The Securities and Exchange Commission (SEC) has significantly revised and “modernized” the Investment Advisers Act regulatory framework governing investment adviser advertisements and payments to solicitors to address fraudulent and deceptive practices in light of evolving marketing practices and associated technologies. The amendments, codified under Rule 206(4)-1, draw from and replace with a single consolidated rule (the New Marketing Rule) the current advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively.

The New Marketing Rule was formally adopted on December 22, 2020, and became effective on May 4, 2021. An 18-month transition period followed, and November 4, 2022, marked the first date on which investment advisers had to be in compliance with the New Marketing Rule.

SEC-registered investment advisers should familiarize themselves with the New Marketing Rule and its various requirements, prohibitions, and exceptions—particularly as the SEC has withdrawn previously issued no-action letters that related to the earlier rules.

As detailed below, the New Marketing Rule broadly defines an advertisement as encompassing both direct and indirect communications relating to securities advisory services (with a few limited exceptions) as well as testimonials and endorsements that are given in exchange for cash or noncash compensation.

Using a principles-oriented approach, the New Marketing Rule prohibits registered investment advisers (or investment advisers who are required to be registered with the SEC) from making false or misleading statements in an advertisement and regulates how they can use third-party ratings and performance results in an advertisement. For an endorsement or testimonial, the New Marketing Rule requires extensive disclosures regarding any cash or noncash compensation or conflicts of interest and the background of the person who is giving the testimonial or endorsement.

What Constitutes an Advertisement under the New Marketing Rule?

Per Section 275.206(4)-1(e)(1)(“Advertisement”) of the Investment Advisers Act, an advertisement is defined to include either of the following:

• Any direct or indirect communication that is made by an investment adviser to more than one person (or to one or more persons if the communication involves a hypothetical performance) in which the investment adviser either (1) offers securities advisory services to a prospective client or an investor in a private fund that is advised by the investment adviser, or (2) offers new services to a current client or an investor in a private fund that is advised by the investment adviser
• Any endorsement (a statement by a person other than a current client or private fund investor) or testimonial (a statement by a current client or private fund investor) for which an investment adviser has directly or indirectly provided compensation

An advertisement does not include any of the following:

• Extemporaneous, live, oral communications
• A communication involving hypothetical performance if the communication is provided in response to an unsolicited request for such information
• Information that is contained in, or that is intended to satisfy the requirements of, a statutory or regulatory filing or notice

What Can’t an Investment Adviser Say in an Advertisement?

Per Section 275.206(4)-1(a)(“General prohibitions”), an investment adviser may not do any of the following in an advertisement:

• Make an untrue statement of a material fact
• Fail to state a material fact that is necessary in order to prevent a statement from becoming misleading “in the light of the circumstances under which it was made”

• Make a material statement of fact that the investment adviser does not have a reasonable basis for believing can be substantiated upon demand from the SEC

• Provide information that is reasonably likely to create an untrue or misleading inference or implication in connection with a material fact about the investment adviser

• Highlight the potential benefits of the investment adviser’s services without disclosing the associated material risks or limitations in a manner that is fair and balanced

• Provide specific investment advice, performance results, or performance time periods in a manner that is not fair and balanced

• “Otherwise be materially misleading”

What Disclosures Are Required in a Testimonial or Endorsement on Behalf of an Investment Adviser?

Per Section 275.206(4)-1(b)(“Testimonials and endorsements”), an investment adviser who advertises by way of a testimonial or endorsement must:

• Clearly and prominently disclose that the testimonial is being provided by a current client or investor, or that the investment is being provided by someone other than a current client or investor

• Clearly and prominently disclose that cash or noncash compensation that was provided in connection with the testimonial or endorsement, to the extent applicable

• Clearly and prominently provide a brief statement of any material conflicts of interest on the part of the person giving the testimonial or endorsement in light of that person’s relationship to the investment adviser

• Provide a description of any material conflicts of interest on the part of the person giving the testimonial or endorsement in light of that person’s relationship to the investment adviser

• Provide the material terms of any compensation arrangement, including a description of the compensation being provided

• Have a reasonable basis to believe that the testimonial or endorsement complies with the New Marketing Rule

• Enter into a written agreement with the person giving the testimonial or endorsement that describes the agreed-on activities and the terms of the compensation (unless the compensation has a value of $1,000 or less)

• Not compensate any person that the investment adviser knows or should know is ineligible to receive compensation for giving a testimonial or endorsement as a result of a disqualifying action or event (unless the compensation has a value of $1,000 or less)

How Can an Investment Adviser Present Performance Results in an Advertisement?

Per Section 275.206(4)-1(d)(“Performance”), the following restrictions apply to the presentation of performance results in an advertisement by an investment adviser:

• Gross performance results (i.e., before deductions are made for fees and expenses) must also include performance results of net performance results (i.e., after the deduction of all fees and expenses), and both the gross and net performance results must be calculated and presented in the same manner.

• Performance results for a portfolio of investments must also include the performance results of the same portfolio for one-, five-, and 10-year periods (with the full life of the portfolio serving as a substitute for any time period that has not yet been reached by the portfolio), with each period presented in the same manner.

• Any related performance results must include the results of all related portfolios, unless the performance results being advertised are not materially higher than if all related portfolios had been included and the exclusion of any related portfolio would not change the presentation of any applicable time periods.

• Extracted performance results must be accompanied by either the performance results of the total portfolio from which the extraction was made or an offer to promptly provide the total portfolio results.

• Hypothetical performance results (not including results created through interactive analytical applications) must be created using procedures that are reasonably designed to ensure that the hypothetical performance is relevant to the expected financial situation and investment objectives of the advertisement’s intended audience, and must contain information that is sufficient for the advertisement’s intended audience to understand how the hypothetical performance results were calculated and the risks and limitations of relying on a hypothetical performance in order to make an investment decision.

• Predecessor performance results cannot be used unless the persons who were primarily responsible for achieving those results now manage accounts for the investment adviser who is making the advertisement, the accounts that were managed by the predecessor are sufficiently similar to the accounts being managed by the investment adviser who is making the advertisement in order to provide relevant information to clients or investors, all accounts that were managed in a substantially similar manner are being advertised unless the exclusion of an account would not result in a materially higher performance and does not change the presentation of any applicable time periods, and the investment adviser clearly and prominently discloses that the performance results being advertised come from a predecessor.

• The advertisement cannot directly state or imply that the calculation or the presentation of the performance results have been approved or reviewed by the SEC.

How Can an Investment Adviser Display Third-Party Ratings in an Advertisement?

Per Section 275.206(4)-1(c)(“Third-party ratings”), an advertisement may not display a third-party rating unless the investment adviser:

• Has a reasonable basis to believe that any questionnaire or survey that was used to create the third-party rating made it “equally easy” for someone to provide both favorable and unfavorable responses and was not created to produce a predetermined result

• Clearly and prominently discloses the date on which the rating was given, the period of time on which the rating was based, the third party that created and calculated the rating, and any compensation that was provided by the investment adviser in connection with the rating

What Other Changes Were Made in Connection with the New Marketing Rule?

In connection with the New Marketing Rule, the SEC has amended Rule 204-2 of the Investment Advisers Act (also known as the Books and Records Rule) to require that investment advisers retain true, accurate, and current copies of all advertisements that are disseminated (including written or recorded materials relating to an oral advertisement) and documentation to substantiate claims relating to performance results and third-party ratings.

Also, Form ADV (the investment adviser registration form) has been amended to require investment advisers to disclose whether their advertisements make use of performance results, specific investment advice, testimonials or endorsements, third-party ratings, cash or noncash compensation, hypothetical performance, or predecessor performance.

What Should Investment Advisers Do Now?

Because the New Marketing Rule is flexible and principles-based in nature, its application will depend heavily on the nature of a particular advertisement and its surrounding circumstances. Investment advisers are encouraged to reach out to counsel in order to assess whether and how their current advertising and recordkeeping practices should be updated in order to be in compliance with the New Marketing Rule.

For instance, investment advisers who actively use social media, or who have hired outside companies to create social media content on their behalf, should seriously consider the extent to which their online communications (such as emails, instant messages, tweets, podcasts, blog posts, and videos) may constitute advertisements under the New Marketing Rule and whether all such advertisements are in compliance with the rule’s requirements.

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