A Running List of Practical Pointers Under the New Marketing Rule

The new marketing rule provides an opportunity for investment advisers to compliantly test out new marketing methods. This post will provide a running list of pointers that I think investment advisers and investment professionals may find helpful or interesting. All of these practice pointers assume the rule is effective. None of these pointers should be relied upon as legal advice and I encourage you to seek out local counsel before engaging in any marketing practices under the new rule.

Also, please feel free to contact me if there are any issues that you would like me to address.

Practical Pointer #1: Centers of influence, such as lawyers and accountants, that refer clients to an investment adviser might be inadvertently providing testimonials or endorsements.

The adopting release states, “Depending on the facts and circumstances,
a lawyer or other service provider that refers an investor to an adviser, even infrequently, may also meet the rule’s definition of testimonial or endorsement.”

Under the new rule, “[a]n advertisement may not include any testimonial or endorsement, and an adviser may not provide compensation, directly or indirectly, for a testimonial or endorsement, unless the investment adviser complies” generally with three conditions. Under the new rule, a “testimonial” is defined as “any statement by a current client or investor in a private fund advised by the investment adviser:

  1. About the client or investor’s experience with the investment adviser or its supervised persons;
  2. That directly or indirectly solicits any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser; or
  3. That refers any current or prospective client or investor to be a client of, or an investor in a private fund advised by, the investment adviser.”
Practical Pointer #2: Can an investment adviser request testimonials from its clients and then advertise them on its website?

Yes, but any advertisement would need to comply with all seven of the general prohibitions under the new marketing rule and meet the three conditions for testimonials and endorsements, absent an exemption.

The testimonial and endorsement requirements are fairly clear. Investment advisers might face trouble with the general prohibitions, and more specifically, the potential for creating untrue or misleading implications or inferences.

The adopting release provides more guidance on implications that may arise from testimonials. The adopting release states that the rule does not “require[] an adviser to present an equal number of negative testimonials alongside positive testimonials in an advertisement, or balance endorsements with negative statements in order to avoid giving rise to a misleading inference….Rather, the general prohibition requires the adviser to consider the context and totality of information presented such that it would not reasonably be likely to cause any misleading implication or inference. General disclaimer language (e.g., “these results may not be typical of all investors”) would not be sufficient to overcome this general prohibition. However, one approach that [the Staff] believe[s] would generally be consistent with the general prohibitions would be for an adviser to include a disclaimer that the testimonial provided was not representative, and then provide a link to, or other means of accessing (such as oral directions to go to the relevant parts of an adviser’s website), all or a representative sample of the testimonials about the adviser.”

As this passage makes clear, investment advisers must be thoughtful in how they solicit feedback from clients to create advertisements containing testimonials and should ensure that the ultimate presentation does not create any misleading inference or implication.

Practical Pointer #3: Can I pay a blogger or influencer to generate leads or clients for my firm?

Yes, so long as you and the blogger or influencer comply with the new marketing rule. Under the new marketing rule, a blogger or influencer that is generating leads or clients for an investment adviser will likely be providing an “endorsement” or “testimonial” under the rule.

The adopting release said as much.

Similarly, a blogger’s website review of an adviser’s advisory service would be a testimonial or an endorsement under the final marketing rule because it indicates approval, support, or a recommendation of the investment adviser, or because it describes its experience with the adviser. If the adviser directly or indirectly compensates the blogger for its review, for example by paying the blogger based on the amount of assets deposited in new accounts from client referrals or the number of accounts opened, the testimonial or endorsement will be an advertisement under the definition’s second prong.

To better understand the compliance requirements, please review the sections titled “What are the general prohibitions under the new advertising rule,” “What are testimonials and endorsements under the new rule,” and “How can an investment adviser use a testimonial or endorsement under the new rule?” available here.

Practical Pointer #4: Can I continue to use awards or rankings in my advertisements, such as those from Barron’s, CNBC, and Forbes?

Yes, but you will need to comply with new rules governing “third-party ratings”.

An advertisement may not include any third-party rating, unless the investment adviser:
(1) Has a reasonable basis for believing that any questionnaire or survey used in the preparation of the third-party rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result; and
(2) Clearly and prominently discloses, or the investment adviser reasonably believes that the third-party rating clearly and prominently discloses:

(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.

Practical Pointer #5: Can I use a complete or partial client list that identifies clients or private fund investors on a website or in a presentation?

Yes, but you would want to first obtain consent from any clients or investors appearing on the list. The use of the list would also need to comply with the new advertising rule’s general prohibitions, which are discussed under the heading “What are the general prohibitions under the new advertising rule” available here. For additional context on how those general prohibitions might be applied, advisors may want to review the no-action letter issued to Denver Investment Advisors, Inc. (July 30, 1993).

Practical Pointer #6: Can I record and publish a video with a client about their experience working with me? The video would discuss the services they received, their investment objectives, how we met their needs, and how we grew their investments.

Yes, but as noted above in Practical Pointer #2, any advertisement would need to comply with all seven of the general prohibitions under the new marketing rule and meet the three conditions for testimonials and endorsements, absent an exemption. As noted in Practical Pointer #2, the general prohibition against creating any misleading implication or inference will probably be most challenging.

Practical Pointer #7: Can our firm create a Google My Business page (or Angie’s List or any other third-party review service) and allow the public to review our firm’s services? What if our firm receives a defamatory or untruthful review?

Yes, the new rule permits an investment adviser to create a Google My Business page, but depending on the facts and circumstances, their page and the comments on the page might be considered advertisements under the new rule. More guidance is available below.

Under the new rule, the definition of an advertisement includes “[a]ny direct or indirect communication an investment adviser makes to more than one person…(a) that offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser or (b) offers new investment advisory services with regard to securities to current clients or investors in a private fund advised by the investment adviser.

Does a Google My Business page (or similar review site) meet the definition of an advertisement? According to the definition, an advertisement requires that an “investment adviser make[]” a communication to more than one person. The adopting release states, “an adviser may [] ‘entangle[]’ itself in a third-party communication if the adviser involves itself in the third party’s preparation of the information”. If that occurs, the statement of the third-party would be deemed made by the investment adviser.

The adopting release states that “[w]e would not view an adviser’s edits to an existing third-party communication to result in attribution of that communication to the adviser if the adviser edits a third party’s communication based on pre-established, objective criteria (i.e., editing to remove profanity, defamatory or offensive statements, threatening language, materials that contain viruses or other harmful components, spam, unlawful content, or materials that infringe on intellectual property rights, or editing to correct a factual error) that are documented in the adviser’s policies and procedures and that are not designed to favor or disfavor the adviser. In these circumstances, we would not view the adviser as endorsing or approving the remaining content by virtue of such limited editing.”

However, whether the Google My Business page is as an advertisement made byt he investment adviser does not stop here. The investment adviser must then consider whether the Google My Business site has otherwise been “adopted” by or become “entangled” with the investment adviser.

The adopting release states:

Whether content posted by third parties on an adviser’s own website or social media page would be attributed to the investment adviser also depends on the facts and circumstances surrounding the adviser’s involvement.

For example, permitting 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 or their presentation and is not involved in the preparation of the content. We believe such treatment of third-party content on the adviser’s own website or social media page is appropriate even if the adviser has the ability to influence the commentary but does not exercise this authority. For example, if the social media platform allows the investment adviser to sort the third-party content in such a way that more favorable content appears more prominently, but the investment adviser does not actually do such sorting, then the ability to sort content would not, by itself, render such content attributable to the adviser. In addition, if an adviser merely permits the use of “like,” “share,” or “endorse” features on a third-party website or social media platform, we would not interpret the adviser’s permission as implicating the final rule.

Conversely, if the investment adviser takes affirmative steps to involve itself in the preparation or presentation of the comments, to endorse or approve the comments, or to edit posted comments, those comments would be attributed to the adviser. This would apply to the affirmative steps an adviser takes both on its own website or social media pages, as well as on third-party websites. 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.

Therefore, if an investment adviser urges its clients to leave reviews on Google, then the entire Google review page could be deemed an advertisement and would become subject to the general prohibitions and the testimonial and endorsement requirements.

Practical Pointer #8: How do you differentiate between a third-party rating and an endorsement where a local publication or website ranks your services?

Many investment advisers will often participate in surveys to obtain a ranking, such as “Best Wealth Manager in New York”. Whether this rating itself and the future use of it in an advertisement is a “third-party rating” or an “endorsement” under the new rule will turn on whether the provider makes this type of ranking in the “ordinary course of its business”. In the adopting release, the Staff stated “[w]e continue to believe that the ordinary course of business requirement would largely correspond to persons with the experience to develop and promote ratings based on relevant criteria. It would also distinguish third-party ratings from testimonials and endorsements that resemble third-party ratings, but that are not made by persons who are in the business of providing ratings or rankings.”

Therefore, if an investment adviser were to pay a local newspaper that did not develop and promoting ratings in the ordinary course of its business, then the rating would likely be treated under the endorsement standard.

Practical Pointer #9: The new rule requires advertisements to generally include one-, five-, and ten-year time periods for the presentation of performance results. How does this work?

Under the new rule, an investment adviser may not include in any advertisement:

“Any performance results, of any portfolio or any composite aggregation of related portfolios, in each case other than any private fund, unless the advertisement includes performance results of the same portfolio or composite aggregation for one-, five-, and ten-year periods, each presented with equal prominence and ending on a date that is no less recent than the most recent calendar year-end; except that if the relevant portfolio did not exist for a particular prescribed period, then the life of the portfolio must be substituted for that period”

As an operational matter, this will make advertising performance really difficult. Performance will need to be calculated relatively quickly at the beginning of each calendar year so that an adviser can show performance as of the most recent calendar year-end.

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