A compliance professional’s take on the new marketing rule

By Scott Snipkie

In evaluating regulatory changes, there’s no magic to the process. Keep it simple. Look at the old rule and the new rule, and ask two questions:

1. What is this rule trying to do?
2. How does this rule accomplish that goal?

So, let’s consider the SEC’s “old” advertising rule and then the “new” marketing rule with the following in mind: Where are we now, and how do we move forward?

The old rule

The goal of the old rule—and the new rule, too—is to balance the rights of firms in letting current and prospective clients know about their services against the possible harm of misleading investors; this is straightforward and doesn’t need a lot of explanation.

The old rule’s mechanism for protecting clients was clunky for most RIAs, though. That mechanism was mainly just specific prohibitions (i.e., no testimonials), followed by 50 years of guidance and letters reinterpreting the rule whenever something new came up (i.e., social media).

Those specific prohibitions always left RIAs, who are fiduciaries, wrongfooted. RIAs run their relationships by simply “doing the right thing” for their folks (I know, the duties of a fiduciary are way more complicated, but the point is that RIAs live by principles, not proscriptions), so the specifics were really out of step with RIA practices.

Those specific prohibitions weren’t just hard for RIAs either; they had regulators constantly searching for new ways to accommodate the changing media landscape, making regulating under the old rule slow and sloppy. For example, it took until spring 2014 for the SEC to weigh in on the general use of social media.

The new rule

Under the new rule, you kiss those specific prohibitions goodbye! We’re back to “Do the right thing.”

The “right thing” here is a two-parter. The first part boils down to “Say what you want, but no funny stuff,” which summarizes all the general advertising principles the rule outlines. That means don’t lie, mislead, leave anything out, or say anything you can’t immediately prove.

The second part is more or less: “Say what you want, but make sure you’re giving the context for it,” which applies to some of the new, more specific stuff that RIAs can say in advertising now. In other words, some stuff now requires extensive disclosures to give folks the full picture.

Moving forward

The new rule is a big change that gives you a lot more freedom—especially the freedom to use testimonials.

The new rule talks about the use of testimonials all wrapped up with endorsements, too, which are statements from folks who are not current clients; it also discusses compensating folks who give testimonials or endorsements on an RIA’s behalf. Compensated endorsements and testimonials are less relevant for most NAPFA members because neither really seems to fit into their business practices, so let’s just talk about uncompensated ones here (which is enough to keep us all busy anyway).

Testimonials are statements by current clients that do one of three things:

1. Talk about their experience with you
2. Directly or indirectly solicit folks for you
3. Refer folks to you

The sorts of statements that would be endorsements are basically the same thing, except you replace number 1 above with:

Indicates approval, support, or recommendation of you, or talks about their experience with you.

The variation is really just meant to capture anything a nonclient or former client could say about you.

Now, before you get concerned and think, “There goes my word-of-mouth business,” this essentially only applies if you ask someone to make these statements for you, or if you pluck these statements out and use them in certain ways. So a client or friend wandering in the wild extolling your virtues is one thing, but be careful if you tell someone, “Hey, it’d be really nice if you told everyone about your experience with me,” or if you pluck something from a message board and drop it onto your website. Once you wrap yourself up in clients’ statements, they essentially become your own. Never fear, you can do those things, you just need to use disclosures.

Which disclosures? Well, sorry, I don’t have a template for you, but I can certainly discuss what you need to address.

First things first: These disclosures need to go out with the advertisement that contains the testimonial. Also, some of the disclosures need to be clear and prominent, which means you need to include them in the advertisement itself, which means that the rest of them are ones to which you can direct folks.

The clear and prominent disclosures boil down to:

1. Who is making the statement? A client or a nonclient?
2. Are they getting paid directly or indirectly using cash or noncash methods?
3. What material conflicts does this person have by virtue of their relationship with the firm? A brief statement of them will do here.

The remaining disclosures just expand on the answers to #2 and #3 above. They don’t need to be in the advertisement itself, but you need to direct folks to them in the advertisement or get those folks to them somehow. You’ll need to explain more deeply the material terms of any arrangement that compensates the person giving the testimonial (unless there’s no compensation or less than $1,000 of compensation over a rolling 12-month period), including a description of their direct or indirect compensation, and a broader description of the material conflicts the speaker has because of their relationship with the firm.

The devil is always in the details on these things, and regulators at the SEC are being no help at the moment about what meets their expectations. To date, they’ve put out precisely zero substantive answers to frequently asked questions on this stuff.

As for the clear and prominent disclosures, it seems fair that a visual advertisement could include those before or alongside the testimonial or have the person providing the testimonial announce them if they’re delivering the testimonial orally, but we don’t know yet for certain. As for the remaining disclosures, links in one manner or another to the more detailed disclosures with language explaining what those links are and encouraging folks to visit them and review the information make sense. Again, though, there’s no certainty yet.

At the end of the day, I recommend moving ahead conservatively, monitoring what’s coming from the SEC over the next 12 months or so, and letting them trim the tall trees first. If you do choose to use testimonials, document your reasoning and approach for posterity; it will help you with your explanations to regulators and show a good-faith approach.

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Scott Snipkie joined Adviser Compliance Services in 2019 after time with Missouri’s Securities Division and Attorney General’s Office. Scott attended the University of Missouri for law and graduate school. Before his undergraduate study at Penn State, Scott served in the Navy.

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