The U.S. Securities and Exchange Commission (“SEC”) recently provided additional guidance through a Risk Alert (6/8/23) about the use of client testimonials and endorsement (formerly referred to as solicitations) by investment advisers under Rule 206(4)-1, which is also referred to as the SEC’s new Marketing Rule.
The Risk Alert highlights several critical areas concerning testimonials and endorsements that are being examined by the SEC staff including the following:
- Disclosures: Is the promoter including the required clear and prominent disclosures whenever a testimonial or endorsement is made. This includes disclosing whether the promoter is a client or investor and whether the promoter is compensated. Additionally, any material conflicts of interest of the promoter must be disclosed.
Best Practice Tip: To the extent that an investment adviser firm subject to the new Marketing Rule is using a separate “solicitor” disclosure statement drafted prior to the approval (or possibly the effective) date of the Marketing Rule, it’s likely such disclosure statement does not include an identification of client status or any material conflict of interest disclosure and consequently is not in compliance with the Marketing Rule. The separate disclosure should be updated as soon as possible.
- Oversight: Does the investment adviser have a reasonable basis for believing the testimonials or endorsements of its promoters comply with the Marketing Rule’s requirements.
Best Practice Tip: An investment adviser will need to have evidence that the required disclosures are being made at the time of the testimonial or promoter. Moreover, the investment adviser should verify initially (and periodically thereafter if it is still used) the accuracy of the testimonial and endorsement. An investment adviser updates its compliance manual/code of ethics to reflect the new Marketing Rule.
- Written Agreements: Has the investment adviser executed written agreements with its promoters? The SEC noted that there are exceptions for (a) readily apparent or disclosed affiliates or (b) or the promoters receive de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
Best Practice Tip: Even if an investment adviser and promoter are not entering into a written agreement based upon the de minimis compensation exception, an investment adviser should still confirm through a written acknowledgement by the promoter that the accuracy of the testimonial or endorsement, authority for the investment adviser to use of the testimonial/endorsement and requirement that the client or third-party to notify the investment adviser if the testimonial/endorsement becomes inaccurate.
- Ineligible Persons: Were any ineligible persons compensated by the investment adviser for testimonials or endorsements?
Best Practices: An investment adviser should require promoter to complete a questionnaire, and the investment adviser should check https://adviserinfo.sec.gov/ and run a criminal and civil background check for last 10 years.
Given the SEC’s scrutiny, it is essential for an investment adviser to thoroughly review its use of testimonials and endorsements in marketing materials and client acquisition, ensuring that the investment adviser meets the Marketing Rule’s requirements.
Related RCC Resources
- WSP/CoE Section – Advertising
- Included with an Annual Compliance Program (Bronze, Silver, Gold, Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/wsp-coe-section-advertising-10-20-2022/
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/investment-adviser-compliance-manual-advertising-section/
- Advertising – Endorser (Unaffiliated) – Disclosure Statement
- Included with an Annual Compliance Program (Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/advertising-endorser-unaffiliated-disclosure-statement/
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/sec-investment-adviser-endorsement-disclosure/
- Advertising – Endorser (Affiliated) – Disclosure Statement
- Included with an Annual Compliance Program (Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/advertising-endorser-affiliated-disclosure-statement/
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/investment-adviser-endorser-disclosure-statement/
- Advertising – Testimonial/Endorsement (No Compensation) Authorization
- Included with an Annual Compliance Program (Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/advertising-testimonial-endorsement-no-compensation-authorization/
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/investment-adviser-authorization-to-use-client-testimonial/
- Solicitor Annual Questionnaire – Unaffiliated and Unlicensed
- Included with an Annual Compliance Program (Platinum & Titanium packages) through our Knowledge Base at https://www.ria-compliance-consultants.com/knowledge-base/solicitor-annual-questionnaire-unaffiliated-and-unlicensed/
- Available for an a la carte purchase through our Online Store at https://www.ria-compliance-consultants.com/product/sample-form-solicitor-annual-questionnaire-unaffiliated-and-unlicensed/
The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. Investment adviser examinations by a securities regulator are not limited to the examination priorities listed above. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s rules and published guidance for more details about the topics referenced above. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.