Will Investment Advisers Registered with the States Be Able to Use Testimonials?

 On December 22, 2020, the U.S. Securities and Exchange Commission adopted amendments to Rule 206(4)-1 under the Investment Advisers Act of 1940 relating to advertisements. Among other things, these amendments, when effective, will permit testimonials. The rules are currently under review by the Biden Administration and won’t become effective until 60 days after they are published in the Federal Register. There is some ambiguity whether an investment adviser registered with the State of New Jersey will be able to take advantage of the amendments to Rule 206(4)-1. I suspect there is similar ambiguity under other state’s laws and regulations.

New Jersey Statute 49:3-53(a)(3) makes it unlawful to “to engage in dishonest or unethical practices as the bureau chief may by rule define in a manner consistent with and compatible with the laws and regulations of the Securities and Exchange Commission [and other organizations]. New Jersey Statute 49:3-53(f) makes it “unlawful for any person soliciting advisory clients to make any untrue statement of a material fact, or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they are made, not misleading.”

New Jersey Annotated Code 13:47A-6.3 (a)(18) and (a)(52) were promulgated by bureau chiefs to define certain dishonest and unethical practices. New Jersey Annotated Code 13:47A-6.3 (a)(18) makes the following practice “dishonest and unethical” and prohibited:

[u]sing any advertising or sales presentation by any person in such a fashion as to be deceptive or misleading. An example of the prohibited practice would be distribution of any nonfactual data, material or presentation based on conjecture, unfounded or unrealistic claims or assertions in any brochure, flyer, press release, or display by words, pictures, graphs or otherwise designed to supplement, detract from, supersede or defeat the purpose or effect of any prospectus or disclosure[.] [Emphasis added.]

New Jersey Annotated Code 13:47A-6.3 (a)(52) makes the following practice “dishonest and unethical” and prohibited:

Publishing, circulating or distributing any advertisement which does not comply with Rule 206(4)-1 [] under the Investment Advisers Act of 1940 [.]

While there is potential conflict between these two passages, I interpret New Jersey Statute 49:3-53(a)(3) as only authorizing the Bureau chief to define dishonest or unethical practices so long as they are consistent with and compatible with the laws and regulations of the Securities and Exchange Commission. I believe it would be unconstitutional for the Bureau to take the position that an investment adviser registered with the State of New Jersey would be engaged in a dishonest or unethical practice while in compliance with Rule 206(4)-1. Therefore, investment advisers registered with the State of New Jersey ought to be able to take advantage of the amendments to Rule 206(4)-1 so long as they aren’t in violation of New Jersey Statute 49:3-53(f), which is nearly identical to the general prohibition in Rule 206(4)-1(a)(1).

3 thoughts on “Will Investment Advisers Registered with the States Be Able to Use Testimonials?

  1. Hi Max,

    Great article! Your timely pieces about the new marketing rule have been really helpful. Do you have any insight as to whether RIAs registered in Illinois will be able to use testimonials/the new marketing rule?

    A quick google search came up with this:
    https://www.ilga.gov/commission/jcar/admincode/014/014001300H08480R.html

    Which looks like testimonials are not allowed, but I’m not a lawyer, so hopefully I’m missing something.

    Anyways, any light you could shine on it would be appreicated!

    Thanks,

    LP

    1. Hi LP, I would defer to the Illinois Securities Department, but based on the rule that you cited, it would appear that testimonials will remain prohibited, unless the Department revises the rules.

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