A deep dive into the SEC’s new Marketing Rule

  • Expanding the use of testimonials, endorsements, hypothetical performance and third-party ratings in advertisements, subject to the regime of changes to marketing rules
  • Scoping out wider solicitation activities, including solicitation of existing or prospective investors in private funds; it also applies to solicitation in exchange for compensation -both cash and non-cash incentives
  • Modifying the solicitation rule, impacting all forms of compensation (cash or non-cash) made to a solicitor
  • The second prong contains the definition that generally includes any endorsement or testimonial for which an adviser provides cash or non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).
  • The advisers not having a reasonable basis for believing the material statement they make
  • Providing information that will likely cause an untrue or misleading implication or inference concerning an adviser’s material facts
  • Discussing any potential benefits without providing fair and balanced disclosure of material risks or limitations
  • Referencing specific investment advice, i.e., not in a fair and balanced manner
  • Including or excluding performance results and performance duration in a manner that is not fair and balanced (cherry picking)
  • Including information that is otherwise materially misleading
  • An “endorsement” is any statement by an individual who is not a current client or investor in a private fund advised by the investment adviser that 1) Indicates recommendation and their experience with the investment adviser or its supervised persons 2) Directly or indirectly solicits any current or prospective client of the investment adviser or investor of a fund the adviser advises 3) Refers any current or prospective client or investor to become a client of, or an investor in, a private fund advised by the investment adviser
  • The Marketing Rule now allows the use of testimonials and endorsements, subject to certain conditions and disclosures.
  • Disclosures: An adviser must clearly disclose
  • Whether the testimonial provider is a client of the adviser
  • Whether the promoter is being compensated (in cash or kind)
  • Material conflicts of interest
  • Oversight and written agreement: An adviser must have a written agreement in place with the promoter, unless the promoter is an affiliate of the adviser or he/she receives de minimis compensation, i.e., USD1,000 or less, during the preceding 12 months. An adviser that uses testimonials or endorsements in an advertisement must also ensure compliance with the Marketing Rule.
  • Disqualification: As defined under Rule 506 of Regulation D, certain “bad actors” are no’t allowed to be promoters.



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Acuity Knowledge Partners

Acuity Knowledge Partners


We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/