In late 2020, the SEC announced that it had finalized changes to its Marketing Rule for financial advisors. The amendments create a single rule that replaces the pre-existing advertising and cash solicitation rules.

The rule’s broadly drawn limitations and principles-based provisions are designed to accommodate the continual change in technology and ever-expanding ways in which advisors may promote themselves to the investing public. The rule now allows advisors to use client testimonials and endorsements in their marketing content, which is a key change and focal point for many advisors.

Advisors are required to be compliant with these rule changes effective November 4, 2022. The SEC Marketing Rule document checks in at a hefty 430 pages, so there’s plenty of nuance for advisors to navigate as they work to stay in compliance.

To help you stay on track, we’ll take a look at the definition of an “advertisement,” the rules regarding using client testimonials, compliance challenges on social media and more.

The SEC Definition of an Advertisement

The last update to the SEC’s definition of an “advertisement” came in 1961, pre-dating not only social media, but widespread adoption of the internet in general. The modernized rule provides principles-based guidance that can be applied across numerous mediums of communication, including emails, texts, videos, social media and a number of other digital platforms.

Advertising as defined by the rule includes two prongs. The first includes any direct or indirect communication to prospective clients by an advisor for the purpose of offering investment advisory services with regard to securities.

This prong covers traditional advertising and does not include one-on-one communications except under certain circumstances. Extemporaneous, live and oral communications are also excluded in this prong, as is information contained in a statutory or regulatory notice, filing or other required communication.

The second prong includes direct and indirect communications to existing clients or investors for the purpose of offering new investment advisory services with regard to securities. Compensated testimonials and endorsements that include oral and one-on-one communications also fall under this prong.

To prevent fraudulent, deceptive or manipulative acts, the SEC provides a set of general prohibitions that apply to all advertisements. The intent of these prohibitions is to avoid information that would mislead the investing public. Under the general prohibitions, an advisor may not include advertising that presents:

  • Untrue statements or omissions of fact.
  • Statements of fact the advisor cannot reasonably substantiate.
  • Information that would likely cause untrue or misleading implications or inference to be drawn.
  • Discussion of potential benefits to clients or investors without providing fair and balanced treatment of any material risks or material limitations associated with potential benefits.
  • Investment advice that is not presented in a fair and balanced manner. (No “cherry picking.”)
  • Performance results or present performance time periods in a manner that is not fair and balanced.
  • Otherwise materially misleading information.

The rule does not require investment advisors to review and approve their advertisements prior to dissemination. It’s up to the firm to decide, but at Carson, we require review of any advertisements prior to distribution to prospects or clients.

Learn more: Watch our on-demand webinar “Staying on Top of SEC Marketing Rule Changes”

Rules Regarding Testimonials

The biggest change to the SEC Marketing Rule is the one allowing advisors to use testimonials and endorsements in advertising. Testimonials are applicable to statements from clients or private fund investors; endorsements are applicable to statements received from non-clients or private fund investors.

The rule also allows for and provides guidance on the use of third-party ratings.  A “third-party rating” is defined as a rating or ranking provided by a person who is not a “related person” as defined by the ADV Glossary of Terms.  Google My Business and Yelp are examples of third-party listing sites.

Using testimonials in your advertising could be an exciting new avenue to expand your marketing efforts, but it comes with some provisions. Here are some general dos and don’ts to help you stay in compliance.

  • As it pertains to client testimonials, you may ask clients to leave a review for you or your firm; however, you should not specifically tell them what to say in their testimonial statement.
  • If an advisor adopts a client’s testimonial statement into their advertising, the advisor must treat the testimonial statement as his or her own advertising. In addition, the advisor must clearly and prominently disclose that the testimonial was given by a current client or private fund investor, that cash or non-cash compensation was provided for the testimonial, and a brief statement of any material conflicts of interest on the part of the person giving the testimonial resulting from the advisor’s relationship with such person.
  • Avoid “entanglement” – entanglement can be defined as the extent to which an advisor has involved themselves in the preparation or presentation of third-party information. Social media is most prone to entanglement – removing or editing a negative review from your firm’s Facebook page for the purpose of appearing more favorable would be considered entanglement, which is prohibited under the rule.
  • The rule allows for clients to receive cash or non-cash compensation for giving a testimonial. However, the advisor must disclose the material terms of any compensation arrangement to include a description of the direct or indirect compensation provided or to be provided resulting from the investment advisor’s relationship with the client. To be clear, although the rule allows for the payment of direct or indirect compensation, a firm’s compliance department may not. Advisors need to have a clear understanding of what is permitted to remain in compliance with firm policy.

As with advertisements in general, the key is to be transparent and avoid misleading information as dictated by the general prohibitions of the rule.

Staying Compliant on Social Media

Social media offers another way for clients to leave testimonials and endorsements, but it also comes with provisions. It’s important to remember that entanglement is prohibited under the rule, and advisors may not edit, remove or arrange comments received to give prominence to more favorable reviews or to mislead.

That being said, the rule does also include provisions to allow for the conditional editing of testimonial statements to remove profanity, misleading or offensive statements, threatening language, spam, unlawful content, content that infringes on intellectual property rights, or correction of factual errors.

For instance, if a review includes a factual error about your firm’s offerings – say, that you helped a client with trust planning when it’s not a service you offer – you can correct it. However, you should first consult with your firm’s compliance department to ensure proper procedure is followed.

Which social media sites your firm chooses to use will likely come down to your ability to archive your content on them. As an example, capturing and archiving some features, such as “Stories” used Instagram or Facebook, can be a challenge. Advisors should consult with their compliance department to confirm which activities are permitted.

Also, personal and business accounts should remain separate. While it’s OK to have personal social media accounts, avoid entangling business and personal accounts.

The social media landscape is ever-changing and can shift rapidly. Advisors should strive to be well-versed in the various offerings of social media, and should work closely with their compliance department to ensure they are following appropriate policies and procedures.

Learn more: Download our resource “How the SEC Testimonial Rule Impacts Your Marketing Strategy”

The Bottom Line

These changes mark the biggest update to the SEC Marketing Rule in more than 60 years, and even at 430 pages, not every compliance scenario an advisor may encounter can be covered. For this reason, it’s important to understand and apply the underlying principles of the rule to any advertisement – show transparency and don’t mislead.

Interested in learning how Carson is helping our partners adapt to these new rules? Schedule a time to chat with our team today.

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