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New Investment Adviser Marketing Rule Relaxes Restrictions on Use of Testimonials

Rule 206(4)-1 under the Investment Advisers Act, known as the “Marketing Rule,” becomes effective on May 4, 2021. Full details of the new rule and the related amendments to the Books and Records Rule and for ADV can be reviewed in the SEC’s adopting release. The new rule changes many aspects of the current guidance applicable to advertising by SEC-registered investment advisers, some of which is drawn from no-action letters and other informal releases. Advisers must come into compliance with the new rule within eighteen months of the effective date or by November 4, 2022. Firms may choose to come into compliance at any time between the effective date and the compliance date, but the SEC has warned that RIAs may not choose to implement parts of the new rules at different times. Rather, a firm must implement and be prepared to comply with the entirety of the new rule on a single date within the eighteen-month compliance period. The rule does not, on its face, apply to state-registered RIAs, who should continue to follow the rules applicable to the states in which they conduct business. Some state rules mirror or adopt the SEC advertising rules in some respects.

One of the most important changes relates to using what has historically been referred to as “testimonials,” or statements by clients regarding their experience with an adviser. The current rule 206(4)-1, titled “Advertisements by Investment Advisers,” states that any advertisement by an adviser that uses a “testimonial of any kind” is deemed fraudulent, deceptive or manipulative. Although “testimonial” is not defined in the current rule, the SEC consistently interpreted the term as a statement of a client’s experience with, or endorsement of, an investment adviser. Under the new rule, however, testimonials as traditionally understood are permitted as long as firms comply with a number of requirements.

The new rule defines “testimonials” as any statement by a current client or investor in a private fund advised by the investment adviser (i) about the client or investor’s experience with the investment adviser or its supervised persons (ii) 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 (iii) 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. Any advertisement that contains or refers to a testimonial and is sent to more than one person will usually fall within the new rule’s definition of “advertisement” and will, therefore, be subject to the general advertising prohibitions against false and misleading advertising, which are beyond the scope of this article. However, all testimonials, whether or not distributed to more than one person and whether or not otherwise constituting an “advertisement” are subject to numerous other requirements.

For all testimonials, an RIA must make five disclosures, namely:

  1. A clear and prominent disclosure that the provider of the testimonial is a client;
  2. If applicable, a clear and prominent disclosure that the provider has received cash or non-cash compensation, as the case may be;
  3. A description of the material terms of the compensation provided, if applicable;
  4. A clear and prominent brief description of all conflicts of interest resulting from the adviser’s relationship with the provider; and
  5. A detailed description of the material conflicts of interest and/or the compensation arrangement if applicable.

Although 4 and 5 are similar, they are distinguishable in that one must be prominent and may be brief, while the other must be detailed but need not be prominent.

Note that disclosures 2 and 3 are required only if the provider receives “compensation” for the testimonial. Although “compensation” is not defined, it includes cash and non-cash compensation. According to the adopting release, the term is to be broadly defined to include anything of value received by the person providing the testimonial. The release lists examples as examples AUM fees, fixed fees, hourly fees, reduced or waived advisory fee, and non-cash rewards. Any benefit or “thing of value” should be deemed to satisfy the requirement.

In addition to the disclosures, the new rule requires the adviser to satisfy two compliance obligations, specifically (1) that the firm have a reasonable basis to conclude that the testimonial complies with the rule, and (2) that it also maintain a written agreement that describes the scope of the agreed-upon activities and the compensation terms. This second element need not be complied with if there is no compensation, or the compensation is de minimisDe minimis compensation is defined as compensation in the total amount of $1,000 or less, or the equivalent in non-cash compensation, over the prior 12 months.

In addition to the disclosures and the compliance obligations, RIAs who use testimonials must also ensure that the person giving the testimonial is not “ineligible.” A would-be provider is ineligible if they have been barred by the Commission or have been the subject of certain other specified sanctions or events. This requirement does not apply to testimonials that are provided for no compensation, or if the compensation is de minimis.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.

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