Definition of an Advertisement Under the Investment Adviser Marketing Rule

JAN 27, 2021 | PRACTUS LLP

Definition of an Advertisement Under the Investment Adviser Marketing Rule

Authored by Karen A. Aspinall

Section II: Defining an “Advertisement” Under the Amended Adviser Marketing Rule

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
– John Wanamaker


In this part of our summary, we explore the new definition of an advertisement under the amended rule.  This definition is very important when determining the type of material that is subject to the amended rule’s requirements.  The SEC made a number of changes to the rule from the proposal, such as tightening the definition of an advertisement such materials related to a current client’s account would not be in scope of the rule.  However, as we illustrate in more detail below, the devil will most certainly be in the details.   

This summary is one part of a series of updates regarding the amended marketing rule. You can read the entire article for our complete Summary of the Investment Adviser Marketing Rule or you may click on any of the links below to view a particular section.

Definition of “Advertisement”

1. When I see the words “generally”, “certain” and “partial”, I feel the need to read on.  First of all, can you give me more detail on how “advertisement” is now defined?

Yes.  The definition of an advertisement includes two prongs. 

  • Prong 1:  any:
    • direct or indirect communication;
    • an investment adviser makes that either:
      • 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 (private fund investors); or
      • offers new investment advisory services with regard to securities to current clients or private fund investors.

This prong captures traditional advertising, and will not include one-on-one communications, unless the communication includes hypothetical performance information that is not provided: (i) in response to an unsolicited investor request; or (ii) to a private fund investor.  It also excludes (i) extemporaneous, live, oral communications; and (ii) information contained in a statutory or regulatory notice, filing, or other required communication, as long as that information is reasonably designed to satisfy the requirements of the notice, filing, or other required communication.

  • Prong 2 – NEW. This prong covers compensated testimonials and endorsements.  It will include oral communications and one-on-one communications to capture traditional one-on-one solicitation activity, as well as solicitations for cash as well as non-cash compensation.  It excludes certain information contained in a statutory or regulatory notice, filing, or other required communication.

2. We advise a number of funds that are underlying funds in funds of funds structures, as well as master funds in master-feeder structures.  Some of the advisers to the top-tier funds and feeder funds take our marketing materials and make their own edits to our materials before they distribute them.  We generally don’t see the edits.  Are we responsible for the edited material?

Not if you didn’t approve or otherwise participate in the edits.

3. Our marketing materials include quite a bit of information we obtain from third-parties, such as our sub-advisers’ GIPS composites and information about how various market indexes performed.  Are we responsible for their information?

It depends.  According to the SEC, if an adviser incorporates information it receives from a third-party into its performance advertising, the information will be attributable to the adviser.  In addition, if the adviser involved itself in the third-party’s preparation of the information, it may be liable for that information.

However, if the adviser edits a third-party’s information based upon pre-established, objective criteria (e.g., correcting factual errors, removing materials that infringe upon intellectual property rights), that alone would not cause the adviser to be responsible for the information. 

4. I would like to increase our presence on social media, but I’ve always worried about our responsibility for anything that someone may post in response to a social media post.  But social media without comments or responses isn’t useful.  Are we responsible for all posts by commenters?  What if we want to remove some comments?

The SEC is now OK with investment advisers permitting all third-parties to post public commentary to the adviser’s website or social media page without attributing the commentary 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.  Moreover, the adviser can edit profane, unlawful, or other such content according to a neutral pre-existing policy, without assuming responsibility for the remaining unedited commentary.  However, an adviser will assume responsibility for posted content if, for example, it manipulates the order in which comments are presented so that more positive commentary appears before negative commentary, or selectively deletes negative commentary.

5. We are sending a presentation to the three co-trustees of a trust.  The trust would be the sole investor.  Our presentation has no hypothetical performance information.  Would it be treated as advertising or subject to the one-on-one exclusion from the advertising definition?

The SEC looks at the “one” at the entity level.  Therefore, sending the presentation to multiple representatives of an entity – in this instance, the three co-trustees – does not cause the presentation to be treated as an advertisement.  

6. Me again.  The co-trustees loved our presentation.  I can think of several other prospects who should be interested.  My firm just invested in new software, so I can personalize each presentation before I send it out.  Can I still rely upon the one-on-one exclusion?

No.  “While communications such as bulk emails or algorithm-based messages are nominally directed at or ‘addressed to’ only one person, they are in fact widely disseminated to numerous investors and therefore would be subject to the final rule.  Similarly, customizing a template presentation or mass mailing by filling in the name of an investor and/or including other basic information about the investor would not result in a one-on-one communication.”

7. We have this strategy that we backtested, and, wow, does it look good!  Mind you, no one has ever invested any actual money in this way.  But our marketing folk think it will really appeal to one prospect in particular.  If we send the backtested performance to the prospect, is this an advertisement?  

Yes.  Hypothetical performance information does not qualify for the one-on-one exclusion unless provided in response to an unsolicited investor request or to a private fund investor.  

8. We are proud of our holistic advisory services.  We would like to advertise our expertise in managing our clients’ money directly, our private funds, and our fixed insurance services.  Will the final rule apply to advertisements of all of these services.

No.  The final rule will apply to communications that offer the investment adviser’s investment advisory services with respect to securities to a prospective client or to investors in a private fund advised by the investment adviser.  It will not apply to advertisements or other communications about services not related to securities.  However, the Advisers Act anti-fraud provisions and related rules will continue to apply to an adviser’s advertisements and other communications about services not related to securities, such as fixed insurance. 

9. We believe our best customers are our existing customers.  If we market new services to them, will the final rule apply to our communications?  

Yes*.  Communications that offer new or additional advisory services with regard to securities to current investors will be subject to the final rule.  

* – if the new services aren’t advisory services with regard to securities, then the final rule won’t apply to the communications.

10. One of our founder’s core values is that our firm be a good corporate citizen.  Our firm has consistently sponsored charitable events, published educational material about securities markets and regularly provides our clients with market commentary.  How does the final rule treat these?  

Generally, generic brand content, educational material, and market commentary would not meet the revised definition of an advertisement.  The question to ask when reviewing any such communication is whether the communication offers any investment advisory services with respect to securities.  

11. One of our portfolio managers frequently appears live as a guest on business shows.  What guardrails will the final rule impose?  

Generally, the portfolio manager’s live, extemporaneous oral comments will not be subject to the rule.  However, if the portfolio manager prepares remarks or a speech to deliver live, or prepares a PowerPoint, these will be subject to the rule.  Also, if the portfolio manager is participating in a live chat, those remarks will be subject to the rule, because there is an opportunity to review it for compliance with the rule before posting.

Moreover, if the live session is recorded, a posting of the recording would be subject to the final rule.

12. Our practice is to send out our Form ADV, Part 2A Brochure together with any marketing communications we send out.  Our Brochure also includes our privacy notice.  Will the final rule require us to start treating our Brochure as advertising?  

Generally, no.  The final rule excludes from the definition of advertisement information contained in a statutory or regulatory notice, filing or other required communication, provided the information is reasonably designed to satisfy the requirements of the communication.  While a privacy notice is not required to be included in a Brochure, it is required to be given to clients.  However, if the Brochure included an appendix that contained, for example, performance information about the firm’s GIPS composites, the performance information would be treated as an advertisement.

13. I understand that the final rule repealed the prohibition on testimonials.  My clients love me.  Celebrities love me – especially the ones who aren’t my clients.  Any reason that I can’t pay a celebrity to endorse my firm, or offer a client a discount on its advisory fee if it writes a letter talking about how great my advisory services are?

The first question to ask is what is a testimonial, and what is an endorsement.  The final rule defines a testimonial to include any statement by a current client or private fund investor about the client’s or private fund investor’s experience with the investment adviser or its supervised persons.  The final rule defines an endorsement to include any statement by a person other than a current client or private fund investor that indicates approval, support, or recommendation of the investment adviser or its supervised persons or describes that person’s experience with the investment adviser or its supervised persons.

Testimonials and endorsements will include opinions or statements by persons about the investment advisory expertise or capabilities of the adviser or its supervised persons.  Testimonials and endorsements also include statements in an advertisement about an adviser or its supervised person’s qualities (e.g., trustworthiness, diligence, or judgment) or expertise or capabilities in other contexts, when the statements suggest that the qualities, capabilities, or expertise are relevant to the advertised investment advisory services.  Finally, the definition of testimonial includes any statement by a current client or private fund investor that directly or indirectly solicits any investor to be the adviser’s client or a private fund investor, or refers any investor to be the adviser’s client or a private fund investor.  The definition of endorsement includes any such statements by a person other than a current client or private fund investor.

The second question to ask is whether any cash or non-cash compensation has been provided in connection with the testimonial or endorsement.  Forms of compensation under the final rule will include fees based on a percentage of assets under management or amounts invested, flat fees, retainers, hourly fees, reduced advisory fees, fee waivers, and any other methods of cash compensation, and cash or non-cash rewards that advisers provide for endorsements and testimonials, including referral and solicitation activities.  They also include directed brokerage that compensates brokers for soliciting investors, sales awards or other prizes, gifts and entertainment, such as outings, tours, or other forms of entertainment that an adviser provides as compensation for testimonials and endorsements.  In addition, compensated endorsements and testimonials may or may not be contingent on the endorsement or testimonial resulting in a new advisory relationship or a new investment in a private fund.

With this in mind, paying a client for a statement about how great the client’s experience is with an adviser would be a compensated testimonial under the final rule.  Similarly, paying a celebrity for an endorsement about how great an adviser is would be a compensated endorsement under the final rule.  Both statements would be advertisements subject to the final rule.

14. If my firm uses testimonials and endorsements, including through solicitors, is there anything I need to provide to the recipients of those advertisements?   

Yes, an adviser will need to provide or otherwise reasonably believe that the person giving the testimonial or endorsement has provided, as applicable, disclosure of (i) whether the testimonial was given by a current client or private fund investor, (ii) whether cash or non-cash compensation was provided for the testimonial or endorsement, and (iii) a brief statement of any material conflicts of interest with the adviser and any associated compensation arrangements (cash and non-cash paid directly or indirectly), including a description of the compensation provided.  These disclosures need to be at least as prominent as the testimonial or endorsement if written or provided at the same time as an oral testimonial or endorsement. 1 

Under the rule, compensation can take many different forms, including referrals of clients to an adviser by a broker-dealer in exchange for recommending proprietary products that have revenue sharing, or referrals that are made by a broker if an adviser directs a certain level of brokerage to that firm.  Firms need to be mindful that compensation arrangements may be more complicated than cash only arrangements.  

15. Does an adviser have any oversight responsibilities of those who provide endorsements or testimonials for the adviser?

Yes, an investment adviser must (i) have a reasonable basis, under the applicable facts and circumstances, to believe that the testimonial or endorsement complies with the requirements of the rule, and (ii) a written agreement with anyone who gives a testimonial or endorsement for the adviser that describes the scope of the agreed-upon activities and the terms of compensation for those activities.

16. My firm participates in adviser referral networks and compensates the network operator for each referral?  It also pays a third-party marketing service to disseminate communication.  Are these advertisements under the final rule?

The adviser referral network would likely constitute an endorsement under the final rule.  An operator may tout the advisers included in its network, and/or guarantee that the advisers meet the network’s eligibility criteria.  In addition, because operators typically offer to “match” an investor with one or more advisers compensating it to participate in the service, operators typically engage in solicitation or referral activities.

However, if an adviser pays a third-party marketing service to disseminate a communication, the SEC generally would not treat this communication as an endorsement for purposes of the final rule.  The marketing service, by disseminating the communication, does not indicate approval, support, or recommendation of the investment adviser, or describe its experience with the adviser, or engage in the solicitation or referral activities described therein.  While such a communication may not qualify as an endorsement, it may still be an advertisement subject to the requirements of the final rule.  

17. A friend told me that the best kinds of testimonials are live testimonials and testimonials delivered in one-on-one communications.  I noticed the exclusion above for live communications and one-on-one communications.  This seems too good to be true – sometimes the best testimonials are the ones that are excluded from the scope of the final rule.

It is too good to be true.  Extemporaneous, live, oral testimonials and endorsements and one-on-one testimonials and endorsements are excluded from the exclusion – in other words, they are treated as advertisements under the final rule.   

18. How will the final rule apply to marketing communications provided to investors and prospective investors in private funds?

The rule will cover marketing communications provided to private fund investors and prospective investors, including pitch books or other materials accompanying private placement memorandum.  It will generally not apply to private placement memorandum themselves, account statements or transaction reports.

19. Are there any limits on who an adviser can compensate for testimonials and endorsements?  

Yes, the rule does not permit an adviser to compensate any person (directly or indirectly) for a testimonial or endorsement if the adviser knows, or in the exercise of reasonable care should know, that the person giving the testimonial or endorsement has engaged in certain disqualifying conduct, such as being subject to an SEC cease and desist order.

The Authors
Karen A. Aspinall
Read Full Bio

Practus, LLP provides this information as a service to clients and others for educational purposes only. It should not be construed or relied on as legal advice or to create an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.

  1. The SEC provides a limited carve out where solicitation activities are performed by a broker-dealer who is subject to Regulation BI and who provides applicable disclosures under those requirements.
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