15 Consequences of the New SEC Ad Rule

15 Consequences of the New SEC Ad Rule


By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

A few days before Christmas in 2020, The Securities and Exchange Commission (SEC) announced it had finalized revisions to the Investment Advisers Act. In a press release, the SEC explained that the changes were made to “modernize rules that govern investment adviser advertisements and payments to solicitors.”

The action had been a long time coming, since the last modifications to the Investment Advisers Act happened several decades ago, in the pre-internet world. The amendments now create a single rule “designed to comprehensively and efficiently regulate investment advisers’ marketing communications.”

Today, it is hard to identify any area of life the internet hasn’t changed, and marketing and advertising are certainly no exceptions, having undergone vast transformations. The SEC realized their rules for governing financial advisers in these areas had not kept up. “The technology used for communications has advanced, the expectations of investors seeking advisery services have changed, and the profiles of the investment advisery industry have diversified,” the commission wrote. The commission created the new marketing rule with the goal of allowing advisers expanded digital access to provide the public with useful information, “subject to conditions that are reasonably designed to prevent fraud.”

SEC Chairman Jay Clayton commented, “This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors.”

The new SEC ad rule went into effect on May, 4, 2021, and advisers will have 18 months from that date to transition into compliance. But, what does this mean in concrete examples for advisers? The answer is that we won’t truly know until we see how the SEC enforces its revisions, but the changes are generally good news to the marketing interests of financial advisers.

Endorsements and testimonials will now be more readily available for advisers to use in marketing materials, so long as they follow the new disclosure and compensation restrictions. Advisers can make use of new tools, such as performance advertising and third-party ratings, by following the guidelines governing transparency. And “transparency” is a critical concept to understanding the wider context of these changes: The new SEC Ad Rule addresses not only what advisers say in their marketing materials, but how they say it, as well. Transparency in giving consumers the “whole story,” and not only what reflects positively on an adviser, will be key for advisors moving forward.

For those who want to research actual documentation, the SEC revisions affect Rule 206(4)-1 and Rule 206(4)-1, as well as the Form ADV and Rule 204-2 that relate to the investment adviser registration form and the books/records rule. But we’ve tried to highlight from the SEC website what we feel are the 15 biggest consequences of the ad rule for advisers in their attempts to market themselves with the transparency that will now be required:

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1. Advisers cannot make untrue statements about a material fact

They also cannot omit a material fact “necessary to make the statement true.” As found in many cases moving through these changes, full disclosure appears to be a common denominator behind many revisions.

2. Advisers must be reasonably able to back up their statements.

This applies to any “statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.” In other words, don’t talk the talk if you can’t walk the walk.

3. Don’t infer or imply untrue statements.


This includes “information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser.”

4. Don’t omit negatives.


Advisers need to talk about potential benefits, and they can still do so, but not without also “providing fair and balanced treatment of any associated material risks or limitations.”

5. Don’t eliminate risks from investment advice.

This is basically the last step applied to investments: Advisers cannot offer specific investment advice without fairly mentioning risks and limitations.

6. Do not ‘cherry pick’ performance results.

Advisers cannot include or exclude performance results for a time period that renders the performance unrepresentative, or, in the commission’s language, falls short of “fair and balanced.”

7. Include full disclosure in testimonials and endorsements.

Advertising “must clearly and prominently disclose whether the person giving the testimonial and endorsement (the “promoter”) is a client and whether the promoter is compensated.” In positive news for advisers, this new rule eliminates the old rule’s requirement “that the adviser obtain from each investor acknowledgements of receipt of the disclosures.”

8. Advisers are responsible for compliance of testimonials and endorsements.


An adviser also must “enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser,” or if the promoter has received $1,000 or less, or the equivalent value, in compensation during the preceding 12 months.

9. No third-party ratings.

Advisers cannot use third-party ratings in their ads unless they disclose the party, the time period and satisfy “certain criteria pertaining to the preparation of the rating,” which can mean that the third party has no relation to the adviser and is in fact in the third-party rating service.

10. “Gross” and “net” must be together in performance ads.

Advisers cannot mention gross performance in an advertisement without mentioning net performance.

11. Refrain from mention of the SEC in performance ads.

It may be tempting to announce that you’re following SEC guidelines, but avoid doing so, as you cannot mention that the commission “has approved or reviewed any calculation or presentation of performance results.”

12. Advisers cannot use partial performance results of portfolios.

Don’t use results from “fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement.”

13. Advisors cannot extract a subset of investments from a portfolio in ads.

The exception to this restriction would be if the advertisement provides, or offers to promptly provide, the whole portfolio’s performance.

14. Avoid hypothetical performance results in ads.

Advisers should steer clear from projections into the future “unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience.”

15. Avoid predecessor performance results.

Don’t mention a previous adviser “unless there is appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser. In addition, the advertising advisor must include all relevant disclosures clearly and prominently in the advertisement.”

The new SEC Ad Rule modernizes financial marketing, granting advisors new ways to access new people. This benefit alone seems enough to outweigh the restrictions in reaching these audiences. But the SEC acknowledges that an adjustment period will be necessary for advisers.

Approaching the compliance deadline of late 2022, it will be important for advisers to ensure that their marketing efforts are compliant. If you have questions, email the SEC directly at IM-Rules@sec.gov.

If you’d like more information on marketing your financial advisory practice visit the Tucker Advisors Blog.

– For Financial Professional Use Only.
Insurance-only agents are not licensed to offer investment advice.

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