Advisers must weigh whether to be first to use testimonials for marketing

Investment advisory firms will have to decide over the next few months whether they want to be on the cutting edge — or perhaps the compliance bleeding edge — of using testimonials to market themselves.

In early November, the Securities and Exchange Commission will implement a 430-page regulation that overhauls adviser advertising rules that have been in place for more than 60 years. Advisers will be able to use testimonials, endorsements and third-party ratings for the first time as long as they comply with anti-fraud protections and other conditions.

As the implementation date approaches, the question is who wants to jump into the water first.

“They need to make a business determination, and it really depends on the culture of the firm as to whether they want to start now and be at the front of the pack or wait and see how the rest of the industry approaches it,” said Amy Lynch, president of FrontLine Compliance.

An important part of the endorsement is the disclosures that go with it, Lynch said. They include having to highlight potential conflicts of interest involved with the pitch and showing how much the person promoting the firm was paid.

The location and substance of the link are key.

“How will that look? What will these disclosures actually contain?” she said.

Big firms with larger compliance staff may be in a better position than smaller firms to navigate testimonials initially, Lynch said. With the Nov. 4 implementation date looming, firms of all sizes are grappling with updating their policies and procedures.

“They’re in the thick of things right now,” Lynch said.

Investment advisers have had years to think about the advertising rule. The SEC approved the final measure in December 2020, and the November implementation date has been known since March of last year.  

The regulation remains top of mind. A recent Investment Adviser Association report shows that for the second year in a row, compliance professionals named the SEC marketing rule as the “hottest” compliance topic.

The IAA, along with ACA Group and Yuter Compliance Consulting, surveyed 425 investment advisory firms — ranging from those with less than $1 billion in assets under management to those with more than $10 billion — and found that 78% cited the advertising rule as their top concern, a 20-point increase from last year. It was followed by cybersecurity (67%) and climate change/environmental, social and governance investing (50%). Other top issues were conflicts of interest, fee calculation and billing, and private funds regulation.

Ron Niemaszyk has heard from clients regarding cybersecurity and ESG compliance. But it’s been mostly crickets when it comes to the advertising rule, and that concerns him. He has to inquire about whether they’ve updated their ADV and talked to compliance professionals.

“I have not gotten a sense of comfort when I do ask those questions,” said Niemaszyk, a principal at Wipfli, a CPA firm where he leads the wealth and asset management group. “They’re not aware of how much impact it will have.”

The new advertising rule will replace years of no-action letters that fleshed out the previous rule. Those letters provided advisers with a road map on how to comply, for instance, when referring to previous specific recommendations and performance.

The updated rule also is principles-based, and it supercedes the no-action letters. The general theme of the rule is that marketing must be “fair and balanced,” Lynch said. But how to meet that bar is not laid out explicitly.

“No one is going to know how the SEC interprets the rule until they have some enforcement actions,” Lynch said. “Fair and balanced is the key. That’s up for interpretation.”

Niemaszyk advises firms to get help from compliance professionals, if they don’t have them on staff.

“There is no room here for amateurs,” he said.