advisers to include a disclaimer alongside any positive testimonial saying that it is not representative and directing readers to the location of all testimonials about the adviser.[126]

4. Prohibition 4: Discussing Benefits to the Client of the Investment Adviser’s Services Without Discussing Risks

This provision prohibits “advertisements that discuss any potential benefits connected with or resulting from the investment adviser’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits.”[127] Advisers do not need to discuss every potential risk, but only the material risks associated with the benefits.[128] While hyperlinks can elaborate on disclosures, it would not be sufficient to have a page of an advertisement discussing benefits, and then hyperlinking to a separate page to discuss risks (and thereby obscuring such risks).[129]

5. Prohibition 5: Cherry Picking by Referencing the Adviser’s Specific Investment Advice in a Manner that is Not Fair and Balanced

The rule prohibits advertisements from referencing specific investment advice that is not presented in a fair and balanced way.[130] In the words of the SEC:

An advertisement that references favorable or profitable past specific investment advice without providing sufficient information and context to evaluate the merits of that advice is not fair and balanced. For example, an adviser may wish to share a “thought piece” to describe the specific investment advice it provided in response to a major market event.[131]

Another practice that meets the SEC’s approval is providing unfavorable or unprofitable past advice in addition to profitable advice, or “listing some, or all, of the specific investment advice of the same type, kind, grade, or classification as those specific investments presented in the advertisement.”[132]

If an adviser includes its previously recommended investments in an ad, then the criteria used to determine such lists and how the criteria apply should produce fair and balanced results.[133] As the SEC observes, “consistent application of the same selection criteria across measurement periods limits an investment adviser’s ability to reference specific investment advice in a manner that unfairly reflects only positive or favorable results.”[134] The SEC also suggests that advisers consider using non-performance-based selection criteria to determine which investments to include in an advertisement, such as listing investments alphabetically.[135]

The nature and sophistication of the audience is relevant to determining whether an advertisement is fair and balanced. In advertisements targeted to retail investors, advisers should include a disclosure that past investment advice does not guarantee future results.[136] This may include “an explanation of the particular or unique circumstances of the previous investment advice and how those circumstances are no longer relevant.”[137] However, this level of detail would not be necessary in an advertisement targeted to institutional investors.[138]

6. Prohibition 6: Including or Excluding Performance Results in a Way that is Not Fair and Balanced

Advisers must include and exclude performance results in a fair and balanced way, just as they must present performance time periods in a fair and balanced way.[139] A key purpose of this provision is to ensure that advisers do not cherry pick the periods used to generate performance results.[140] The SEC cautions that presenting performance over a short period of time (such as a couple months) or over inconsistent periods may portray performance in a way that is inconsistent with the adviser’s general results.[141] And if additional information is needed for an investor to assess performance results, failure to provide such information runs afoul of the fair and balanced standard.[142] Advisers should consider providing information about the state of the market at the time of their performance, unusual circumstances that contributed to their performance, and similar material considerations.[143]

7. Prohibition 7: Being Misleading in Another Way

This final prohibition is intended as a catch-all provision which disallows any materially misleading advertisements.[144]

D. Testimonials, Endorsements, and Solicitations

The new marketing rule introduced a significant change to the landscape of investment adviser advertising by allowing testimonials and endorsements, which had been traditionally banned,[145] subject to specific disclosure, oversight, and disqualification provisions.[146] The definitions of the terms testimonial and endorsement now include solicitation activity that was previously covered by the former cash solicitation rule (now incorporated into the new marketing rule).[147]

As discussed in more detail below, the use of testimonials and endorsements is subject to certain conditions that differ depending on whether they are paid or unpaid.[148] The conditions are intended to inform prospective clients about the conflicts of interests associated with testimonials and endorsements, to prohibit paid testimonials and endorsements by certain bad actors, and to require a written agreement with certain persons giving a testimonial or endorsement for more than de minimis compensation.[149] The SEC has identified compliance with the rules surrounding testimonials, endorsements, and solicitations as one of its enforcement priorities.[150]

1. Overview

To use testimonials and endorsements in an advertisement, advisers must ensure that the advertisement clearly, prominently, and succinctly discloses: (1) whether or not the reviewer is a current client of the adviser; (2) an overview of any compensation arrangements given for the testimonial or endorsement (if compensation was given); and (3) any material conflicts on the part of the promoter resulting from their relationship with the adviser.[151] As described below, certain other disclosures are also required, but they do not need to be “clear and prominent.”[152]

Advisers must either make this disclosure themselves or have a reasonable basis for believing that the testimonial or endorsement complies with these requirements.[153] Rather than adopting standardized disclosure requirements, the SEC intended to give advisers latitude to provide disclosures in a way that ensures that testimonials and endorsements are not false or misleading.[154]

i. Clear, Prominent, and Succinct

The three disclosures subject to the “clear and prominent” standard must be at least as prominent as the testimonial or endorsement. In other words, the SEC “believe[s] that the ‘clear and prominent’ standard requires that the disclosures be included within the testimonial or endorsement, or in the case of an oral testimonial or endorsement, provided at the same time.”[155]

Using hyperlinks is acceptable for disclosures that are not subject to the “clear and prominent” standard but is insufficient for those that are.[156] This means that disclosures regarding the promoter’s status as a client, whether compensation was paid for the review, and information about any material conflicts of interest, must be “close to the associated statement” so that the statement and disclosures are read at the same time.[157]

The SEC also expects the clear and prominent disclosures to be succinct.[158] In the case of a conflict of interest disclosure, for example, “it would be sufficient for an adviser to simply state that the testimonial or endorsement was provided by an affiliate of the adviser, or that the promoter is related to the adviser, if this relationship is the source of the conflict.”[159] While the SEC requires a more complete disclosure regarding conflicts of interest, the full disclosure is not subject to the clear and prominent standard.[160]

When promoters work with advisers, “there should be explicit disclosure that the promoter, due to such compensation, has an incentive to recommend the adviser, resulting in a material conflict of interest.” [161] The SEC goes on, “Additionally, we believe a promoter could have other material conflicts of interest based on a relationship with the investment adviser that could affect the credibility of the testimonial or endorsement.”[162] These would also need to be disclosed.

ii. Details of Compensation

In addition to the clear and prominent statement regarding whether the reviewer was compensated, the marketing rule requires detailed disclosure of the material terms of any compensation arrangement, including a description of the compensation provided for the testimonial or endorsement.[163] To achieve this goal, the SEC allows the use of layered disclosures, in which the testimonial clearly and prominently states that the reviewer was paid, while an associated hyperlink provides information about the compensation.[164] The SEC notes the level of detail it expects in such disclosures:

If a specific amount of cash compensation is paid, the advertisement should disclose that amount. If the compensation takes the form of a percentage of the total advisory fee over a period of time, then the advertisement should disclose such percentage and time period. With respect to non-cash compensation, if the value of the non-cash compensation is readily ascertainable, the disclosures should include that amount. Moreover, if all or part of the compensation, cash or non-cash, is payable upon dissemination of the testimonial or endorsement or is deferred or contingent on a certain future event, such as an investor’s continuation or renewal of its advisory relationship, agreement, or investment, then the advertisement should disclose those terms.[165]

The SEC notes that “this provision will require disclosures about any compensation arrangement with a promoter for its testimonial or endorsement,” suggesting that other compensation paid to the promoter does not need to be included in the disclosure.[166] The SEC does not further elaborate on this point, but additional clarity would be helpful to distinguish between compensation paid specifically for a testimonial or endorsement, which is subject to disclosure, and compensation paid for another purpose, which is not subject to disclosure except to the extent it creates a conflict of interest.

In the specific circumstance where an adviser compensates a “third-party marketing company to advertise and refer potential clients to the adviser,” the disclosure should include, if applicable: that compensation consists of a percentage of fees collected from the referred clients, and what that percentage is; that the adviser has a directed brokerage arrangement with a third-party brokerage firm and the material terms of the arrangement; and any other material terms of compensation.[167]

iii. Reasonable Belief

Either the adviser or promoter can provide the necessary disclosures,[168] but if an adviser does not provide them, then the adviser must reasonably believe that the promoter has provided them.[169] To establish a reasonable belief, the adviser can include a disclosure mandate in its written agreement with the promoter, provide the promoter with appropriate disclosure language and ask the promoter to use it, and/or “periodically mak[e] inquiries of a sample of investors solicited or referred by the promoter in order to assess whether that promoter’s statements comply with the rule.”[170]

iv. Timing

The required disclosures must be delivered at the time the testimonial or endorsement is disseminated.[171] Disclosures can be included in an oral communication such as a podcast, in electronic form on a website, on paper, or in another format, as long as they are clear and prominent.[172]

v. Written Agreement and the Books and Records Rules

Advisers are ultimately responsible for ensuring that all testimonials and endorsements that meet the definition of advertisement comply with the requirements of the rule. In addition to either making the disclosures themselves, or having a reasonable basis to believe that testimonials and endorsements comply with the marketing rule, advisers must have “a written agreement with any person giving a compensated testimonial or endorsement that describes the scope of the agreed upon activities and the terms of the compensation for those activities,” assuming the compensation is above the de minimis threshold.[173] Moreover, per the books and records rule, advisers need to keep copies of the advertisement and disclosures on file.[174]

2. Disqualification of Promoters Who Engaged in Misconduct

The marketing rule prohibits compensating promoters—whether they are providing an endorsement, testimonial, or solicitation—“if the adviser knows, or in the exercise of reasonable care should know, that the person giving the testimonial or endorsement is an ineligible person” who is subject to a disqualifying event or SEC action.[175] Note that this restriction does not apply to those giving uncompensated testimonials and endorsements.[176]

The restriction extends not only to the person subject to the disqualifying event or SEC action, but also to certain associated persons of the disqualified promoter, including “any employee, officer, or director of an ineligible person and any other individuals with similar status or functions.” [177] If the ineligible person is a partnership, then the rule includes all general partners, and if the ineligible person is a limited liability company managed by elected managers, then the rule includes all elected managers.[178]

By contrast, the marketing rule does not apply to a disqualified person’s “control affiliates,” who “may operate independently from the person providing the compensated testimonial or endorsement.”[179] In other words, if an entity is eligible to be a promoter, then it will not become ineligible solely because an employee, officer, or director is ineligible.[180] However, that ineligible person may not directly or indirectly receive compensation for the testimonial or endorsement, including, for example, “by receipt of a share of profits the entity receives from the testimonial or endorsement, or as a bonus tied to the entity’s overall profits without setting aside revenue from testimonials and endorsements.”[181]

i. Regulation D

If a person is covered by Rule 506(d) of Regulation D—the “bad actor” disqualification from the securities registration exemptions of Rules 506(b) and (c)—and that person’s involvement in the securities offering would not disqualify the offering, then the person may be compensated for a testimonial or endorsement that is made only as part of the offering.[182] The SEC’s rationale is to avoid double regulation, so that individuals are not subject to the bad actor disqualifications of the marketing rule and Rule 506 of Regulation D.[183]

But this exemption only applies to people covered by Rule 506(d) “to the extent they are acting thereunder in a rule 506 securities offering.”[184] For example, an otherwise-disqualified broker-dealer serving as a placement agent in a Rule 506 securities offering would only be exempt from the bad actor disqualification of the marketing rule with respect to testimonials and endorsements made as part of the Rule 506 offering.[185] That same broker-dealer would be disqualified from giving a general testimonial or endorsement outside of that offering.[186]

The SEC also notes that covered persons under Rule 506(d) are not exempt from any other requirements of the marketing rule, such as the general prohibitions, performance requirements, and other conditions for the use of testimonials and endorsements (except the disqualification provision).[187]

ii. Verification Obligation

Advisers should check a compensated promoter’s eligibility on an annual basis as long as an ongoing endorsement or testimonial is available to investors.[188] So, as long as the solicitation relationship remains in place, advisers must annually confirm the promoter’s eligibility.[189] By doing so, advisers will be able to demonstrate that they did not know, or did not have reason to know, that the promoter was ineligible.[190]

iii. Defining Disqualifying Events and Commission Actions

A “disqualifying Commission action” is any SEC “opinion or order barring, suspending, or prohibiting a person from acting in any capacity under the Federal securities laws.”[191] The marketing rule permits advisers to compensate solicitors and promoters who are subject to certain SEC orders, so long as they have not been “barred, suspended, or prohibited . . . from acting in any capacity under the Federal securities laws.”[192]

A “disqualifying event” is a finding of a court or certain regulatory agencies that a person has engaged in one of five categories of prohibited events in the past ten years.[193] These events “are drawn from section 203(e) of the [Investment Advisers] Act, which is a basis for Commission action to censure, place limitations on the activities, or revoke the registration of any investment adviser or its associated persons.”[194] The definition also includes similar actions of the Commodity Futures Trading Commission and certain self-regulatory agencies that are not included in Section 203(e).[195]

3. Exemptions from Testimonial and Endorsement Requirements

i. Partners, Officers, Employees, Control Persons, etc.

The marketing rule exempts testimonials and endorsements from the disclosure and written agreement requirements when the testimonials and endorsements are given by an adviser’s partners, officers, directors, or employees, or persons that control, are controlled by, or are under common control with the adviser.[196] For this exemption to apply, the affiliation between the adviser and promoter must be apparent or disclosed at the time of the testimonial or endorsement, and the adviser must document the person’s status at the time of dissemination.[197] Note, however, that promoters who fall within this exemption are still subject to the disqualification rule, and advisers must still have a reasonable basis to believe that the testimonial or endorsement does not implicate the disqualification rule.[198]

ii. De Minimis Compensation

The SEC also exempts endorsements and testimonials that are given for de minimis compensation, which the SEC considers as $1,000 or less over a twelve-month period.[199] In this case, promoters are not subject to the disqualification provisions, nor are they required to have a written agreement, but advisers must still comply with the oversight and disclosure provisions, which include a requirement to disclose conflicts of interest.[200] Of course, even a payment of less than $1,000 creates an incentive to recommend the adviser, which is likely a disclosable conflict. The SEC also observes that conflicts of interest may exist in the absence of compensation: “For instance, if the adviser and the promoter are participants in a referral network, it is important that these investors fully understand that the provider expects to benefit from its endorsement of or testimonial about the adviser.”[201]

iii. Broker-Dealers

Broker-dealers that are registered under Section 15(b) of the Securities Exchange Act of 1934 are exempt from the marketing rule’s disqualification provisions if they are not subject to disqualification under Section 3(a)(39) of the Exchange Act.[202] They are likewise exempt from the disclosure requirements when providing a testimonial or endorsement to retail customers that constitutes a recommendation subject to Regulation BI.[203] In both cases, the requirements of the Exchange Act achieve the same goals as the requirements of the marketing rule, and the SEC sees no benefit to regulatory overlap.[204]

Also, when a broker-dealer provides a testimonial or endorsement to an investor who is not a retail customer as defined in Regulation BI, the broker-dealer is not required to disclose the material terms of compensation or material conflicts of interest.[205] However, the clear and prominent disclosures are still required, as are the other disclosure obligations of the marketing rule, such as the oversight and written agreement requirements.[206]

E. Third-Party Ratings

Third-party ratings are allowed in advertisements if the adviser reasonably believes that the rating mechanism makes it equally easy to submit a negative or positive review and is not designed to produce a predetermined outcome.[207] To make this determination, the adviser must engage in due diligence to determine how the survey was designed, structured, and administered to ensure that the advertisement does not include misleading information.[208] In addition, the rating provider should be an entity that provides ratings in its ordinary course of business, and it cannot be a related person, so as to avoid the risk of a biased rating.[209]

When presenting a third-party rating, the advertisement must clearly and prominently disclose: the date of the rating and the time period to which it applies; the identity of the party that compiled the rating; and, if applicable, that compensation was given by the adviser for obtaining or using the rating.[210] These clear and prominent disclosures must be at least as prominent as the rating itself.[211]

The SEC also cautions that ratings cannot be misleading in any other way, based on the marketing rule’s general anti-fraud provisions:

For example, where an adviser’s advertisement references a recent rating and discloses the date, but the rating is based upon on an aspect of the adviser’s business that has since materially changed, the advertisement would be misleading. Likewise, an adviser’s advertisement would be misleading if it indicates that the adviser is rated highly without disclosing that the rating is based solely on a criterion, such as assets under management, that may not relate to the quality of the investment advice.[212]

Advisers should be sure to consider the general prohibitions when presenting third-party ratings.

F. Performance Advertising

The marketing rule imposes special investor protections when advertisements include performance results.[213] These extra protections reflect the SEC’s concern that performance-based advertising is especially likely to be misleading. When it comes to performance advertising, the marketing rule prohibits all of the following presentations:

• "Gross performance, unless the advertisement also presents net performance;"

• "Any performance results, unless they are provided for specific time periods;"

• "Any statement that the Commission has approved or reviewed any calculation or presentation of performance results;"

• "Performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;"

• "Performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;"

• "Hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance;" and

• "Predecessor performance, unless there is appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement."[214]

The sections that follow elaborate on each point of this bullet summary. Note that the SEC has identified the performance advertising rules among its current enforcement priorities.[215]

G. Gross and Net Performance

Whenever an advertisement presents gross performance (i.e., performance results before advisory fees and expenses come out), the advertisement must also present performance net of fees: (1) with equal prominence and in a format that facilitates comparison with gross performance; and (2) calculated over the same time period using the same type of methodology.[216] In response to an FAQ question, the SEC points out that the requirements concerning gross performance apply when an advertisement includes the gross performance of even a single investment, as well as when an advertisement includes the performance of an entire portfolio.[217]

Why is the SEC so concerned about presenting gross performance without including net performance? As it explains:

Presenting gross performance alone . . . may imply that investors received the full amount of the presented returns, when the fees and expenses paid in connection with the investment adviser’s investment advisory services would reduce the returns to investors. Presenting gross performance alone also may be misleading to the extent that amounts paid in fees and expenses are not deducted and thus not compounded in calculating the returns. In addition, we believe that presenting net performance in all advertisements will help illustrate for investors the effect of fees and expenses on the advertised performance results and allow all investors to compare the adviser’s performance presentation with their own calculations, if applicable.[218]

The marketing rule does not set forth particular disclosure requirements for net and gross performance presentations, but the SEC suggests that advisers include “the assumptions, factors, and conditions that contributed to the performance.”[219]

1. Definitions

Gross performance is defined as the performance results of a portfolio before “the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio.”[220] While this is simple enough, things get more complicated when it comes to net performance.

Net performance is defined as the performance results of a portfolio “after the deduction of all fees and expenses that a client or investor has paid or would have paid in connection with the investment adviser’s investment advisory services to the relevant portfolio,” including, but not limited to, “advisory fees, advisory fees paid to underlying investment vehicles, and payments by the investment adviser for which the client or investor reimburses the investment adviser.”[221]

Net performance may exclude a bank or third-party’s custodian fee, unless the adviser charges the custodian fee directly.[222] By way of example, custodian fees should be included in net performance in the following three circumstances: (1) if the adviser is the custodian and charges custodial fees directly; (2) if custodial fees are included in a single fee paid to the adviser; or (3) if the client reimburses the adviser for third-party custodial fees.[223]

With the above definition as context, the rule gives advisers latitude to compute net performance without requiring a particular method of calculation.[224] When calculating net performance, advisers may choose to deduct a “model fee” (i.e., a representative, hypothetical fee) to simplify the calculation of their actual fee, provided that the resulting performance is no better than it would be if the advertisement included the actual fee.[225] In other words, if advisers use a model fee in their advertising, then it should be equal to, or higher than, their highest actual fee.[226] Along the same lines, when an advertisement includes hypothetical performance, net performance should reflect the fees and expenses that would have been paid if the hypothetical portfolio were in fact a real portfolio.[227]

H. Performance Time Periods

Whenever an advertisement includes performance for a particular time period, it must also include performance for the past one-, five-, and ten-year periods, or life-to-date performance, if the portfolio did not exist for one of those periods.[228] “For example,” explains the SEC, “if a portfolio has been in existence for seven years, then the adviser must show performance results for one- and five-year periods, as well as for the seven-year period.”[229]

While an adviser can show performance results for other periods, those three periods must be included.[230] The goal of this rule is to protect investors from relying on performance advertising based on cherry-picked periods of high performance.[231]

1. Private Fund Exemption

Private funds are exempt from the time period requirement—they do not need to include any performance periods in their advertising. This is because private funds are often advertised to investors at early stages, when their performance is negatively affected by organizational expenses of the “J-curve,” which is defined as a loss followed by a significant gain.[232] As the SEC explains:

[T]he presentation of performance using an internal rate of return, as is typical with private equity funds, is often not meaningful in the early years of the fund because the fund is not fully invested, no investments have been harvested, and the new investments likely have not changed in value.[233]

2. Calculating Time Periods

Regarding how to calculate the time periods, the marketing rule requires that the time periods end at the most recent calendar year-end, or a more recent date.[234] This means that when presenting the one-, five-, and ten-year time periods, the latest the end date can be is the most recent calendar year-end.[235] Advisers may need to present performance results as of a more recent date than the most recent calendar year-end to comply with the general prohibitions on misleading ads.[236] However, the SEC has also indicated that if, in the one-month period following year-end, an adviser does not have enough time to calculate its year-end performance data, then it can rely on third-quarter data in an advertisement until it can calculate its year-end performance results.[237]

The SEC cautions advisers not to select time periods that show only their most favorable performance.[238] For example, it would be inappropriate to show “a five-year period ending on a particular date because that five-year period showed growth while presenting a ten-year period ending on a different date because that ten-year period showed growth.”[239] While the rule provides some flexibility in choosing the most recent year-end or a more recent date, the general prohibitions on misleading ads should serve as a beacon when choosing end dates.[240]

I. No SEC Approval

Performance advertisements may never state or imply that the SEC has somehow approved or reviewed the performance results.[241] “For example,” explains the SEC, “while potentially true, a statement that ‘performance results are prepared in compliance with the Commission’s requirements on performance presentations in advertisements’ may mislead an investor into thinking that the Commission has approved the results portrayed.”[242]

J. Related Performance

The marketing rule does not allow advisers to present any “related performance” unless it includes all “related portfolios.”[243] Let’s unpack this: “related performance” is defined as “the performance results of one or more related portfolios,”[244] while “related portfolio” is defined as a portfolio “with substantially similar investment policies, objectives, and strategies as those of the services being offered in the advertisement.”[245]

So, if an advertisement includes the performance results of a particular portfolio, but the adviser has other portfolios with “substantially similar investment policies, objectives, and strategies as those of the services being offered in the advertisement,” then the performance of all such “related portfolios” must be included in the advertisement.[246]

This requirement largely turns on a determination of what is being “offered” in an advertisement. For example, let us assume that a particular investment adviser has ten unique strategies with different investment goals and objectives, one of which is its flagship strategy. If the adviser offers only its flagship strategy in a particular advertisement, and sets forth the performance of that strategy, then the adviser is likely compliant with the marketing rule because the other strategies are arguably not “related portfolios.” However, if the adviser has a “performance overview” page on its website—and the website advertises all the adviser’s strategies—then the webpage cannot include an overview of the flagship strategy without any of the others. That would violate the marketing rule.

The SEC explains: “We continue to believe that conditioning the presentation of related performance in advertisements on the presentation of all related portfolios (with limited exceptions) is necessary to prevent investment advisers from including only related portfolios that have favorable performance results or otherwise ‘cherry-picking.’” [247] The SEC believes that this approach provides advisers with “flexibility in presenting related portfolios, without permitting exclusion because of poor performance.”[248] Based on this rationale, the marketing rule does allow an adviser to exclude related portfolios if the advertised performance is not materially higher than it would be if the related portfolios were included.[249]

How does an adviser determine whether portfolios are in fact related? The SEC provides the following guidance:

Whether a portfolio is a “related portfolio” under the rule requires a facts and circumstances analysis. An adviser may determine that a portfolio with material client constraints or other material differences, for example, does not have substantially similar investment policies, objectives, and strategies and should not be included as a related portfolio. On the other hand, different fees and expenses alone would not allow an adviser to exclude a portfolio that has a substantially similar investment policy, objective, and strategy as those of the services offered.[250]

If an adviser determines that two portfolios are not related, then they do not need to be presented together in an advertisement.

K. Extracted Performance

The marketing rule prohibits advisers from using advertisements that present extracted performance unless the advertisements include, or offer to promptly provide, the performance of the total portfolio from which the extracted performance was derived.[251] “Extracted performance” is defined as “the performance results of a subset of investments extracted from a portfolio.”[252] Consistent with the theme of its performance advertising rules, the SEC takes this approach with extracted performance to prevent advisers from cherry-picking strong performance while leaving out lower-performing components of the same portfolio.[253]

1. Composite of Extracts

The SEC cautions that “performance that is extracted from a composite from multiple portfolios is not extracted performance as defined in the final rule because it is not a subset of investments extracted from a portfolio.”[254] A consolidated extraction from multiple portfolios “carries a greater risk of misleading investors than an extract from a single portfolio because an adviser could cherry-pick holdings from across the composite and deem those holdings part of a particular strategy.”[255] This type of composite also may not reflect the holdings of any actual investor.[256] For these reasons, the SEC considers a “composite of extracts” in the same category as hypothetical performance, and thus subject to the additional rules that govern hypothetical performance (discussed below).[257]

L. Hypothetical Performance

1. Definitions and Exclusions

The marketing rule defines “hypothetical performance” as “performance results that were not actually achieved by any portfolio of the investment adviser,” including “model performance, backtested performance, and targeted or projected performance returns.” (all three terms are defined below).[258] The definition of hypothetical performance excludes interactive analysis tools and predecessor performance.[259]

i. Definition of Model Performance

As the name suggests, model performance includes a range of performance results that are made by model simulations, but are not implemented in actual portfolios. The SEC gives three examples:

(i) [the models] described in the Clover no-action letter where the adviser applies the same investment strategy to actual investor accounts, but where the adviser makes slight adjustments to the model (e.g., allocation and weighting) to accommodate different investor investment objectives; (ii) computer generated models; and (iii) those the adviser creates or purchases from model providers that are not used for actual investors.[260]

ii. Definition of Backtested Performance

Backtested performance is the presentation of performance that is used by applying “a strategy to data from prior time periods when the strategy was not actually used during those periods.”[261]

iii. Definition of Targeted and Projected Performance

Targeted performance is “an investment adviser’s aspirational performance goals” and projected performance is “an investment adviser’s performance estimate, which is often based on historical data and assumptions” and is “commonly established through mathematical modeling.”[262]

The hypothetical performance rules only apply to portfolios or securities offered in an advertisement, rather than an adviser’s projections of general market performance or economic conditions, which are not subject to the rule’s requirements for hypothetical performance.[263]

iv. Interactive Analysis Tools: Not Hypothetical Performance

The definition of hypothetical performance does not include:

[A]n interactive technological tool that produces simulations and statistical analyses that present the likelihood of various investment outcomes if certain investments are made or certain investment strategies or styles are undertaken, thereby serving as an additional resource to investors in the evaluation of the potential risks and returns of investment choices.[264]

To use interactive analysis tools, advisers must:

(1) Provide[] a description of the criteria and methodology used, including the investment analysis tool’s limitations and key assumptions; (2) Explain[] that the results may vary with each use and over time; (3) If applicable, describe[] the universe of investments considered in the analysis, explain[] how the tool determines which investments to select, disclose[] if the tool favors certain investments and, if so, explain[] the reason for the selectivity, and state that other investments not considered may have characteristics similar or superior to those being analyzed; and (4) Disclose[] that the tool generates outcomes that are hypothetical in nature.[265]

v. Exclusions from Hypothetical Performance Requirements

Certain communications regarding hypothetical performance are excluded from the hypothetical performance rules: (1) responses to unsolicited requests; (2) hypothetical performance provided to a private fund investor in a one-on-one communication; and (3) hypothetical performance that is presented in a live, extemporaneous, and oral communication. None of these three are subject to the conditions on the use of hypothetical performance.[266]

2. Hypothetical Performance Raises Special Concerns

The marketing rule does not allow advisers to present hypothetical performance unless the advertisement “takes certain steps to address its potentially misleading nature.”[267] Specifically, an adviser must adopt policies to ensure that the hypothetical performance information is relevant to the likely financial situation and investment objectives of the advisement’s intended audience, which must consist of investors “who have the financial expertise to understand the risks and limitations of these types of presentations.”[268] This means that hypothetical performance should not appear in general advertisements and should only be targeted to sophisticated investors.[269] Advisers must also provide sufficient information for the advertisement’s target audience to understand the “criteria, assumptions, risks, and limitations” of the hypothetical performance.[270]

While recognizing the value of hypothetical performance, the SEC is especially cautious of its use:

[W]e believe that such presentations in advertisements pose a high risk of misleading investors since, in many cases, they may be readily optimized through hindsight. Moreover, the absence of an actual investor or, in some cases, actual money underlying hypothetical performance raises the risk of a misleading advertisement, because such performance does not reflect actual losses or other real-world consequences if an adviser makes a bad investment or takes on excessive risk.[271]

The rule is intended to protect against these risks while recognizing the value of hypothetical performance in making investing decisions.

3. Conditions for Use of Hypothetical Performance

The marketing rule prohibits advisers from using hypothetical performance unless the following conditions are met:

First Condition: “[T]he adviser must adopt and implement policies and procedures reasonably designed to ensure that the hypothetical performance information is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement.”[272]

The marketing rule does not dictate the specific policies and procedures that advisers must have to ensure that hypothetical performance is relevant to the financial situation and objectives of the target audience, but rather gives advisers flexibility to develop policies and procedures that are most appropriate for their investors and advisory business.[273] As a foundational point, since hypothetical performance should not be included in general/mass advertisements, an adviser’s policies should “address how the adviser’s dissemination of the advertisement would seek to be limited to that audience.”[274]

Second Condition: “[T]he adviser must provide sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance.”[275]

The SEC does not expect advisers to disclose proprietary or confidential information, but they should disclose assumptions that future events will occur.[276]

Third Condition: “[T]he adviser must provide (or, if the intended audience is a private fund investor, provide, or offer to provide promptly) sufficient information to enable the intended audience to understand the risks and limitations of using hypothetical performance in making investment decisions.”[277]

Advisers should disclose risk information, tailored to their intended audience, to help the audience determine how much value and weight to give the hypothetical performance:[278]

With respect to risks and limitations, investment advisers should provide information that would apply to both hypothetical performance generally and to the specific hypothetical performance presented—e.g., if applicable, that hypothetical performance reflects certain assumptions but that the adviser generated dozens of other, varying performance results applying different assumptions. Risk information should also include any known reasons why the hypothetical performance might differ from actual performance of a portfolio—e.g., that the hypothetical performance does not reflect cash flows into or out of the portfolio.[279]

4. No Performance Time Periods Are Required for Hypothetical Performance

When presenting hypothetical performance, advisers have no obligation to present one-, five-, and ten-year performance periods, nor must they comply with the requirements regarding related and extracted performance.[280] These are inapplicable to hypothetical performance.[281]

M. Portability of Performance, Reviews, Ratings, and Investment Advice

Subject to certain conditions, advisers may advertise any past investments, portfolio performance, testimonials, reviews, third-party ratings, or investment advice which the adviser or its personnel had achieved or had given at another entity or predecessor firm.[282] The SEC cautions that predecessor performance may be misleading in certain circumstances, including when:

(i) The team that was primarily responsible for the predecessor performance is different from the team whose advisory services are being offered in the advertisement,(ii) an individual who played a significant part in achieving the predecessor performance is not a member of the advertising adviser’s investment team, (iii) the adviser that generated the performance underwent a restructuring, reorganization, or sale, or (iv) an advertising adviser does not clearly disclose that the performance was achieved at a different entity.[283]

Within this context, predecessor performance in advertisements is prohibited unless the following requirements are satisfied:

(i) The person or persons who were primarily responsible for achieving the prior performance results manage accounts at the advertising adviser; (ii) the accounts managed at the predecessor investment adviser are sufficiently similar to the accounts managed at the advertising adviser that the performance results would provide relevant information to investors; (iii) all accounts that were managed in a substantially similar manner are advertised unless the exclusion of any such account would not result in materially higher performance and the exclusion of any account does not alter the presentation of any prescribed time periods; and (iv) the advertisement clearly and prominently includes all relevant disclosures, including that the performance results were from accounts managed at another entity.[284]

When considering necessary disclosures, and determining whether performance is predecessor performance, advisers should consider whether there is a sufficient business nexus between the predecessor’s and successor’s advisers; whether the reorganization of the predecessor into the successor was designed to eliminate substantial liabilities or spin off personnel; and whether the successor assumed substantially all of the assets and liabilities of the predecessor.[285]

Per the amended books and records rule, “an adviser must have access to the books and records underlying the performance” to demonstrate “a reasonable basis for believing that [the adviser] will be able to substantiate (upon demand by the Commission) all material statements of fact contained in an advertisement.”[286]

N. Recordkeeping

Pursuant to the recordkeeping rule, advisers must keep records of all advertisements they directly or indirectly disseminate.[287] As long as such records are easily accessible and maintained for no less than five years, the SEC does not require or prohibit particular methods of maintaining them.[288] This means, for example, that email records are acceptable.[289] The marketing rule amends certain provisions of the recordkeeping rule, which the SEC has identified as an examination priority.[290]

1. Oral Advertisements

When an adviser advertises orally, the adviser can retain a copy of the script and other written materials associated with the advertisement, rather than having to record the advertisement itself.[291] If an advertisement includes “a compensated oral testimonial or endorsement,” then the adviser may keep a record of the disclosures provided to investors in accordance with the marketing rule, rather than recording the advertisement.[292] Along the same lines, “if an adviser’s disclosures with respect to a testimonial or endorsement are not included in the advertisement, then the adviser must retain copies of such disclosures provided to investors.”[293]

2. Performance Advertisements

The marketing rule amends the recordkeeping rule to “require advisers to maintain written communications relating to the performance or rate of return of any portfolios.”[294] Advisers are also required to maintain documentation of communications regarding predecessor performance to ensure that advisers have records to substantiate their presentation of predecessor performance.[295]

3. Hypothetical Performance

When advisers use hypothetical performance in advertisements, they must retain “copies of all information provided or offered pursuant to the hypothetical performance provisions of the final rule.”[296] Advisers must also keep records regarding the intended audience of the advertisements.[297] The SEC cautions: “Our examination staff may choose to review the adviser’s policies and procedures (for displaying hypothetical performance) against the records retained in connection with this new recordkeeping provision when determining whether the adviser satisfied the hypothetical performance policies and procedures condition.”[298] These records will also help SEC examination staff confirm that advisers consider the target audience when using hypothetical performance in advertisements.[299]

4. Testimonials, Endorsements, and Third-Party Ratings

Advisers must create and keep any communication or document related to the adviser’s determination that a testimonial, endorsement, or third-party rating complies with the marketing rule.[300] Per the current recordkeeping rule, advisers must continue to retain the disclosures delivered to investors, including those related to testimonials, endorsements, and third-party ratings.[301]

Advisers must “retain a copy of any questionnaire or survey used in the preparation of a third-party rating included or appearing in any advertisement,” but to the extent an adviser does not have the questionnaire or survey:

[T]he rule will require an adviser to retain a copy of this material only in the event the adviser obtains a copy of the questionnaire or survey (i.e., an adviser would not be required to obtain a copy of the questionnaire or survey in order to comply with [the rules]).[302]

5. Solicitation

In a significant departure from the former solicitation rule, the new marketing rule does not require promoters to provide investors with the adviser’s brochure.[303] The marketing rule also contains a partial exemption from the disclosure requirements for testimonials and endorsements that are made by an adviser’s affiliated personnel, provided that the amended recordkeeping rule requires that advisers relying on this exemption keep a record of the names of their affiliated personnel at the time that their testimonial or endorsement is disseminated.[304]

V. Conclusion

With its adopting release and other guidance materials, the SEC created tremendous resources to help advisers and their counsel understand each component of the new marketing rule, and in a bigger picture sense, both the history of the SEC’s approach to adviser marketing and its rationale for certain larger principles of adviser regulation.

By implementing the new marketing rule, the SEC has replaced, by its own admission, “an outdated and patchwork regime on which advisers have relied for decades”—albeit a regime with which advisers and their counsel were familiar.[305] Although the marketing rule is still new, the SEC’s current resources interpreting the rule give practitioners significant guidance and direction. At the same time, however, the SEC has withdrawn a number of no-action letters and other guidance regarding the former advertising and cash solicitation rules on which advisers have come to rely.[306]

While the current guidance is robust, it is based primarily on comments submitted from interested parties during the drafting process of the new rule, with an FAQ page that is still in its infancy (currently consisting of a mere three questions).[307] Over time, the existing materials will be supplemented by new no-action letters, more elaborate FAQs, and other experience-based guidance, which will add color to the interpretation of the rule’s various requirements.

Perhaps this compliance guide may also play a small part in the industry’s collective understanding and interpretation of the new rule.

Endnotes

[1]Press Release, Sec. & Exch. Comm’n, SEC Adopts Modernized Marketing Rule for Investment Advisers (Dec. 22, 2020), https://www.sec.gov/news/press-release/2020-334 [https://perma.cc/HB3P-GCCA].

[2]Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1 (2023); U.S. Sec. Exch. & Comm’n, Investment Adviser Marketing: A Small Entity Compliance Guide (2021), https://www.sec.gov/investment/investment-adviser-marketing [https://perma.cc/78LS-KNTR] [hereinafter U.S. Sec. & Exch. Comm’n, Compliance Guide].

[3]Press Release, Sec. & Exch. Comm’n, supra note 1; U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[4]Press Release, Sec. & Exch. Comm’n, supra note 1; U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[5]17 C.F.R. § 275.206(4)-1; U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[6]Investment Adviser Marketing, 86 Fed. Reg. 13,024 (May 4, 2021) (to be codified at 17 C.F.R. pts. 275, 279); Sec. & Exch. Comm’n, Marketing Rule Adopting Release No. IA-5653 (Dec. 22, 2020), https://www.sec.gov/rules/final/2020/ia-5653.pdf [https://perma.cc/8SQU-B6ET] [hereinafter Adopting Release].

[7]Investment Adviser Marketing, 86 Fed. Reg. 13,024; Kaplan, Series 65: Uniform Investment Adviser Law Exam.

[8]Investment Adviser Marketing, 86 Fed. Reg. 13,025.

[9]Id.

[10]Id. at 13, 024–25; Adopting Release, supra note 6.

[11]See 17 C.F.R. § 275.206(4)-1.

[12]Id.

[13]Id. § 275.206(4)-1(e)(1).

[14]Id. § 275.206(4)-1(e)(1)(A)–(C).

[15]Id. § 275.206(4)-1(e)(1).

[16]See id.

[17]Id. § 275.206(4)-1(a)(1)–(7).

[18]Id. § 275.206(4)-1(b)(1)–(4).

[19]Id. § 275.206(4)-1(b)(1)–(4).

[20]Id.

[21]Id. § 275.206(4)-1(b)(2).

[22]See id. § 275.206(4)-1(b)(4).

[23]Id.

[24]Id. § 275.206(4)-1(b)(3).

[25]See id. § 275.206(4)-1(b)(4).

[26]Id. § 275.206(4)-1(c)(1).

[27]Id. § 275.206(4)-1(c)(2)(i), (iii).

[28]Id. § 275.206(4)-1(d)(1).

[29]Id. § 275.206(4)-1(d)(2).

[30]Id. § 275.206(4)-1(d)(4).

[31]Id. § 275.206(4)-1(d)(5).

[32]Id. § 275.206(4)-1(d)(6).

[33]Id. § 275.206(4)-1(d)(7)(i), (iv).

[34]Id. § 275.206(4)-1(d)(3).

[35]Sec. & Exch. Comm’n Div. of Examinations, Risk Alert, Examinations Focused on the New Investment Adviser Marketing Rule (Sept. 19, 2022), https://www.sec.gov/files/exams-risk-alert-marketing-rule.pdf [https://perma.cc/E73V-7KE2].

[36]Id. at § II.

[37]Id. (quoting Adopting Release No. IA-5653, supra note 10).

[38]Id.

[39]Id. § I.

[40]Id. § II.

[41]Id. § III.

[42]See Investment Adviser Marketing, 86 Fed. Reg. 13,024, 13,025 (May 4, 2021) (to be codified at 17 C.F.R. pts. 275, 279).

[43]See id.

[44]See id.

[45]See id.

[46]See id.

[47]Sec. & Exch. Comm’n Div. of Examinations, supra note 35.

[48]See id.

[49]U.S. Sec. & Exch. Comm’n Div. of Examinations, 2023 Examination Priorities 9 (2023), https://www.sec.gov/files/2023-exam-priorities.pdf [https://perma.cc/35QL-CSUF] [hereinafter 2023 Examination Priorities].

[50]Press Release, Sec. & Exch. Comm’n, supra note 1.

[51]U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[52]Investment Adviser Marketing, 86 Fed. Reg. 13,024, 13,026. (May 4, 2021) (to be codified at 17 C.F.R. pts. 275, 279).

[53]Id. at 13,026, 13,033.

[54]Id. at 13,033.

[55]Id.

[56]Id. at 13,034.

[57]Id.

[58]See id.

[59]Id. at 13,026, 13,027, 13,030 (“The one-on-one exclusion in the definition’s first prong applies regardless of whether the adviser makes the communication to a natural person with an account or multiple natural persons representing a single entity or account. . . . For purposes of this exclusion, we also interpret the term ‘person’ to mean one or more investors that share the same household. For example, a communication to a married couple that shares the same household would qualify for the one-on-one exclusion.”).

[60]Id. at 13,026.

[61]Id. at 13,031 (“An adviser should consider adopting compliance policies and procedures that are reasonably designed to determine whether a communication nominally directed to a single person is actually a communication to more than one person, or contains duplicated inserts as part of that communication. In these circumstances, the duplicated information is an advertisement because it is sent to more than one person and would not qualify for the exclusion.”).

[62]Id.

[63]Id. at 13,028.

[64]Id.

[65]Id.

[66]Id.

[67]Id. at 13,029.

[68]Id.

[69]Id.

[70]See generally Isaac Mamaysky, Can Investment Advisers Ask Clients for Online Reviews? The Implications of the SEC’s New Marketing Rule, Fordham J. Corp. & Fin. L. (June 2, 2022), https://news.law.fordham.edu/jcfl/2022/06/02/can-investment-advisers-ask-clients-for-online-reviews-the-implications-of-the-secs-new-marketing-rule/.

[71]Investment Adviser Marketing, 86 Fed. Reg. at 13,029.

[72]Id.

[73]Id.

[74]Id.

[75]Id. at 13,029–30.

[76]Id.

[77]Id. at 13,033.

[78]Id.

[79]Id.

[80]Id. at 13,034 (quoting Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(e)(1)(i)(B) (2021)).

[81]Id. at 13,035.

[82]Id. at 13,027; see also id. at 13,035–36 (“[W]e are adding solicitation activities to the definitions of testimonial and endorsement. The definition of testimonial includes any statement by a current client or private fund investor that directly or indirectly solicits any investor to be the adviser’s client or a private fund investor, or refers any investor to be the adviser’s client or a private fund investor. The definition of endorsement includes any such statements by a person other than a current client or private fund investor. . . . [A] person providing an endorsement or testimonial under the final rule might be a firm that solicits for an adviser (such as a broker-dealer or a bank), an individual at a soliciting firm who engages in solicitation activities for an adviser (such as a bank representative or an individual registered representative of a broker-dealer), or both.”).

[83]Id. at 13,027; see also id. at 13,035 (“A compensated testimonial or endorsement will meet the definition of advertisement’s second prong regardless of whether the communication is made orally or in writing, to one or more persons.”).

[84]Id. at 13,035.

[85]Id. at 13,036. All of the following are considered compensation: fees based on a percentage of assets under management (“AUM”), flat fees, retainers, hourly fees, directed brokerage, sales awards, and gifts and entertainment (outings, tours, etc.). However, “attendance at training and education meetings, including company-sponsored meetings such as annual conferences, will not be non-cash compensation, provided that attendance at these meetings or trainings is not provided in exchange for solicitation activities.” Id.

[86]Id. at 13,037.

[87]Id.

[88]Id.

[89]Id. at 13,038.

[90]See id.

[91]Id.

[92]Id.

[93]Id. at 13,039.

[94]Id. (footnotes omitted).

[95]Id.

[96]Id. at 13,039 n.173.

[97]Id.

[98]Investment Company Act of 1940, 15 U.S.C. §§ 80a-3(c)(1), 3(c)(7).

[99]Investment Adviser Marketing, 86 Fed. Reg. at 13,040.

[100]Id.

[101]U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[102]Robert E. Plaze, Regulation of Investment Advisers by the U.S. Securities and Exchange Commission 40 (June 2018), https://prfirmpwwwcdn0001.azureedge.net/azstgacctpwwwct0001/uploads/f09a98d6a3772c83e8ddef323215f446.pdf [https://perma.cc/S4Y2-QXSX] (citing Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928)).

[103]Id. (quoting Meinhard, 164 N.E. at 546).

[104]Investment Adviser Marketing, 86 Fed. Reg. at 13,026.

[105]Id. at 13,041.

[106]Id.

[107]Id.

[108]Press Release, Sec. & Exch. Comm’n, supra note 1.

[109]Investment Adviser Marketing, 86 Fed. Reg. at 13,042.

[110]Id.

[111]Id.

[112]Id.

[113]Id.

[114]Id.

[115]Id.

[116]Conversation with Richard Ellenbogen.

[117]Investment Adviser Marketing, 86 Fed. Reg. at 13,042.

[118]Id. at 13,042–43.

[119]Id.

[120]Sec. & Exch. Comm’n Div. of Examinations, supra note 35.

[121]Investment Adviser Marketing, 86 Fed. Reg. at 13,043.

[122]2023 Examination Priorities, supra note 49; Sec. & Exch. Comm’n Div. of Examinations, supra note 35.

[123]2023 Examination Priorities, supra note 49.

[124]Investment Adviser Marketing, 86 Fed. Reg. at 13,043.

[125]Id. at 13,044.

[126]Id.

[127]Id.

[128]Id.

[129]Id.

[130]Id.

[131]Id. at 13,045.

[132]Id.

[133]Id.

[134]Id.

[135]Id.

[136]Id.

[137]Id.

[138]Id.

[139]Id. at 13,046.

[140]Id.

[141]Id.

[142]Id.

[143]Id.

[144]Id.

[145]Mamaysky, supra note 70; U.S. Sec. Exch. Comm’n, Compliance Guide, supra note 2.

[146]Press Release, Sec. & Exch. Comm’n, supra note 1.

[147]See Investment Adviser Marketing, 86 Fed. Reg. at 13,047.

[148]Id. at 13,046–47.

[149]Id. at 13,047.

[150]2023 Examination Priorities, supra note 49, at 10.

[151]Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(b)(1)–(4) (2023).

[152]Investment Adviser Marketing, 86 Fed. Reg. at 13,046.

[153]17 C.F.R. § 275.206(4)-1(b)(2); Investment Adviser Marketing, 86 Fed. Reg. at 13,046.

[154]Investment Adviser Marketing, 86 Fed. Reg. at 13,025.

[155]Id. at 13,048.

[156]Id.

[157]Id.

[158]Id. at 13,049.

[159]Id. at 13,049.

[160]Id. at 13,047.

[161]Id. at 13,051.

[162]Id.

[163]Id.

[164]Id.

[165]Id.

[166]Id. at 13,042, 13,050 (emphasis added).

[167]Id.

[168]Id.

[169]Id.

[170]Id. at 13,053 (citing 17 C.F.R. § 275.204-2(a)(7)(iv) (2023)).

[171]Id.

[172]Id.

[173]Id. (citing Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(b)(2) (2021)).

[174]Investment Adviser Marketing, 86 Fed. Reg. at 13,053.

[175]17 C.F.R. § 275.206(4)-1(b)(3); Investment Adviser Marketing, 86 Fed. Reg. at 13,054 (citing 17 C.F.R. § 275.206(4)-1(b)(3)) (The rule does include certain conditional carve-outs that permit advisers to compensate certain promoters subject to disqualifying events under certain circumstances and with specific disclosures.).

[176]Investment Adviser Marketing, 86 Fed. Reg. at 13,055.

[177]Id. at 13,057.

[178]Id.

[179]Id.

[180]Id.

[181]Id. (citing Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(b)(3) (2021)).

[182]17 C.F.R. § 275.206(4)-1(b)(4); U.S. Sec. Exch. & Comm’n, Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings and Related Disclosure Requirements: A Small Entity Compliance Guide (Sept. 19, 2013), https://www.sec.gov/info/smallbus/secg/bad-actor-small-entity-compliance-guide [https://perma.cc/ES9G-VRVK]; Adopting Release, supra note 6, at 152 (“With respect to rule 506 of Regulation D, ‘covered persons’ include the issuer, its predecessors and affiliated issuers; directors, general partners, and managing members of the issuer; executive officers of the issuer, and other officers of the issuer that participate in the offering; beneficial owners of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power; promoters connected to the issuer in any capacity at the time of sale; for pooled investment fund issuers, the fund’s investment manager and any general partner, managing member, director, executive officer or other officer participating in the offering of any such investment manager; and persons compensated for soliciting investors, including any general partner, managing member, director, executive officer or other officer participating in the offering of any such solicitor.”).

[183]See Investment Adviser Marketing, 86 Fed. Reg. at 13,136 (Along the same lines, the SEC explains that broker-dealers acting as compensated promoters do not need to be regulated by the disqualification provisions of both the Investment Advisers Act Marketing Rule and the Securities Exchange Act, so the marketing rule contains “an exemption from the disqualification provisions for registered broker-dealers, that are subject to and complying with the statutory disqualification provisions under the Exchange Act.”).

[184]Id. at 13,055.

[185]Id.

[186]Id.

[187]Id. at 13,065.

[188]Id. at 13,056.

[189]Id.

[190]Id. at 13,070.

[191]Id. at 13,058 (citing Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(e)(3) (2021)).

[192]Id.

[193]Id.

[194]Id.

[195]Id. at 13,058.

[196]Id. at 13,061.

[197]Id. at 13,061 (“For example, to the extent that an affiliated person’s status is notated through corporate records, employee payroll records, Central Registration Depository (‘CRD’), or any other similar records and licensing for investment adviser representatives, then such records would suffice so long as such records are kept current.”).

[198]Id. at 13,061–62.

[199]See id. at 13,063.

[200]Id. at 13,062–63.

[201]Id. at 13,063.

[202]Id. at 13,063–64.

[203]Id. at 13,063.

[204]Id.

[205]Id.

[206]Id. at 13,064.

[207]Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(c)(1) (2023).

[208]Investment Adviser Marketing, 86 Fed. Reg. at 13,067.

[209]Id. at 13,067.

[210]17 C.F.R. § 275.206(4)-1(c)(2)(i)–(iii).

[211]Investment Adviser Marketing, 86 Fed. Reg. at 13,067.

[212]Id. at 13,068.

[213]Id.

[214]U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2; see also Sec. & Exch. Comm’n Div. of Examinations, supra note 35; Press Release, Sec. & Exch. Comm’n, supra note 1.

[215]2023 Examination Priorities, supra note 49, at 10.

[216]Investment Adviser Marketing, 86 Fed. Reg. at 13,069.

[217]Marketing Compliance Frequently Asked Questions, U.S. Sec. & Exch. Comm’n, https://www.sec.gov/investment/marketing-faq [https://perma.cc/FT8Z-AK8Q] (last updated Jan. 11, 2023) (Presenting the performance of a single investment would also trigger the extracted performance requirements.).

[218]Investment Adviser Marketing, 86 Fed. Reg. at 13,069 (citing Chartered Fin. Analyst Inst., Comment Letter on Proposed Rule for Investment Adviser Advertisements; Compensation for Solicitations (Feb. 24, 2020)).

[219]Id. (The SEC states that disclosures may include: “(1) the material conditions, objectives, and investment strategies used to obtain the results portrayed; (2) whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings; (3) the effect of material market or economic conditions on the results portrayed; (4) the possibility of loss; and (5) the material facts relevant to any comparison made to the results of an index or other benchmark.”); Adopting Release, supra note 6, at 168.

[220]Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(e)(7) (2023); Investment Adviser Marketing, 86 Fed. Reg. at 13,070 (citing 17 C.F.R. § 275.206(4)-1(e)(7)).

[221]17 C.F.R. § 275.206(4)-1(e)(10); Investment Adviser Marketing, 86 Fed. Reg. at 13,070 (citing 17 C.F.R. § 275.206(4)-1(e)(10)).

[222]17 C.F.R. § 275.206(4)-1(e)(10)(i).

[223]Investment Adviser Marketing, 86 Fed. Reg. at 13,071.

[224]Id.

[225]Id. at 13,071–72.

[226]See id.

[227]Id. at 13,071.

[228]Id. at 13,072–73. Note, however, that private funds are exempt from this requirement and do not need to include any performance periods in their advertising. Id. at 13,073. The SEC explains that private funds are often advertised to investors at early stages, when their performance is negatively affected by organizational expenses of the “J-curve,” which is defined as a loss followed by a significant gain. Id. The SEC explains that the “presentation of performance using an internal rate of return, as is typical with private equity funds, is often not meaningful in the early years of the fund because the fund is not fully invested, no investments have been harvested, and the new investments likely have not changed in value.” Id. at 13,072–73 (citing Fried, Frank, Harris, Shriver & Jacobson LLP, Comment Letter on Proposed Rule on Investment Adviser Advertisements; Compensation for Solicitations (Feb. 10, 2020) and Managed Funds Ass’n & Alt. Inv. Mgmt. Ass’n, Comment Letter on Proposed Rule on Investment Advisor Advertisements; Compensation for Solicitations (Feb. 10, 2020)).

[229]Id. at 13,072–73.

[230]Id. at 13,073.

[231]Id.

[232]Id.

[233]Id.

[234]Id. at 13,072.

[235]Id. at 13,073.

[236]Id. at 13,073–74 (“[I]t could be misleading for an adviser to present performance returns as of the most recent calendar year-end if more timely quarter-end performance is available and events have occurred since that time that would have a significant negative effect on the adviser’s performance.”).

[237]U.S. Sec. & Exch. Comm’n, supra note 217.

[238]Investment Adviser Marketing, 86 Fed. Reg. at 13,073–74.

[239]Id. at 13,073.

[240]See id. at 13,074.

[241]Id.

[242]Id.

[243]Id.

[244]Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(e)(14) (2023) (emphasis omitted).

[245]Id. § 275.206(4)-1(e)(15) (emphasis omitted).

[246]See id. § 275.206(4)-1(e)(14)–(15); Investment Adviser Marketing, 86 Fed. Reg. at 13,074.

[247]Investment Adviser Marketing, 86 Fed. Reg. at 13,074.

[248]Id.

[249]Id. at 13,075. “We understand,” says the SEC, “that an adviser will likely be required to calculate the performance of all related portfolios to ensure that the exclusion of certain portfolios from the advertisement meets the rule’s conditions.” Id. The SEC goes on: “Because of the special concerns that performance advertising raises, however, we believe that this burden is warranted to prevent related performance advertising from misleading investors.” Id.

[250]Id. at 13,076.

[251]Id. at 13,077.

[252]Id. (citing Chartered Fin. Analyst Inst., Chartered Fin. Analyst Inst., Comment Letter on Proposed Rule for Investment Adviser Advertisements; Compensation for Solicitations, supra note 218) (The SEC explains why extracted performance may be valuable, by way of example: “[A]n investment adviser seeking to manage a new portfolio of only fixed-income investments may wish to advertise its performance results from managing fixed-income investments within a multi-strategy portfolio. If a prospective investor already has investments in fixed-income assets, it may want to use the extracted performance to consider the effect of an additional fixed-income investment on the prospective investor’s overall portfolio. The prospective investor may also use the presentation of extracted performance from several investment advisers as a means of comparing investment advisers’ management capabilities in that specific strategy. We continue to believe that extracted performance can provide important information to investors about performance actually achieved within a portfolio. It can also provide investors with information about performance attribution within a portfolio.”).

[253]Id.

[254]Id.

[255]Id.

[256]Id.

[257]Id.

[258]Id. at 13,079 (citing 17 C.F.R. § 275.206(4)-1(e)(8)); Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(e)(8) (2023).

[259]17 C.F.R. § 275.206(4)-1(e)(8); Investment Adviser Marketing, 86 Fed. Reg. at 13,079.

[260]Investment Adviser Marketing, 86 Fed. Reg. at 13,079 (citing SIFMA Asset Mgmt. Grp., Comment Letter on Proposed Advertising Rule (Feb. 10, 2020) and investment Adviser Association, Comment Letter on Investment Adviser Advertisements; Compensation for Solicitations Rule (Feb. 10, 2020)).

[261]Id. at 13,080; 17 C.F.R. § 275.206(4)-1(e)(8)(i)(B).

[262]Investment Adviser Marketing, 86 Fed. Reg. at 13,081.

[263]Id. at 13,079.

[264]Id. at 13,082.

[265]Id. at 13,082 (citing 17 C.F.R. § 275.206(4)-1(e)(8)(ii)(A)); 17 C.F.R. § 275.206(4)-1(e)(8)(ii)(A).

[266]Id. at 13,026–37.

[267]Id. at 13,078.

[268]Id.

[269]See id.

[270]Id.

[271]Id.

[272]Id. at 13,083 (citing Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(d)(6) (2021)) (emphasis added).

[273]Id.

[274]Id. at 13,084.

[275]Id. at 13,083 (citing 17 C.F.R. § 275.206(4)-1(d)(6)) (emphasis added).

[276]Id. at 13,084.

[277]Id. at 13,083 (citing 17 C.F.R. § 275.206(4)-1(d)(6)(iii)) (emphasis added).

[278]Id. at 13,085.

[279]Id.

[280]Id. at 13,079.

[281]Id. at 13,079, 13,083.

[282]Id. at 13,085.

[283]Id. at 13,086 (footnotes omitted).

[284]Id. at 13,113.

[285]Id. at 13,086.

[286]Id. at 13,088 (citing Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(a)(2) (2021)).

[287]Id. at 13,090; U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[288]Investment Adviser Marketing, 86 Fed. Reg. at 13,091.

[289]Id.

[290]Sec. & Exch. Comm’n Div. of Examinations, supra note 35.

[291]Investment Adviser Marketing, 86 Fed. Reg. at 13,090.

[292]Id. at 13,053.

[293]Id. at 13,090 (citing 17 C.F.R. § 275.204-2(a)(11)(i), (15)(i) (2021)).

[294]Id. at 13,091 (citing 17 C.F.R. § 275.204-2(a)(7)(iv)).

[295]Id.

[296]Id. (citing Investment Adviser Marketing Rule, 17 C.F.R. § 275.206(4)-1(d)(6) (2021)).

[297]Id.

[298]Id.

[299]Id.

[300]Id.

[301]Id.

[302]Id. at 13,092.

[303]Id. at 13,044.

[304]Id. at 13,091–92.

[305]Press Release, Sec. & Exch. Comm’n, supra note 1.

[306]U.S. Sec. & Exch. Comm’n, Compliance Guide, supra note 2.

[307]U.S. Sec. & Exch. Comm’n, supra note 217.