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\. .~i __~~1.:- ~~:y_~.~-~.;~___.~"_..

March 24, 1998

Our Ref. No. 97-453-CC

DALBAR, Inc,

File No. 132-3

SECTION ..._

RULE ;;;OGJ(4,)- /(ClY,I)l J()(P(q)-I(o.YS)

~~1~ILITY 3/~Lj/ra . ; )

RESPONSE OF 1HE OFFICE OF CmEF COUNSEL

DIVISION OF INVESTMENT MANAGEMENT

Your letter dated March 20, 1998 requests assurance that we would not recommend

enforcement action to the Commission under Section 206(4). of the Investment Advisers Act

of 1940 ("Advisers Act") and Rule 206(4)-1(a)(1) thereunder if, as descnbed in your letter,

DALBAR, Inc. ("DALBAR"), any investment adviser, or any associated person of an

adviser, uses certain numerical ratings created by DAIBAR in investment adviser

advertisements.

FACTS

DALBAR is a research finn that conducts survey research regarding financial

institutions and, based on the survey findings, issues ratings of these institutions. DALBAR

has. conducted a survey to measure the effectiveness of services rendered by investment

advisers 1/ and/or their investment advisory representatives ("IARs-). 2/ You state that

DALBAR intends to conduct subsequent surveys on a quarterly basis using substantially

identical questionnaires; however, an adviser or JAR will be permitted to participate and be

rated only once a year. 3/

) You represent that DALBAR will not be affiliated with any adviser or JAR

participating in the surveys. You state that DALBAR will solicit advisers and IARs to

participate in a survey for a $500 fee, paid in advance, per participating IAR, or if a rating

is sought ònly for an adviser, per adViser. M You represent that to participate in

DALBAR's survey, an adviser and any participating JAR must have: (1) at least five years of

experience as a financial adviser; (2) a minimum of 100 clients from whom a fee or commission was earned within the prior 12 months, or at least $15 million in client assets

under management; and' (3) no record of any regulatOry sanctions imposed within the past

1/ You state that DALBAR expects that most of the investmeIit advisers surveyed will be

regiStered with the Commission. .

,

2/ The term "investment ~dvisoryrepresentatives" refers to those natural persons employed by investment advisers who render investment advisory services to an

adviser's clients.

'J/ You state that the description of the DALBAR program applies to activities that

already have been conducted as well as activities to be conducted in the future. The

no-action assurances provided in this letter, however, apply only to activities relating

to the DALBAR program that take place in the future in accordance with the facts and

representations in your letter. '

1/ As applicable, the discussion in this letter regarding participating IARs also applies to

participating Advisers that have no IARs who are being rated.

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
'.

\ - 2 -

five years by the Commission, state securities regulators or any self-regulatory organization

as that term is defined in Section 3 (a) (26) of the Securities Exchange Act of 1934.

.'

You state that DALBAR will send uniform questionnaires to all clients of a

participating IAR, except when an JAR has a sufficient number of clients to permit a

statistically valid saiIipling. You represent that if a participating JAR has fewer than 300

clients from whom the JAR has earned a fee within the prior 12 months, DALBAR will send.

each of these clients a questionnaire prepared by DALBAR. If a participating JAR has 300

or more clients from whom the JAR earned an advisory fee, DALBAR will send

questionnaires to a statistically valid sample of these clients that it randomly selects. 5..1 You also state that if an adviser wants to receive a fimi-wide rating, the adviser must provide

DALBAR with a list of all of its lARs, who then provide DALBAR with a list of all their

clients from whom the JAR earned a fee within the last 12 months. DALBAR sends all of

these clients a questionnaire. If, however, an adviser has 100 or more IARs, DALBAR then

randomly will select at least 10% or 100 of the lARs (whichever is higher), and will send a

questionnaire to each client, or a statistically valid sample of clients, of these lARs. (J/

Thus, you assert that advisers seeking firIn-wide ratings will not be able to pre-determine

which clients will participate in the surveyor which lARs will be the subject of the

survey. 1/

)

5..1 If an JAR earned an advisory fee from 300 to 1,000 clients in the paSt twelve months, DALBAR will send the questionnaire to 100 of those clients that it randomly will

select. If an JAR earned an advisory fee from 1,001 to 2,000 clients in the past

twelve months, DALBAR will send the qùestionnaire to 150 of those clients that it randomly selects. If an JAR earned an advisory fee from more than 2,000 clients in

the past twelve months, DALBAR will send the questionnaire to 200 or more of those

clients that it randomly selects. In subsequent surveys, DALBAR may adjust these

guidelines based on pnor response rates, although it always will survey a sufficient

number of clients to have a statistically valid sample.' If an adviser or JAR

. participates in subsequent DALBAR surveys, DALBAR will randomly select the

clients from a group that includes clients of the adviser or IAR from whom the

adviser or JAR earned advisory fees in the past year as well as clients who were listed

by the adviser or JAR for any previous DALBAR survey.

fil DALBAR will follow the same procedures as described in note 5.

11 You represent that the survey responses will be kept confidential by DALBAR. You

state that no adviser or JAR will have access to the responses of any client.

Additionally, you state that DALBAR will not disclose to any adviser or JAR which

of its clients responded or did not respond to the survey . You represent that

DALBAR randomly will contact certain clients to confimi the validity of their

responses.

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
'ì

- 3 -

You represent that the questionnaire has not been prepared to produce any predetermined results that could benefit any adviser or IAR. Rather, you represent that the

q~stionnaire is structured to make it equally easy for a client to give negative or positive

responses. ?J./ You state that the questionnaire contains a series of questions with four

multiple-choice answers. You further represent that DALBAR will not pedonn any

. subjective analysis of the survey results, but instead assigns numerical ratings basëd on the

aggregate client responses for each adviser or JAR. Each possible client response

corresponds to a number from 1 to 4. You state that for each survey question, DALBAR

averages the responses of an adviser's or !AR's clients to obtain a rating for that question.

Each adviser or JAR also is rated in three major categories - pedonnance, tiiist, and

satisfaction - by averaging the client responses to the questions in those categones. 2/ You

represent that DALBAR will not issue ratings to an adviser or IAR unless the ratings are

statistically valid with respect to that adviser or IAR.

You state that DALBAR will publicly release the names of the advisers and lARs who

satisfy Certain minimum rating guidelines and will publish some or all of the survey results in

its wntten directories and on its Internet web site. You represent that, among other

infonnation, these published listings will identify clearly the percentage of survey participants

who have received each of the designations described in note 9 and the total number of

survey participants. In addition, you state that DALBAR expects some advisers and lARs to

refer to their ratings and! or to other relevant survey ratings of their services in their own

advertisements or sales materials.

ANALYSIS

Section 206(4) of the Advisers Act generally prohibits any investment adviser from

engaging in any act, practice, or Course of business that the Commission, by rule, defines as

fraudulent, deceptive or manipulative. Rule 206(4)-1(a)(I) under the Advisers Act provides

that it is a fraudulent, deceptive or manipulative act, practice or course of business within the

ß./ The questionnaire asks about: (1) the length of time that the IAR has provided

services to the client; (2) the client's overall rating of the IAR; (3) the client's

satisfaction rating regarding eight different types of advisory services; (4) the client's

rating of the IAR's financial results to date for the client; (5) the extent to which the

JAR puts the client's interests ahead of the !AR's own interests; (6) the client's

satisfaction levels with various aspects of the IAR's services; and (7) client information. .

2/ IARs and advis.ers are rated from 1 (poor) to 4 (excellent) in each category,

DALBAR assigns those IARs and advisers who are rated from 3.75 to 4.0 an

"Excellent" designation, those who are rated from 3.5 to 3.74 a "Very Good"

designation, and those who are rated from 3.0 to 3,49 a "Good" designation.

/

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
ì

- 4 -

meaning of Section 206(4) for any investment adviser registered or required to be registefed

as such with the Commission to publish, circulate, or distribute any advertisement which

refers, directly or indirectly, to any testimonial of any kind concerning the investment

adviser or concerning any advice, analysis, report, or other service rendered by the

investment adviser. .

When the Commission adopted Rule 206(4)-1, it stated that testimonials were

inherently misleading because "by their very nature they emphasize the comments and the

activities favorable to the investment adviser and ignore those which are

unfavorable." lQl The rule foroids the use of a testimonial "because the testimonial may

give nse to a fraudulent or deceptive implication, or mistaken inference, that the expenence

of the person giving the testimonial is typical of the expenence of the adviser's

clients." ill Although the term "testimonial" is not defined in Rule 206(4)-1, we

consistently have interpreted that term to include a statement of a client's expenence with, or

endorsement of, an investment adviser. 12/ We also have taken the position, however, that

an article by an unbiased third party concerning an investment adviser's pedormance is not a

testimonial unless it includes a statement of a client's expenence with, or endorsement of, the

adviser. 111

.. You maintain that the ratings produced and used in the manner described in your

letter are not testimonials within the meaning of Rule 206(4)':'1(a)(I). First, you argue that

the ratings assigned by DALBAR are reports by an unbiased third party that do not contain

any statement regarding the expenence of any particular client with an adviser or JAR.

Second; you argue that the ratings themselves do not constitute client testimonials because

they do not directly or indirectly emphasize statements by one or more clients that are

favorable to the investment adviser or IARand igriore those that are unfavorable. Finally,

you argue that even if the ratings are considered to be indirect testimonials by the clients of

advisers and lARs, the "experience" being conveyed is not the expenence of a single client

or a group of clientS selected by the adviser or JAR. You state that a DALBAR rating is, at

most, the collective experience of all, clients responding to the survey. .

We believe that. a DALBAR rating is a testimonial because the rating is an implicit

statement of clients' expenences with an adviser or IAR and because the rating purports to

convey the experience of a hypothetical average, or typical, client with an adviser or IAR.

101 Advisers Act Release No, 121 (Nov. 2, 1961) (adopting Rule 206(4)-1).

ill Richard Silverman (pub. avail. Feb. 25, 1985) ("Silverman").

121 See, ~, Cambiar Investors, Inc. (pub. avail. Aug. 28, 1997).

131 See Silverman; New York Investors Group, Inc. (pub. avail. Sept. 7, 1982) ("New

York Investors").

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
ì

- 5 -

As a result, We believe that a DALBAR rating would be a testimonial by DALBAR,

notwithstanding that it is third-party report. 14/ For the same reasons, we also consider a

D~AR rating to be a testimonial by an adviser's clients, indirectly made through

DALBAR.

Nonetheless, we would not recommend enforcement action to the Commission under.

Section 206(4) of the Advisers Act and Rule 206(4).-I(a)(I) thereunder if DALBAR, any

adviser, or any associated person of an adviser publishes, circulates, or distributes

advertisements containing DALBAR ratings prepared in the manner described in your letter.

We believe that the use of these ratings in advertisements would not raise any of the dangers

that Rule 206(4)-1(a)(l) was designed to prevent because, based upon your representations, a

DALBAR rating does not emphasize the favorable client responses or ignore the unfavorable responses; til a DALBAR rating represents all, or a statistically valid sample, of the

responses of an adviser's or JAR's clients; the questionnaire that is sent to the clients of

participating advisers and lARs has not been prepared to produce any pre-determined results

that could benefit any adviser or JAR; the questionnaire is stiiictured to make it equally easy

for a client to give negative or positive responses; and DALBAR does not pedorm any

subjective analysis of the survey results, but instead .assigns numencal ratings after averaging

the client responses for each adviser or IAR.

) .

HI You cite Stalker Advisory Services (pub. avail. Ian. 18, 1994) ("Stalker") in support

of your assertion that the mere payment of compensation by an adviser to an unbiased

third party does not transform a report by the third party about the adviser's

pedormance into a prohibited testimonial.. We note, however, that ,the third-party

report in Stalker was not a testimonial, regardless of the payment of any fee to the

third party by the adviser, because the third party merely venfied and published the

investment pedormance of certain accounts managed by the adviser, which

pedormance the adviser coúld have published directly without implicating Rule

206(4)-1 (a)(I).

In contrast, DALBAR soliCits the views of clients about their experience with an

adviser or JAR, thus creating a ratiÌig that contains an implicit statement of the

expenence of a typical client with the adviser or JAR. Because we conclude that a

DALBAR rating contains a client testimonial, and that therefore a DALBAR rating is

itself a testimonial, we do not need to detennine whether DALBAR's receipt of

compensation from participating advisers' or IARs would transform a DALBAR rating

into a testimonial.

151 Because an adviser or IAR can receive DALBAR ratings in various categories, we

note that an advertisement for an adviser or IAR that included one or more favorable

) ratings while ign()ring one or more unfavorable ratings could present the dangers that

Rule 206(4)-1(a)(1) was designed to prevent.

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
')

- 6 -

In taking this position, we rely in particular on your representations discussed in the

previous paragraph and your representations that: (1) participating advisers and IARs will

ha:ve met the eligibility criteria described above, or similar criteria reasonably designed to

ensure that a participating adviser or JAR has an established and significant history and a

record free from regulatory sanctions; (2) DALBAR will not be affiliated with any

participating adviser or JAR; ~I (3) DALBAR will survey all or, as appropriate, a

statistically valid sample, of a participating adviser's or lAR's clients; (4) all participating

advisers and IARs are charged a uniform fee, paid in advance; (5) DALBAR will not issue

ratings to an adviser or IAR unless the ratings are statistically valid with respect to that

adviser or IAR; and (6) any survey results published by DALBAR. will contain information

that clearly identifies the percentage of survey participants who have received each

designation listed in note 9 and the total number of survey participants. You should note that

any different facts or representations may require a different conclusion.

We note that the use of DALBAR ratings in advertisements by investment advisers

and lARs would be subject to Section 206(4) of the Advisers Act and Rule 206(4)-I(a)(5)

thereunder. Rule 206(4)-I(a)(5) makes it a fraudulent, deceptive or manipulative act,

practice, or course of business within the meaning of Section 206(4) of the Advisers Act for

any investment adviser to publish, circulate, or distribute, directly or indirectly, any

adve.rtisement that contains any untrue statement of a material fact or that is otherwise. false

or misleading. Whether a particular advertisement is false or misleading depends upon all of

the relevant facts and circumstances. 11./ Generally, an advertisement may be considered

false or misleading if it implies, or would lead a prospective client to infer, something about

the adviser or JAR or its clients' experiences that would not be true if all material facts had

been disclosed. 18/

161 We note that if an investment adviser p~cipated in a survey of its clients that was

created or conducted by that adviser, or by a person affiliated with the adviser, the

advertising, indirectly or directly, of any resulting ratings by that adviser could

present the dangers that Rule 206(4)-1(a)(1) was designed to prevent.

171 See, ~, Anametncs Investment Management (pub. avail. May 5, 1977) (whether a

communication is misleading will depend upon all of the particular facts, including the

form and content of the communication, the implications or inferences arising out of

the context of the communication, and the sophistication of the prospective client).

See also In the Matter of LBS Capital Management. Inc., Advisers Act Release No.

1644 (July 18, 1997), and In the Matter of Spear & Staff. Inc" Advisers Act Release

No. 188 (March 25, 1965) ("In appraising advertisements. . . we do not look only to

the effect that they might have had on careful analytical persons. We.look also to

their possible impact on those unskilled and unsophisticated in investment matters. ").

181 See, ~, New York Investors Group, )

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
- 7 -

ì

We express no view on whether a particular presentation of DALBAR ratings in an

advertisement by advisers or lARs would violate Section 206(4) and Rule 206(4)-I(a)(5).

We are, however, taking the opportunity to provide guidance regarding some factors that

advisers and lARs should consider when determining whether any advertisement containing a

DALBAR rating is false or misleading:

1. Whether the advertisement discloses the criteria on which the rating was based;

2. Whether an adviser or IAR advertises any favorable rating without disclosing any

facts that the adviser or IAR knows would call into question the validity of the rating

or the appropriateness of advertising the rating ~, the adviser or JAR knows that it

has been the subject of numerous client complaints relating to the rating category or

in areas not includ~ in the survey);

3. Whether -an adviser or IAR advertises any favorable rating without also disclosing any

unfavorable rating of the adviser or JAR (or the adviser that employs the JAR);

4. Whether the advertisement states or implies that an adviser or JAR was the top-rated

adviser or JAR in a category when it waS not rated first in that category;

5. Whether, in disclosing an adviser's or IAR's rating or designation 19../, the

advertisement clearly and prominently discloses the category for which the rating was

calculated. or designation determined, the number of advisers or lARs surveyed in that

category, and the percentage of advisers or lARs that received that rating or designation; - ..

6. Whether the advertisement discloses. that the rating may not be representative of any

one client's expenence because the rating reflects an average of all, or a sample of

all, of the expenences of the adviser's or JAR's clients;

7. Whether the advertisement discloses that the rating is not indicative of the adviser's or

IAR's future performance; tind .

8. Whether the advertisement discloses prominently who created and conducted the

survey, and that advisers and IARs paid a fee to participate in the survey.

Y..u-..£'.~

Veena K. Jain

Staff Attorney

) 191 See note 9,

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART LLP

) 1800 MASSACHUSETIS AVENUE, N.W

2ND FLOOR

WASHINGTON, D.C. 20036-1800

TELEPHONE (202) 778-9000

FACSIMILE (202) 778-9100

RpBERT J. ZlTfZ

(202) 778-9059

March 20, 1998

Advisers Act/Section 206(4)

and Rule 206(4)-1(a)(1)

Douglas J, Scheidt, Esq,

Chief Counsel

Division of Investment Management

Securities and Exchange Commission

Judiciaiy Plaza

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: DALBAR. Inc, Request for No-Action Relief

Dear Mr. Scheidt:

On behalf of DALBAR, Inc. ("DALBAR"), I respectfully request that the Division of

Investment Management staff advise me that it will not recommend enforcement action based on

Section 206(4) of the Investment Advisers Act of 1940 (the "Advisers Act") and Rule 206(4)-

l(a)(l) thereunder against DALBAR or any investment adviser (or any associated person thereof)

as a result of investment adviser advertisements that includeDALBAR ratings as described below,

L BACKGROUND

DALBAR is a nationally recogiuzed research firm that has been in business since 1976,

DALBAR specializes in conducting survey research in order to issue ratings of financial

institutions. The DALBAR ratings are designed to indicate how effectively each participatiiig

firm in the surveyed industry is meeting the needs of its clients.

DALBAR has conducted a survey that is designed to measure the effectiveness of

services rendered by investment advisers ("Adviserslt) and/or their investment advisory

)

oe-192490.12

BOSTON. HARRISBURG. MIA,\\I.I\EW YORK .PITTSBURGII. \VASHINGTOI\

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART LLP

ì

Douglas J. Scheidt, Esq.

March 20, 1998

Page 2

representatives (UIARs'il Based on the results of this survey, each participating Adviser and IAR

received numerical ratings. DALBAR intends to continue this program on a quarterly basis using

substantially identical questionnaires; however, Advisers and lARs will be permitted to participate

in the program and be rated only once every year.2

To qualify to participate in DALBAR's program, an Adviser and any participating IAR

must have (1) at least five years of experience as a financial adviser, (2) a minimum of 100 clients

from whom a fee or commission was earned within the prior 12 months or at least $15 million inclient assets under management,3 and (3) no record of any regulatory sanctions within.the past

five years by the Securities and Exchange Commission (USECU), state securities regulators or any

self-regulatory organization as that term is defined in Section 3(a)(26) of the Securities Exchange

Act of 1934. Qualifying Advisers and lARs will be solicited by DALBAR to participate in tlus

survey for a fee, paid in advance, of $500 per survey per participating JAR or, if a rating is sought

Oiùy for an Adviser, per Adviser.4 DALBAR will have no affiliation with any Adviser or IAIt

participating in the survey.

DALBAR will send a uniform questionnaire to all clients of a participating JAR, except

when an JAR has a sufficient number of clients to pennit a statistical sampling of those clients. 5

). The two-page questionnaire will seek the following information: (1) the length of time that the

JAR has serviced the client; (2) the client's overall rating of the JAR (ratings range from "very

poorll to lIexcellentU); (3) the client's satisfaction rating (ranging from "verydissatisfiedll to "very

As used herein, the term IAR is not intended to have the same definition as set forth in SEC rules.

Rather, it simply refers to those natural persons employed by investment advisers who render advisoiy services to

an Advisets clients. .

2 Thus, the description of the DALBAR program contained herein applies both to the activities that have

already been conducted and to future program activity.

3 As a result of this requirement, DALBAR expects that most, but not all, participating Advisers will be

registered with the Secunties and Exchange Commission as investment advisers under the Advisers Act.

" Thus, as applicable, references herein to participating lARs also apply to a participating Adviser that has

no lARs who are being rated. ..

5 DALBAR randomly will select clients from a group that includes persons from whoin the Adviser or JAR

has earned an advisory fee during the past 12 months and clients who were listed by the Adviser or JAR with

respect to any pnor DALBAR suivey, In particular, ü an IAR has fewer than 300 clients from whom the JAR has

earned a fee within the pnor 12 months, the questionnaire will be sent to each client If an IAR has between 300

and 1,000 such clients, it will be sent to 100 randomly selected clients. If an JAR has between 1,001 and 2,000

such clients, it will be sent to 150 randomly selected clients. If an IAR has more than 2,000 clients, it will be sent

to 200 or more randomly selected clients. In the future, DALBAR may adjust these guidelines based on pnor

response rates. However, DALBAR always will send questionnaires to a sufficient number of clients in order to

have a statistically valid sample. )

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART LLP

) Douglas J. Scheidt, Esq.

March 20, 1998

Page 3

satisfiedlt) with respect to eight different types of advisoiy services (such as retirement planning

and: tax planning); (4) the client's ratings of the IAR's financial results to date for the client

(ranging from Itfar below expectations" to Itabove expectations"); (5) the extent to which the IAR

puts the client's interests ahead of the JAR's own interests; (6) the client's satisfaction levels with

various aspects of the JAR's services (such as the clarity of explanations and timeliness of

advice); and (7) client information, such as age, sex, employment status and value of investment

portfolio.

The questionnaire consists of a senes of questions with four specific multiple choice

answers. The questionnaire has not been prepared in such a manner so as to produce any type of

pre-detennined results to the possible benefit of any particular Advisers or IARs. Rather, the

questionnaire is structured so as to make it equally easy for a client to give negative or positive

responses.

)

If an Adviser desires to receive a firm-wide rating, the Adviser must provide DALBAR

with a list of all of its qualifying IARs, who then must provide DALBAR with a list of all of their

clients. DALBAR sends all of these clients a questionnaire. However, if an Adviser has more

than 100 IARs, DALBAR will select randomly at least l()ofc¡ or 100 of the IARs (whichever is

higher), and clients of these randomly selected lARs will be sent a questionnaire in accordance

with the numerical guidelines set forth in footnote 5. Thus, Advisers seeking finn-wide rankings

will not be able to pre-detennine those lARs whose clients will be surveyed,

The questionnaire responses will be held in strict confidence by DALBAR. No Adviser or

IAR will have access to the specific responses of any particular client. In addition, DALBAR will

. not advise any participating Adviser or JAR as to which of their clients responded to the survey

and which did not respond. However, DALBAR randomly will contact certain clients to confirm

the validity of their responses. .

Each response by a client to a multiple choice question is assigned a numencal value

ranging from 1 to 4. For each question, DALBAR averages the responses of all clients of an .

Adviser or IAR to obtain a rating for that question. Each Adviser or JAR receives ratings in three

major categories - pedormance, trust and satisfaction - by averaging client responses to the

questions in those categones. Based on the cumulative responses of all clients of an Adviser or

JAR, as applicable, who return a questioimaire, DALBAR will assign to each such Adviser or IAR

a numerical rating for each categoiy, with 4.0 being the highest possible rating. DALBAR will not

issue ratings to an Adviser or JAR unless the ratings are statistically valid with respect to that

Adviser or JAR. DALBAR will not pedorm any subjective analysis of the survey results; rather,

DALBAR merely assigns numencal ratings based directly on the composite client responses to the

sur,vey for each participating Adviser or IAR. In addition, each participating Adviser or IAR will

receive a written numencal analysis of the survey results of their clients. These results should

)

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART LLP

'ì

Douglas J. Scheidt, Esq.

March 20, 1998

Page 4

enable the Adviser or IAR to identify those aspects of their services that are rated highly by their

clients and those areas that need improvement.

As noted above, Advisers and lARs will receive numerical ratings for each category from

1 (poor) to 4 (excellent). Those Advisers and lARs who are rated from 3.75 to 4.0 will be

assigned an "excellent" rating. Other participants with ratings of 3.0 or higher will receive the

following designations:. 3.0 to 3.49 - good; and 3.5 to 3.74 - very good.

DALBAR will release publicly the names of Advisers and lARs who satisfy certain

minimum rating guidelines (such as ratings of3.0 or higher) and will publish listings of some or all

of its survey results in its own wntten directories and in its own Internet web site. Among other

information, those published listings will identify clearly the percentage of survey participants who

have received each of the designations described above and the total number of survey

participants. In addition, DALBAR expects that Advisers and lARs who participate in the survey

will refer to their overall survey rating and/or to other relevant survey ratings of their seivices in

their own advertisements or sales materials, This letter seeks no-action relief with respect to the

proposed use of these ratings (or. ratings from subsequent surveys conducted to the same

manner6) in these advertisements and sales literature,

It DIS~SSION

Section 206(4) of the Advisers Act generally prohibits an investment adviser from

engaging in any fraudulent, deceptive or manipulative conduct. Rule 206(4)-1(a)(1) provides that

it shall constitute a violation of Section 206(4). for an investment adviser to distribute an

advertisement which, directly or indirectly, refers to a testimonial concerning the adviser. The

rule does not define what constitutes a "testimonial." However, the SEC staff regularly interprets

this term to mean a client's statement of his or her experience with, or endorsement of: an

investment adviser.' The SEC staff also has stated that "(t)estimonials are prohibited because

they are likely to give rise to a fraudulent or deceptive implication or mistaken inference that the

experience of the person giving the testimonial is typical of the experience of the advisets

clients."s Based on these criteria, the use,by Advisers and lARs ofDALBAR's ratings would not

be a testimonial and would not contravene the purposes of the testimonial rule. To the contrary,

6 DALBAR hopes to produce a quarterly survey using substantially identical questionnaires. Advisers and

lARs who participate in subsequent suiveys will be able to monitor those areas in which their services have

improved or deteriorated.

7 See, e.g., Cambiar Investors, Inc. (August 28, 1997) and the no-action letters cited in footnote 4 thereof.

8 See, e.g., Multi-Financial Securities Corp. (November 9, 1995); CIGNA Securities, Inc. (September 10,

1991); and 1.Y, Bany Aibittage Management, Inc. (October 18, 1989). See also Investment Advisers Act Release

) No. 121 (November 2,1961),

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART LLP

) Douglas J. Scheidt, Esq.

March 20, 1998

Page 5

the ratings can be a valuable piece of information to be considered by potential clients of the

Advisers or the lARs.

First and foremost, the ratings at issue are assigned by DALBAR, an independent research

finn that has no affiliàtion or relationship with any Adviser or IAR other than as described in this

letter. Although client responses to multiple choice questions on the survey questionnaire are the

key determinant in the rating process, the ratings are made exclusively by DALBAR and do not

directly or indirectly identify any individual client, let alone contain any statement regarding the

experience of any particular client. The SEC staff has stated on many occasions that such

unbiased third-party reports in advertisements are not testimonials prolubîted by Rule 206(4)-1.9

The SEC staff also has stated that the use of a tlurd-party report in an advisets

advertisement can constitute a prohibited testimonial if "it incltides a statement of a customets

experience or endorsement."10 The proposed DALBAR ratings do not directly or indirectly

constitute such a statement by a customer. Indeed, these ratings are made explicitly by DALBAR,

and not by any client. No individual client or group of clients will be mentioned in connection

with the references to DALBAR's ratings,

) The fact that DALBAR charges each participating IAR a fee does not compromise

DALBAR's status as a bona fide, independent tlurd party. DALBAR is in the business of

producing independent third-party surveys and providing related iIiformation. Its business cannot

succeed unless DALBAR maintains its integrity as an unbiased third party service provider.

DALBAR has no intent to compromise its business, Moreover, DALBAR's rating process simply

is not subject to any type of intentional bias for or against an identifiable group of lARs or their

Advisers. The DALBAR ratings are a function of numerical calculations derived directly from the

client survey responses. Thus, absent an error in its mathematical calculations, there simply is no

way that DALBAR's actions have any effect on the ratings for individual lARs or Advisers. In

other words, there is no opportunity for the ratings issued to particular survey participants to be

influenced due to the level of compensation paid to DALBAR by one or more such persons.

51 See, e.g.; Stalker Advisoiy Services (January 18, 1994) ("The staff takes the position that bona fide,

unbiased third-party reports generally are not prohibited by the testimonial rule. H); and Kurtz Capital Management

(lanuaiy 18, 1988) ("The staff takes the position that bona-fide third party reports generally are not covered by

Rule 206(4)-1(a)(I), which prohibits the use of testimonials by an investment adviser. H).

10 New York Investors Group, Inc. (September 7, 1982). See a/so In the Matter of Patricia Owen-Michel,

Investment Advisers Act Release No. 1584 (September 27, 1996) (president' of investment adviser sanctioned for

numerous violations, including a testimonial rule violation for including in a promotional package a repnnt of a

newspaper article quoting a client's investment expenence with the adviser). )

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART LLP

~"ì

Douglas J. Scheidt, Esq.

March 20, 1998

Page 6

Moreover, the mere fact that every participant in the survey provides uniform

compensation to DALBAR should not be construed to transform DALBAR's services and ratings

into a prohibited testimonial. Every survey participant is subject to the same fee schedule,

_regardless of whether the participant ultimately receives DALBAR's high~st rating or its lowest

rating, The Advisers and lARs do not know how they will be rated when they pay to participate in

the survey. In addition, the no-action ¡etters cited above regarding third-party reports contain no

authority for the proposition that this type of compensation transforms the ratings into a

testimonial. If anything, the Stalker letter makes clear that the mere payment of compensation by

an adviser to an unbiased third party in connection with a third-party report does not transform

the report into a prohibited testimonial.

In Stalker, a registered investment adviser paid Money Manager Verified Ratings

("MMVR") - an independent organization with no affiliation to the adviser - to verifY the

advisets investment pedormance for a category of client accounts. As summarized by the staft:

"MMVR reviews client statements, verifies the (pedormance) calculations, and ranks the adviser

in its respective category. These rankings are then used by financial publications, such as

Barron's," The staff concluded as follows:

)

I Even though (the adviser) pays MlvfVR alee to verify (the advisets) investment

pedonnance, and MMVR's pedormance infonnation may be included in a financial

publication, paragraph (a)(l) (of Rule 206(4)-1) would not prohibit (the adviser)

from using reprinted articles containing this pedormance information. (Emphasis

added.)

Similarly, the compensation to be received by DALBAR should not cause the results of its

surveys to be transformed into a testimonial prohibited by Rule 206(4)-1.

The stafi's most recent no-action position dealing with the testimonial rule also supports

the relief requested herein. In a letter issued on August 28, 1997, the staff advised Cambiar

Investors, Inc. that the use of a partial client list in an advisets advertisement does not constitute a .

testimonial. In so doing, the staff stated as follows:

In prohibiting the use of testimonials, the Commission was concerned that such

advertisements were inherently misleading because "by their very nature they

emphasize the comments and activities favorable to the investment adviser and

ignore those that are unfavorable." Advisers Act Release No, 12l (Nov. 2, 1961)

(adopting Rule 206(4)-1). A partial client list neither emphasizes cómments or

activities favorable to the investment adviser nor ignores those that are

unfavorable.

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
KIRKPATRICK & LOCKHART UP

~

Douglas J. Scheidt, Esq.

March 20, 1998

Page 7

Based on this same logic, the use ofDALBAR's ratings is not a testimonial. On their face,

the ratings do not constitute a statement by clients of the adviser, but rather a conclusion by

DALBAR, an unbiased third-party research company, based on DALBAR's pre-established

numerical guidelines, Moreover, the ratings ar~ not even an indirect statement by a select group

of advisory clients, Unlike the SEC's concern cited above, the ratings do not directly or indirectly

"emphasizell statements by one or more clients that are "favorable to the investment adviser and

ignore those that are unfavorable. II Rather, survey responses will be solicited from at least 100

clients of each participating IAR. In addition, in order for an Adviser to. receive a rating, a similar

number of clients of at least 10% or 100 of the Advisets lARs (whichever is higher) must be

surveyed,

Similarly, as noted above, the staff has stated that the purpose of the testimoiual rule is to

avoid the implication or inference "that the experience of the person giving the testimonial is

typical of the advisets clients." Even if DALBAR's ratings are construed to be an indirect

testimonial due to the role of clients in the survey - which we believe would be an inappropriate

conclusion - the "experiencell being conveyed is not the experience of a single client or a selected

group of clients, Rather, it is, at most, the Collective experience of all clients responding to the

survey.

) ill. REQUEST FOR RELIEF

For the foregoing reasons, DALBAR respectfully requests that the SEC staff advise me

that it will not recommend enforcement action to the SEC based on Section 206(4) of the

Advisers Act or Rule 206(4)-1(a)(1) thereunder against DALBAR, any Adviser or any associated

person thereof due to their use ofDALBAR ratings as described above in advertisements and

sales materials. 

11 .

11 I note that no relief is being sought with respect to Rule 206(4)-1(a)(5), which prolubits an advertisement

from containing any untrue statement of a material fact or from otherwise being false or misleading.

Advertisements containing DALBAR ratings as described above would still be subject to these standards. As noted

in Stalker Advisory Seivices, supra, "(w)hether any advertisement is false or misleading will depend generally on

the particular facts and circumstances surrounding its use. H .

J

i

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements
, "

KIRKPATRICK & LOCKHART LLP

". Douglas J. Scheidt, Esq.

) March 20, 1998

Page 8

* * * *

If you have any questions, or require additional infonnation with respect to the contents of

this letter, please contact me at (202) 778-9059.

Enclosure

cc: Louis S, Harvey

DALBAR, Inc.

)

)

,

.~

Effective November 4, 2022, This Letter is Withdrawn. Please consult the following web page for 

more information: https://www.sec.gov/divisions/investment/im-modified-withdrawn-staff-statements