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White Paper: SEC Marketing Rule

by | May 5, 2022 |

SEC Marketing Rule Insights

By Seth Gadreau and Stephen Wilkes

With the U.S. Securities and Exchange Commission (“SEC”) November 4, 2022, date for full compliance with its “Marketing Rule” (found here) approaching, firms need to be working towards updating their compliance programs.

The Marketing Rule – Rule 206(4)-1 under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”) – overhauls and modernizes the SEC’s “Advertising Rule” (Rule 206(4)-1) and “Cash Solicitation Rule” (Rule 206(4)-3) and creates a single rule.  The Marketing Rule is designed to regulate advisers’ marketing communications and uses principles-based prohibitions that will apply to all advertisements, comprehensively and efficiently.  The SEC view is that these principles-based provisions are “designed to accommodate the continual evolution and interplay of technology and advice.”

The Marketing Rule:

  • Expands the scope of communications that are considered “advertisements” for purposes of the rule.
  • Allows the use of testimonials, endorsements, third-party ratings, and hypothetical performance in advertisements, subject to the Marketing Rule’s principles-based regime.
  • Expands the scope of solicitation activities, including solicitation of investors or prospective investors in private funds. Further, it applies to solicitations in exchange for compensation which includes both cash and non-cash compensation.
  • Expressly applies to communications by advisers of private funds.

The SEC also instituted related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule.

The Marketing Rule is the first significant change to these rules and has important implications for all investment advisers, particularly with respect to presentation of performance and solicitation activities.

Definition of Advertisement.

Under the Marketing Rule, the definition of “advertisement” contains two prongs.

The first prong includes any 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 adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser.

The second prong of the definition generally includes any testimonial or endorsement for which an adviser provides compensation. Communications directed to only one person are included, as are oral communications.  Compensation includes cash and non-cash compensation paid directly or indirectly by the adviser (e.g., directed brokerage, awards or other prizes, gifts, and entertainment, and reduced advisory fees).[1]  A key to the SEC’s view of compensation is whether it is the basis of some form of quid pro quo for the testimonial or endorsement. Attendance at training and education meetings, including company-sponsored meetings such as annual conferences, is not considered compensation if it is not provided in exchange for the endorsement or testimonial.  The SEC declined to offer a bright-line test.

The Marketing Rule formally excludes from the definition of  advertisements: i) extemporaneous, live oral communications (excluded only from the first prong of the definition); ii) information 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 (excluded from both prongs of the definition); and iii) communication that includes hypothetical performance provided in response to an unsolicited request from a prospective or current client or investor in a private fund, or to a prospective or current investor in a private fund in a one-on-one communication (excluded only from the first prong of the definition).

For purposes of the Marketing Rule, the new advertisement definition does not differentiate between retail and non-retail investor communications and applies a uniform standard for both institutions and individuals.

Testimonials and Endorsements

The Marketing Rule eliminates the long-standing prohibition on the use of testimonials and endorsements and permits their use, subject to certain conditions and disclosures.  The Marketing Rule creates new definitions for both testimonial and endorsement, as follows:

  • A “testimonial” is any statement by a current client or investor in a private fund advised by the investment adviser: (i) about his or her experience with the investment adviser or its supervised persons, (ii) that directly or indirectly solicits another to be a client of the investment adviser or invest in a private fund the adviser advises, or (iii) that refers any client or investor to be a client of the adviser or invest in a private fund the adviser advises.
  • An “endorsement” is any statement by a person other than a current client investor in a private fund advised by the investment adviser that: (i) indicates approval, support or recommendation of the investment adviser or its supervised persons or describes his or her experience with them, (ii) directly or indirectly solicits any current or prospective client of the investment adviser or investor of a fund the adviser advises, or (iii) refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.

The Marketing Rule permits the use of testimonials and endorsements, subject to compliance with the following four conditions:

  • Disclosure. An adviser must clearly and prominently disclose, or reasonably believe that the person giving the testimonial or endorsement discloses, whether the individual giving the testimonial or endorsement (the “Promoter”) is a client of the investment adviser, and whether the Promoter is being compensated (which includes both cash and non-cash compensation). Further disclosures are required for any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from the compensation arrangement and/or the adviser’s relationship with the Promoter.
  • Oversight and Written Agreement. Investment advisers must enter into written agreements with Promoters in connection with the use of a testimonial or endorsement. Investment advisers that use testimonials or endorsements in advertisements must also have policies and procedures to ensure compliance with the new Marketing Rule.
  • Disqualification. An adviser will not be able to compensate a person, directly or indirectly, for a testimonial or endorsement if the adviser knows, or in the exercise of reasonable care should know, that the person giving the testimonial or endorsement is, at that time, ineligible under the Marketing Rule. Certain “bad actors,” as defined under Rule 506 of Regulation D, and other “ineligible persons” are prohibited from acting as Promoters.

What was traditionally known as solicitation is now expressly included in the definitions of testimonial and endorsement, stated above, and referred to as a “promoter” instead of a solicitor[2].  The Marketing Rule replaces the solicitor rule (Rule 206(4)-3), which had been unchanged since it was released in 1979.  Promoters (solicitors), subject to the requirements discussed above, will no longer need to provide the solicitors written disclosure document nor will they need to provide the advisers brochure.  The written agreement requirements of the Marketing Rule will require those with an existing solicitor agreement to enter into a new agreement in order to comply.

Partial Exemptions 

The rule includes a series of partial exemptions from these conditions, as follows:

  • Advisory Affiliates. Affiliates, partners, directors, officers, and employees of the adviser are exempt from the written agreement requirement, provided the affiliation is either readily apparent or disclosed at the time the testimonial or endorsement is disseminated, and the adviser documents such person’s status at the time the testimonial or endorsement is disseminated.
  • De Minimis Compensation. Persons giving a testimonial or endorsement that receive no compensation or total compensation of $1,000 or less (or the equivalent value in non-cash compensation) during 12 months are exempt from the written agreement requirement.
  • Broker-Dealers. U.S.-registered broker-dealers are exempt from the Marketing Rule’s disqualification provisions provided they are not subject to statutory disqualification under the Securities Exchange Act of 1934. Registered broker-dealers are also exempt from the disclosure requirement when providing a testimonial or endorsement to a retail customer that is a recommendation subject to Regulation Best Interest. Registered broker-dealers soliciting non-retail customers (as defined in Regulation Best Interest) are exempt from the supplemental disclosure requirement.
  • Rule 506(d) Covered Persons. A testimonial or endorsement by a person that is covered by rule 506(d) of the Securities Act of 1933 with respect to a Rule 506 securities offering and whose involvement would not disqualify the offering under that rule is exempt from the disqualification provision.

Third-Party Ratings

The Marketing Rule explicitly permits the use of third-party ratings in advertisements if the adviser complies with the Marketing Rule’s general prohibitions and certain additional requirements. “Third-party rating” is defined as “a rating or ranking of an investment adviser provided by a person who is not a related person (as defined in the Form ADV Glossary of Terms), and such person provides such ratings or rankings in the ordinary course of its business.”.  The adviser is required to have a reasonable basis for believing that any questionnaire or survey used in the preparation of the third-party rating is fair.  The questionnaire or survey must be structured in a way that makes it equally easy for a participant to provide favorable and unfavorable responses and it cannot be designed or prepared to produce any predetermined result.  Advertisements containing third-party ratings must clearly and prominently disclose, or the investment adviser must reasonably believe that the advertisement clearly and prominently discloses, the following: i) the date on which the rating was given and the period of time upon which the rating was based; ii) the identity of the third party that created and tabulated the rating; and iii) if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.

Performance Advertising

The Marketing Rule’s general prohibitions prohibit an adviser from including or excluding performance results, or presenting time periods for performance, in a manner that is not fair and balanced.  The SEC continues its principles-based approach, requiring advisers to evaluate the facts and circumstances surrounding performance advertising to ensure that the presentation of performance is “fair and balanced”.

The Marketing Rule sets forth seven specific requirements and prohibitions for presenting performance information relating to:  i) gross and net performance, ii) prescribed time periods, iii) statements about SEC approval, iv) related performance, v) extracted performance, vi) hypothetical performance and vii) predecessor performance.

  • Gross and Net Performance. Gross performance may not be used in any advertisement unless the advertisement also presents net performance: i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance; and ii) calculated over the same time period, and using the same type of return and methodology, as the gross performance. The requirement of showing net performance applies to all advertisements not just retail advertisements and does not include a requirement that the advertisement provide or offer to provide a schedule of fees and expenses deducted to calculate net performance.  In addition, model advisory fees can be used to calculate net performance so long as the model fee is equal to the highest fee charged to the intended audience to whom the advertisement is disseminated.
  • Prescribed Time Periods. Other than for private funds, performance results in advertisements are required to cover one-, five- and 10-year periods (or life of the portfolio, if shorter).  The Marketing Rule provides an exception for the presentation of performance results over prescribed time periods for private funds, as the performance results for the early years of a private equity fund may not be meaningful for investors.
  • Statements About SEC Approval. Advertisements cannot include performance results that include any statement, express or implied, that the calculation or presentation of performance results has been approved or reviewed by the SEC.
  • Related Performance. Performance results of one or more related portfolios may only be used if the presentation includes all related portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions if the excluded related performance would not result in materially higher performance and does not alter the presentation over the one-, five-, and 10-year periods, if applicable.
  • Extracted Performance. The Marketing Rule prohibits an investment adviser from presenting results of a subset of investments.  In order to show such extracted performance, the advertisement must provide, or offer to provide, the performance results of the total portfolio from which the performance was extracted.
  • Hypothetical Performance.   The Marketing Rule allows for hypothetical performance (excluding interactive analysis tools and predecessor performance), which is “performance results that were not actually achieved by any portfolio of the adviser.”  This includes but is not limited to performance derived from model portfolios, back-tested performance, and targeted or projected performance returns.  Hypothetical performance may only be used if the adviser:
    • adopts and implements policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement;
    • provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance; and
    • provides (or if the intended audience is investors in a private fund provides, or offers to provide promptly) sufficient information to enable the intended audience to understand the risks and limitations of using such hypothetical performance in making investment decisions.
  • Predecessor Performance. Predecessor performance may only be used in an advertisement when: i) the person or persons primarily responsible for achieving the prior performance results manage the applicable accounts at the advertising adviser; ii) the accounts managed at the predecessor investment adviser are sufficiently similar to the accounts managed at the advertising investment adviser that the performance results would provide relevant information to clients or 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 change the presentation of any applicable 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.

General Prohibitions

Under the SEC’s new principles-based approach to advertisements, those communications may not:

  • make an untrue statement of a material fact, or omit a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;
  • make 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;
  • include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;
  • discuss any potential benefits to clients or investors 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;
  • reference specific investment advice provided by the investment adviser, where such investment advice is not presented in a manner that is fair and balanced;
  • include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or
  • be otherwise materially misleading.

As these are not per se prohibition, the SEC discussed that advisers will need to analyze the particular “facts and circumstances of each advertisement” when applying the general prohibitions of the Marketing Rule, including the nature of the audience to which the advertisement is directed.  The SEC noted that the requirements are similar to FINRA Rule 2210’s General Standards regarding Communication with the Public.

Implications of the Marketing Rule for Private Fund Sponsors

The SEC has expressly included communications regarding private fund investors (as defined in the Advisers Act) in the two prongs of an advertisement under the Marketing Rule.  The SEC noted that the this “provide[s] more specificity (and certainty) regarding what we believe to be untrue or misleading statements that advisers must avoid in their advertisements.” The SEC stated that the Marketing Rule’s general prohibitions “will provide advisers with a principles-based framework to assess private fund advertisements and will provide greater clarity, compared to the anti-fraud provisions of the Act, on marketing practices that are likely misleading.”

This affects guidelines that private fund managers have traditionally relied upon with respect to advertising practices under the Advisers Act. Private fund managers will need to review their advertising policies and procedures and any standard marketing materials they have implemented. For example, the SEC stated that private placement memoranda would not be treated as advertisements but pitch books and/or other materials accompanying private placement memorandums could fall within the definition of an advertisement.

Amendments to the Books and Records Rule and Form ADV

Books and Records Rule. The SEC also adopted amendments to Rule 204-2 under the Advisers Act (“books and records rule”) which requires investment advisers to make and keep certain records regarding all advertisements they disseminate, with certain accommodations for complying with this provision in the case of oral advertisements.

Form ADV. In connection with the adoption of the amendments to the Marketing Rule, the SEC also adopted amendments to Item 5 of Part 1A of Form ADV to add a new section entitled “Marketing Activities.” This new section requires advisers to indicate in their Form ADV: 1) whether their advertisements include performance results, specific investment advice, testimonials, endorsements, or third-party ratings; 2) whether they provide cash or non-cash compensation, directly or indirectly, in connection with the use of testimonials, endorsements, or third-party ratings; 3) whether their advertisements include hypothetical performance; and 4) whether their advertisements include predecessor performance.


As summarized in the corresponding press release (found here), “in the decades since the adoption of the current rules, advertising and referral practices have evolved. The technology used for communications has advanced, the expectations of investors seeking advisory services have changed, and the profiles of the investment advisory industry have diversified. The new marketing rule recognizes these changes and the Commission’s experience administering the current rules. The reforms will allow advisers to provide investors with useful information as they choose among investment advisers and advisory services, subject to conditions that are reasonably designed to prevent fraud.”

Ahead of the November 4, 2022, compliance date, the SEC has withdrawn or modified a significant number of No-Action Letters for the previous Advertising Rule and the Cash Solicitation Rule.  The list can be found on Appendix A (found here) of the Staff’s October 2021 Information Update.   The Information Update confirms firms and investment advisers will no longer be able to rely on the provisions of the withdrawn letters and will need to ensure compliance with the provisions of the modified letters, as applicable, by the Marketing Rule’s compliance date.

The Marketing Rule represents a substantial overhaul of the SEC’s now-defunct advertising and cash solicitation rues. Based on a firm’s current practices, compliance with the Marketing Rule can be a significant process — firms need to make sure they are on track for full compliance by November 4, 2022.


[1] This position likely conflicts with the Department of Labor’s view that fiduciaries to retirement plans may not receive additional compensation if it may influence their recommendations.

[2] As has always been the case, a third-party solicitor may be subject to state qualification standards, including registration requirements.