The U.S. Securities and Exchange Commission's Division of Examinations recently published a Risk Alert to promote compliance with the Advisers Act Marketing Rule.  The Risk Alert focuses, in particular, on compliance with the provisions of the Marketing Rule governing testimonials and endorsements and third party ratings.  

Testimonials and Endorsements

The Marketing Rule generally prohibits investment advisers from using testimonials and endorsements, or from providing for a testimonial or endorsement, unless specific disclosure and substantiation requirements are followed and the investment adviser has a written agreement with the person giving the testimonial or endorsement.  

The SEC said that, based on its review of industry advertising, the “most common observed reason that an endorsement or testimonial was observed to be non-compliant was that it did not provide the disclosures at the time the testimonial or endorsement was disseminated.”  For example, advertising did not properly disclose whether the person giving the testimonial or endorsement was a current client or an investor, whether the person was paid to give the endorsement or testimonial, or whether the person had a material conflict of interest. 

The SEC also noted that, in some situations when disclosures were included, they were not made in a clear and prominent manner.   For example, advertisers used hyperlinked disclosures “rather than including the required clear and prominent disclosures within the testimonial or endorsement.”  The SEC also pointed to disclosures that were not properly included because they were in a smaller or lighter font than the testimonials or endorsements that they were related to. 

Third-Party Ratings

The Marketing Rule also prohibits investment advisers from using third-party ratings unless the adviser has a reasonable basis for believing that any questionnaire or survey used in the preparation of the rating meets certain criteria and discloses certain information related to the ratings.  The SEC said that it observed advisers “using third-party ratings without appearing to comply with all or some of the requirements for use of third-party ratings."