Understanding the SEC Marketing Rule: A Guide for Advisors

The SEC Marketing Rule represents the most significant overhaul of advisor advertising regulations in decades. Finalized in December 2020 and effective since May 2021, with required compliance from November 2022, this rule fundamentally changes how financial advisors can market their services. Whether you're an RIA, financial planner, or wealth manager, understanding this rule is essential for compliant marketing.

This comprehensive guide walks through key components of the SEC Marketing Rule, providing actionable insights on implementation and avoiding common pitfalls.

Historical Context: Why the New Marketing Rule Matters

To appreciate the significance of these changes, it's important to understand the historical context. The previous advertising rule dated back to 1961, long before digital marketing, social media, or even widespread computer usage. The new rule replaces:

• The Advertising Rule (Rule 206(4)-1)
• The Cash Solicitation Rule (Rule 206(4)-3)

This modernized approach recognizes contemporary marketing channels while maintaining investor protection. Rather than providing prescriptive prohibitions, the rule adopts a principles-based approach that focuses on preventing fraudulent, deceptive, or manipulative practices.

Key Components of the SEC Marketing Rule

1. Expanded Definition of "Advertisement"

The rule introduces a two-prong definition of advertisements:

• Traditional advertisements: Direct or indirect communications offering investment advisory services to prospective clients or private fund investors.
• Compensated testimonials and endorsements: Including traditional referral arrangements, which are now treated as advertisements.

Importantly, this definition excludes one-on-one communications (unless they contain hypothetical performance information), as well as extemporaneous, live, oral communications.

2. General Prohibitions

The rule prohibits advertisements that:

• Include untrue statements of material fact, or omit material facts
• Make unsubstantiated material claims or statements
• Include untrue or misleading implications about material facts
• Discuss potential benefits without clearly discussing associated risks
• Include references to specific investment advice that are not fair and balanced
• Include or exclude performance results in a way that is not fair and balanced
• Would otherwise be materially misleading

3. Testimonials and Endorsements

Perhaps the most significant change allows advisors to use client testimonials and third-party endorsements, which were previously prohibited. However, several requirements apply:

• Clear disclosure of whether the person giving the testimonial/endorsement is a client
• Disclosure of any compensation provided for the testimonial/endorsement
• Prominent display of specific disclosures about the arrangement
• Written agreement requirements when compensation exceeds $1,000
• Oversight and compliance by the advisor
• Disqualification provisions for certain "bad actors"

These requirements effectively integrate the former Cash Solicitation Rule into the broader Marketing Rule framework.

4. Third-Party Ratings

The rule permits the use of third-party ratings, provided they comply with specific disclosure requirements:

• The date of the rating and period it covers
• Identity of the third-party that created the rating
• Disclosure of any compensation provided for obtaining/using the rating
• Confirmation that ratings were developed using a predetermined methodology

5. Performance Information

The rule imposes strict requirements for presenting performance information, including:

• Net performance must be displayed at least as prominently as gross performance
• Performance results must be shown for specified time periods (1, 5, and 10 years)
• Performance must be presented in a fair and balanced manner
• Additional requirements for hypothetical performance, including having policies and procedures for determining who receives such information
• Restrictions on presenting "extracted performance" and "related performance"

These performance advertising requirements are among the most technical aspects of the rule, requiring careful implementation.

Practical Implementation Strategies

Content Creation and Review Process

To comply with the SEC Marketing Rule, you should establish a robust review process for marketing materials:

1. Content inventory and classification: Categorize all marketing content to identify what constitutes "advertisements" under the rule.
2. Develop clear guidelines: Create templates and checklists for common marketing content.
3. Implement a review workflow: Establish clear responsibilities for content creation, legal review, and approval.
4. Document retention: Maintain records of all advertisements for the required period (typically five years).

Testimonial and Endorsement Management

For advisors eager to leverage newly permitted testimonials:

1. Create disclosure templates: Develop standard language for the required disclosures that accompanies testimonials.
2. Establish compensation policies: If providing any compensation (monetary or non-monetary) for testimonials, document these arrangements.
3. Implement tracking systems: Monitor testimonial usage across platforms to ensure ongoing compliance.
4. Conduct due diligence: Screen for disqualifying events for anyone providing paid testimonials or endorsements.

Performance Advertising Safeguards

If using performance data in your marketing:

1. Create standardized calculation methodologies: Document how performance is calculated to ensure consistency.
2. Implement disclosure templates: Develop standard disclosures that accompany different types of performance data.
3. Establish presentation guidelines: Ensure net performance is at least as prominent as gross performance and required time periods are included.
4. Develop hypothetical performance policies: If using hypothetical performance, create policies determining when such information is appropriate for specific clients.

Common Pitfalls and How to Avoid Them

Social Media Compliance Challenges

Social media presents unique compliance challenges under the Marketing Rule:

• Endorsements through platform functions: Comments, likes, and shares may constitute testimonials requiring disclosures.
• Third-party content: Sharing or linking to third-party content could be deemed adoption of that content.
• Character limitations: Platforms like Twitter make including full disclosures challenging.

Initiative: Develop platform-specific policies, use disclosure links where appropriate, and implement a monitoring system for social media activity.

Testimonial Oversight Lapses

Common issues with testimonial management include:

• Inconsistent disclosures across platforms
• Failure to maintain required documentation for compensated testimonials
• Inadequate screening for disqualifying events

Initiative: Create a centralized testimonial management system that tracks all testimonials, maintains required documentation, and ensures consistent disclosures.

Performance Presentation Errors

When presenting performance information, advisors often make these mistakes:

• Making gross performance more prominent than net performance
• Cherry-picking favorable time periods
• Inadequate disclosure of material conditions or assumptions
• Sharing hypothetical performance too broadly

Initiative: Develop standardized performance presentation templates that comply with all requirements, and implement a specialized review process for performance-related marketing.

SEC Enforcement Trends and Examination Focus

Since the Marketing Rule's implementation, the SEC has signaled its examination priorities:

• Written policies and procedures: Examiners are reviewing whether firms have updated their P&P to reflect the new rule.
• Substantiation requirement: The SEC is focusing on whether advisors can substantiate material statements of fact in advertisements.
• Performance advertising: Particular attention is being paid to net vs. gross performance presentation and time period requirements.
• Due diligence on testimonials: Examiners are reviewing whether firms adequately vet and monitor testimonial providers.

Recent enforcement actions suggest the SEC is actively monitoring compliance with the new rule, with particular emphasis on misleading performance advertisements and inadequate disclosures around testimonials.

Technology Solutions for Marketing Rule Compliance

Technology can significantly ease the compliance burden of the Marketing Rule:

• Content review platforms: Systems that facilitate review, approval, and archiving of marketing materials
• Testimonial management tools: Solutions for collecting, disclosing, and tracking testimonials across platforms
• Performance calculation software: Tools that ensure consistent, compliant performance calculations
• Social media archiving: Solutions that capture and preserve social media communications

When evaluating technology solutions, look for those that provide comprehensive workflow management, robust documentation, and integration with your existing systems.

Planning for the Future: Ongoing Compliance

The Marketing Rule requires not just initial implementation but ongoing compliance monitoring:

1. Regular training: Ensure marketing and advisory staff understand the requirements
2. Periodic reviews: Conduct regular reviews of marketing materials for continuing compliance
3. Annual compliance testing: Include Marketing Rule compliance in your annual review process
4. Stay informed: Monitor SEC guidance and enforcement actions for evolving interpretations

By establishing systematic processes for ongoing compliance, you can confidently leverage the marketing opportunities the new rule provides while mitigating regulatory risk.

Conclusion: Embracing Opportunity While Ensuring Compliance

The SEC Marketing Rule represents both a challenge and an opportunity for financial advisors. While compliance requirements have increased in some areas, the rule also opens new marketing avenues previously unavailable to advisors. Testimonials, endorsements, and performance advertising—when done correctly—can significantly enhance marketing effectiveness.

By understanding the rule's requirements, implementing robust compliance processes, and leveraging appropriate technology, advisors can confidently embrace these new marketing opportunities while maintaining regulatory compliance.

The firms that will thrive under the new rule are those that view compliance not as a burden but as a framework for effective, authentic, and transparent marketing that builds trust with clients and prospects alike.