SEC targets disclosure failures tied to paid advisor ratings, awards

Advisors are facing stricter oversight on how they advertise client testimonials and third-party ratings after the SEC released its second risk alert in under two years on the topic.

The SEC’s Dec. 16 notice followed its previous marketing rule risk alert issued in April 2024. In its most recent risk alert, the SEC said advisors were not meeting proper disclosure requirements for indicating when "direct or indirect” compensation was sent to third-party rating providers and that advisors would often hyperlink to these disclosures instead of meeting the “clear and prominent,” requirement placed alongside its online testimonial or rating.

“A conflict that advisers often fail to fully disclose centers around third party rankings or awards,” Lori Weston, head of compliance at STP Investment Services, told InvestmentNews. “These are not too hard to come by if you’re willing to pay to participate, yet when favorable results are announced and an adviser wishes to tout their ranking, they can be reluctant to provide clear and prominent disclosure indicating that they paid to participate or to be promoted within the survey. Omitting this disclosure is clearly misleading.”

Weston added that, “some violations are likely misunderstandings, though the majority are general failures,” committed by advisory firms. Regarding third-party ratings, the SEC is also clamping down on the need for advisors to “prominently identify the date on which the ratings were given and the period of time upon which the ratings were based,” per the latest risk alert.

“The [Dec. 16] alert makes it clear that all types of payments connected with the rating need to be disclosed, even if no payment was made to obtain the rating,” added Matthew Shepard, director of financial services consulting firm ACA Group. “So, if you pay a licensing fee to display a logo, this payment needs to be disclosed, even if this payment doesn’t compromise the integrity of the rating per se.”

Law firms such as Dorsey & Whitney and Paul Hastings both published their interpretations of last month’s SEC marketing rule risk alert.

Marketing rule provisions approved by the SEC in 2020 have since allowed advisors, for the first time, to use client testimonials and third-party endorsements to advertise their services. The framework was intended to modernize regulations for the social media age, but the SEC “didn’t give much guidance” in its original marketing rule announcements, according to Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services for broker-dealers and RIAs, who welcomed the latest marketing rule expectations outlined by the SEC. 

“Before these examples were shared, firms and compliance experts were left to interpret the rules and do their best, and in some cases, unsurprisingly, they came up a bit short,” Ressler said. I do believe this release is a good thing, but I do hope those involved in these situations were not materially or reputationally harmed for trying to do the right thing and missing the mark. This really should be more educational than punitive.”