In the 1960s, marketing looked very different from what it is today. Billboards and magazine advertisements have been replaced by social media posts, emails, influencer marketing, and endorsements. Even hashtags and comments on social media posts can be used for marketing purposes. 

With advertising and marketing constantly evolving, it makes sense that regulations need to change and adapt as well, which is exactly what the Securities and Exchange Commission (SEC) did when, in December 2020, it unveiled its new marketing rule, modernizing the 1961 Advertising Rule 206(4)-1 and combining it with Rule 206(4)-3, the Cash Solicitation Rule. 

The SEC’s New Marketing Rule

In 1961, to protect investors, the Securities and Exchange Commission (SEC) implemented the Advertising Rule 206(4)-1. By 1979, an additional rule, the Cash Solicitation Rule 206(4)-3, was implemented as well. This rule focused on how cash could be paid to referees within the financial services sector.

What followed was a patchwork of ‘No-Action’ letters and interpretive guidance as marketing evolved but the laws governing the advertisements of SEC-registered investment advisers did not. 

Merging and amending the existing rules under the New Marketing Rule allows the SEC to provide more efficient and comprehensive marketing guidance for investors under one rule. It is also designed to help prevent fraud, while still allowing advisers to offer important information to their clients—information that investors want and expect.

Gone are the days of only very affluent individuals investing with registered investment advisors who operated in a performance-based world. The Investment Advisers Act and the rules for marketing were created for this world, where it was crucial to limit firms from inappropriately plugging their investment performances (particularly through client testimonials), which could result in over-promising and under-delivering to clients.

Today, advisers support their clients through multiple channels, including financial planning, wealth management, and financial advice. It’s an intangible offering that can be difficult to evaluate and vet—especially when financial advisers are prohibited from sharing the experiences of their clients.

The revised rule takes this into account, with the SEC creating guidelines that not only accommodate marketing channels like social media and adviser review platforms, but recognize that clients want to be able to read testimonials and research to decide which advisers suit their needs. 

To do this, the Marketing Rule replaces certain prohibitions that previously existed with a more flexible principles-based framework. For example, under the new rule, advisers can highlight specific past investment recommendations in an advertisement without including a full year of recommendations, as long as the recommendations are presented in a fair and balanced manner.

However, while this gives advisers far more latitude in how they advertise, with new rules come new responsibilities—specifically, amended recordkeeping rules and Form ADV changes.

Amendments to the Recordkeeping Rule

The Recordkeeping Rule is Rule 204-2 under the SEC’s Advisers Act. The New Marketing Rule has resulted in important amendments, specifically that financial advisers must make and keep records of all “advertisements” they circulate, a requirement that expands the current recordkeeping rule.  

The records that the New Marketing Rule requires advisers to retain includes:

• Written or recorded materials used in all oral or verbal advertisements
• Written communications relating to the rate of return or performance of any portfolios
• Any material used to demonstrate how the performance or rate of return of any portfolios are calculated
• Any records that showcase the hypothetical performance of a portfolio or investment 
• Any communications relating to predecessor performance
• Records of who the “intended audience” of any hypothetical performance documentation
• Any documentation showing that an adviser has a reasonable belief that a testimonial or endorsement complies with the Marketing Rule’s due diligence requirement
• Any documentation showing that an adviser has a reasonable belief that a third-party rating complies with the Marketing Rule’s due diligence requirement
• A copy of any questionnaire or survey that has been used to create a third-party rating included in an advertisement.

Investment advisers have until November 4, 2022 to comply with the Marketing Rule, the amended books and records rule, and Form ADV—so it’s important to understand what the new rule requires and how it impacts recordkeeping. With so many different forms of communication counting as “advertisements,” recordkeeping requirements are now extensive.

The good news is that, since much of the SEC’s existing marketing guidance has been delivered through multiple no-action letters, the SEC will provide future guidance as to which no-action letters are incorporated in or superseded by the Marketing Rule and will be withdrawn. A list of the letters will be available on SEC.gov.

The Marketing Rule and How It Impacts the Recordkeeping Rule and Form ADV

There are several important amendments in the new rule that have implications for financial advisers, but we will be discussing the following key points:

• Modifications to the definition of the word “advertisement” 
• Prohibitions that all advertisements must adhere to 
• Limits in the way testimonials and endorsements are used in marketing 
• The SEC’s related amendments to its books and records rule (Rule 204-2 under the Advisers Act) and to Form ADV

The new definition of the word ‘advertisement

There are two distinct parts to the definition of “advertising” designed to cover all future permeations of marketing and advertising:

Traditional communications 

The SEC defines the first section of advertisements as, “any direct or indirect communication an investment adviser makes that: 

(i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or 

(ii) offers new investment advisory services with regard to securities to current clients or private fund investors.” 

This definition covers:

• Any indirect or direct communication from an investment adviser to more than one person (this differs from the previous regulation of ten or more people)
• Any indirect or direct communication an investment adviser makes to one or more people, if the communication includes hypothetical performance
• Any communication offering investment advisory services relating to securities to prospective clients, or to investors in a private fund advised by the financial adviser 
• Offering investment advisory services relating to securities to existing clients, or to potential investors in a private fund advised by the financial adviser 
• Any communication that is “fair and balanced”
• Exclusions include live, oral, and impromptu communications

Testimonials and endorsements

Testimonials and endorsements are similar. They both speak to an investment firm’s capabilities and expertise and are given by a person who is not an employee of the firm. But, there are key distinctions between the two and these are highlighted in the new rule: 

• Testimonials: Share personal experiences with a firm and are written by current or former clients, or by private fund investors. 
• Endorsements: Statements of support or approval written by people who are not current clients or private fund investors 

Under the new rule, both testimonials and endorsements are only allowed in advertisements if they meet specific conditions around disclosures, oversight, written agreements, and disqualifications.

Disclosure

Disclosures should be prominently displayed and include the following information: 

• If the statement was given by an investor, current client, or another person 
• If any compensation (cash or non-cash) was given in exchange for the endorsement or testimonial 
• Any conflicts of interest between the person offering the endorsement and the firm 
• Firms must also disclose the terms of compensation and the details regarding any conflicts of interest. 

Disclosures do not only need to be made in writing but they must be recorded, even if they are made orally.  

Prohibitions include:

• Advisers are prohibited from making any untrue statements of fact or omitting to disclose facts that result in misleading statements
• Advisers are also prohibited from including in facts that they do not have a reasonable belief in, or cannot substantiate to the SEC on demand

These requirements emphasize the importance of recordkeeping, which will allow advisers to document and therefore substantiate statements used in advertising to prove they are fair and balanced and not materially misleading.

Oversight and written agreement

A written agreement with a promoter must be in place, unless the promoter is an affiliate or receives $1,000 or less from the firm during the previous twelve months.  

Disqualification

Financial services firms are expressly prohibited from compensating ineligible people for an endorsement or testimonial. The disqualification rule states that if the adviser knows, or should reasonably know, that the person giving the endorsement or testimonial is an ineligible person, then it is given in bad faith. The goal is for no “bad actors” to receive compensation for promotions.

How ‘adoption and entanglement’ impact whether a communication is considered to be an advertisement

‘Adoption and entanglement’ refers to whether an adviser has explicitly or implicitly endorsed or approved information after its publication (adoption, such a ‘liking’ a social media post), or the extent to which an adviser has involved themselves in the preparation of the information being presented (entanglement).

Adoption and entanglement is important because it is the primary way that the SEC can assess third-party communications about the adviser and whether they can be considered advertising or not.  

For most financial advisers, how third-party content will be reviewed will be important, so it’s worth looking at the SEC’s exact wording of the rule in this regard:

"Whether content posted by third parties on an adviser’s own website or social media page would be attributed to the investment adviser also depends on the facts and circumstances surrounding the adviser’s involvement. For example, permitting all third parties to post public commentary to the adviser’s website or social media page would not, by itself, render such content attributable 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. We believe such treatment of third-party content on the adviser’s own website or social media page is appropriate even if the adviser has the ability to influence the commentary but does not exercise this authority. For example, if the social media platform allows the investment adviser to sort the third-party content in such a way that more favorable content appears more prominently, but the investment adviser does not actually do such sorting, then the ability to sort content would not, by itself, render such content attributable to the adviser. 

“In addition, if an adviser merely permits the use of “like,” “share,” or “endorse” features on a third-party website or social media platform, we would not interpret the adviser’s permission as implicating the final rule. Conversely, if the investment adviser takes affirmative steps to involve itself in the preparation or presentation of the comments, to endorse or approve the comments, or to edit posted comments, those comments would be attributed to the adviser. This would apply to the affirmative steps an adviser takes both on its own website or social media pages, as well as on third-party websites. For example, if an adviser substantively modifies the presentation of comments posted by others by deleting or suppressing negative comments or prioritizing the display of positive comments, then we would attribute the comments to the adviser (i.e., the communication would be an indirect statement of the adviser) because the adviser would have modified third-party comments with the goal of marketing its advisory business. However, as discussed above, we would not view an adviser’s merely editing profane, unlawful, or other such content according to a neutral pre-existing policy as the adviser adopting the content.”

Becoming compliant

These new definitions of what counts as an advertisement are making it essential for firms to check all content for compliance. Here are a few specific areas that firms should consider creating new protocols for:

• Webcasts and slide shows: Oral recordings and scripted oral material are now considered advertisements. These scripts should therefore go through a compliance checking procedure. 
• Social media posts: Social media policies must be up to date and reflect current guidelines. 
• Third-party material: All third-party ratings should be reviewed for compliance and firms must understand the Marketing Rule when reviewing draft material. 
• Testimonials and endorsements: Create a clear process that covers disclosure, oversight and written agreement, and disqualifications to ensure all testimonials and endorsements are compliant. Keep records of all communications, particularly because marketing material often passes through multiple sets of hands.

The New Marketing Rule and Recordkeeping

To recap, the SEC has implemented a more flexible, principle-based framework that is based on ‘reasonable and fair’ content being shared. To support this framework, it is offering as much guidance as possible around what is considered to be an “advertisement.” This includes text messages, emails, instant messages, social media posts, comments, likes, videos, digital and audio files, blogs, podcasts, billboards and traditional media, including newspapers, magazines, and the mail.

To keep track of everything that firms and advisers are doing with regard to advertising, the Marketing Rule makes specific amendments to both Form ADV and the Recordkeeping Rule.

Form ADV 

To facilitate inspections, the SEC’s Form ADV now requires financial firms and advisers to provide additional insights into their marketing practices. For example, any testimonials, endorsements, and third-party rating systems that are used in advertisements must be explained. How performance results, hypothetical performance, or predecessor performance data are calculated must also be proven if they are used in advertisements. These are all extremely difficult to prove if the SEC comes knocking without robust recordkeeping policies, procedures, and technology in place.

Form ADV will also have to be updated and submitted annually to keep it up to date, and the SEC will use this information for rule enforcement.

The Recordkeeping Rule 

The Marketing Rule changes also impact Rule 204-2 of the Advisers Act, also known as the Recordkeeping Rule. This rule dictates what types of communication records a firm must maintain for a specific period of time, and the additions and changes are extensive:

• Firms must maintain records of any advertisements sent to more than one person (previously firms were only required to maintain records of advertisements sent to more than ten people). However, one-on-one communications are not “advertisements” under the first part of the definition and have been excluded from this part of the recordkeeping rule
• This includes all written and oral communications (although for compliance purposes the record of oral communication can be a recording or a written script)
• Firms must keep originals of any written communications sent or received that relate to the performance of securities recommendations or managed accounts. 
• Firms must keep account statements and internal worksheets or memos detailing information about included portfolios 
• Any calculations used in an advertisement must be retained.
• Any predecessor performance must also be supported by all communications relating to the performance and not simply supporting records as previously stipulated.
• The records necessary to demonstrate the calculation of the performance of managed accounts or securities recommendations in advertisements must be retained.
• Copies of agreements with solicitors, disclosure documents, and clients’ signed acknowledgments of the receipt of solicitor disclosure documents must be retained. 
• Advisers must also keep copies of all information provided or offered under the hypothetical performance provisions of the rule. 
• Advisers must keep a record of the “intended audience” of any advertisement, which will help the SEC compare the adviser’s policies and procedures against its practices. 
• An adviser using testimonials, endorsements, and third-party ratings will need to retain records proving a reasonable belief that they comply with the Marketing Rule.  
• Any adviser who uses the services of affiliated solicitors must keep a list of their names and document their affiliates’ status at the time the adviser disseminates the testimonial or endorsement.

Practical solutions for investment advisers

Today, most investment advisers are making use of websites, social media platforms, Google Ads, podcasts, Youtube videos, and “finfluencers” to promote their services. Great Google and Yelp reviews are also leveraged. There are a multitude of marketing channels that can be leveraged and nothing is as powerful as testimonials, endorsements, and performance data to educate clients and prospective clients.

So, what does compliance across these channels look like?

• First, ensure that any content your firm creates is fair and balanced. To prove your performance data or hypothetical data, you will need records of everything, so ensure you have a good archiving solution.
• You can continue to use all the social media channels you have been using, however, understand what constitutes adoption and entanglement. For example, if there is a comment or post that you like or comment on, you have essentially said that you agree with the content. It’s therefore your responsibility to ensure the content is accurate and fair. 
• Any content that you alter, edit or hide essentially becomes your content - you will not be able to distance yourself from content you have adopted if it contravenes the rules. However, if you edit content and it is aligned with the rules, there is no problem. So, editing a social post, or liking or sharing a social post, is completely fine, as long as it adheres to the rules. 
• In the same way, you can use a Google or Yelp review - provided you know the content is fair and accurate, but if it contravenes the rule, once again, it will be attributed to you. 
• If you do not comment, like, or in any way alter third-party content, it is not your responsibility - even if the comment has been left on your website, social media channel, or third-party website.
• You can create YoutTube videos, offer investment advice and share testimonials - just make sure that you are always fair and balanced and that the information you are sharing is accurate.
• “Finflunecers” remain an important marketing tool for financial advisers. This is also completely fine under the rules, with a few exceptions. If the “finfluencer” contravenes the rules and is endorsed or compensated by you, you are also liable. You must also clearly state if a “finfluencer” has been compensated. The rule supports the use of these channels, but its goal is to ensure that untrue, misleading or unfair content is not disseminated. 

The key is to always be able to prove what you have and have not done, which is where recordkeeping and archiving become so important. How can you prove you didn't alter a post or that you didn’t delete a comment or a “like” without defensible archives? It is more important than ever that firms maintain comprehensive records of website and social media content—including all versions of a webpage or social post. In other words, if a post has been edited or a comment has been deleted, the original content needs to be contained within the firm’s archives. 

It is also worth considering how to capture and preserve third-party content. If reviews from sites like Yelp or Google Reviews are used in marketing materials, it is best to capture and archive your own copies of this content. And when working with social media influencers, their posts should be collected and archived to prove compliance. Luckily, forensic collection tools exist that can archive this third-party content.

The New Marketing Rule provides investment advisers with increased opportunities to use endorsement and testimonials. However, compliance with new rules is crucial. Firms must abide by the latest regulations—and ensure that they have the records needed to prove compliance.

Want to learn more about the SEC recordkeeping requirements of modern data sources like websites, social media accounts, and team collaboration tools? Download our compliance guide for financial services companies.