The Securities and Exchange Commission staff has issued fresh guidance on its marketing rule, giving RIAs more clarity around using testimonials from certain disciplined individuals and more flexibility in how they present performance net of fees.
In the latest update to its Marketing Rule Q&A – which follows the SEC's Marketing Rule risk alert in December – staff from the SEC's Division of Investment Management clarified that it would not recommend enforcement action if an adviser pays for a testimonial or endorsement from someone who is subject to a final order by a self-regulatory organization, as long as very specific conditions are met.
The key is that the individual cannot have been barred or suspended by that organization and must be fully compliant with the terms of the order, including any disgorgement, interest, or penalties.
As laid out in the Thursday update, the staff is effectively extending the logic the commission used when it carved out some commission orders from the definition of “disqualifying event.”
It said “when the Commission has issued an opinion or order with respect to a person’s disqualifying conduct but not barred or suspended the person or prohibited the person from acting in any capacity under the federal securities laws, it is appropriate to . . . permit such person to engage in activities related to compensated testimonials and endorsements,” as long as certain conditions are satisfied.
Following the newly clarified staff interpretation, advisers may compensate a person who's been on the wrong end of a final order within the past 10 years for a testimonial or endorsement, provided that:
Another update Thursday addresses how advisers should handle performance advertising when the fees they plan to charge a target audience are higher than the fees actually paid in a historical track record.
The SEC pointed to footnote 590 of the Marketing Rule's adopting release, noting that it has often been read to require advisers in that situation to replace net performance based on actual fees with numbers calculated using a model fee that reflects anticipated charges.
The staff pushed back on a categorical reading of that footnote, emphasizing that the marketing rule’s general prohibitions were meant to “provide appropriate flexibility and regulatory certainty," and advisers applying those prohibitions should rely more on case-specific factors.
In SEC staff's view, whether using actual fees violates the rule “depends on all of the facts and circumstances of a specific advertisement, including, but not limited to, relevant disclosures.”
The staff added that advisers “may use various means to illustrate the effect of differences between actual fees and anticipated fees on performance.”
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