13024 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

1Unless otherwise noted, when we refer to the 

Advisers Act, or any section of the Advisers Act, 

we are referring to 15 U.S.C. 80b, at which the 

Advisers Act is codified. When we refer to rules 

under the Advisers Act, or any section of those 

rules, we are referring to title 17, part 275 of the 

Code of Federal Regulations [17 CFR part 275], in 

which these rules are published. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 275 and 279 

[Release No. IA–5653; File No. S7–21–19] 

RIN 3235–AM08 

Investment Adviser Marketing 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (the ‘‘Commission’’ or the 

‘‘SEC’’) is adopting amendments under 

the Investment Advisers Act of 1940 

(the ‘‘Advisers Act’’ or the ‘‘Act’’) to 

update rules that govern investment 

adviser marketing. The amendments 

will create a merged rule that will 

replace both the current advertising and 

cash solicitation rules. These 

amendments reflect market 

developments and regulatory changes 

since the advertising rule’s adoption in 

1961 and the cash solicitation rule’s 

adoption in 1979. The Commission is 

also adopting amendments to Form 

ADV to provide the Commission with 

additional information about advisers’ 

marketing practices. Finally, the 

Commission is adopting amendments to 

the books and records rule under the 

Advisers Act. 

DATES: 

Effective date: This rule is effective 

May 4, 2021. 

Compliance dates: The applicable 

compliance dates are discussed in 

section II.K. 

FOR FURTHER INFORMATION CONTACT: 

Juliet Han, Emily Rowland, Aaron Russ, 

or Christine Schleppegrell, Senior 

Counsels; Thoreau Bartmann or Melissa 

Roverts Harke, Senior Special Counsels; 

or Melissa Gainor, Assistant Director, at 

(202) 551–6787 or IM-Rules@sec.gov, 

Investment Adviser Regulation Office, 

Division of Investment Management, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–8549. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting amendments to 

17 CFR 275.206(4)–1 (rule 206(4)–1) and 

17 CFR 275.204–2 (rule 204–2) under 

the Investment Advisers Act of 1940 [15 

U.S.C. 80b–1 et seq.],1 and amendments 

to 17 CFR 279.1 (Form ADV) under the 

Advisers Act. The Commission is 

rescinding 17 CFR 275.206(4)–3 (rule 

206(4)–3) under the Advisers Act. 

Table of Contents 

I. Introduction 

Advertising and Solicitation Rules and 

Proposed Amendments 

Merged Marketing Rule 

II. Discussion 

A. Scope of the Rule: Definition of 

‘‘Advertisement’’ 

1. Overview 

2. Definition of Advertisement: 

Communications Other Than 

Compensated Testimonials and 

Endorsements 

3. Definition of Advertisement: 

Compensated Testimonials and 

Endorsements, Including Solicitations 

4. Investors in Private Funds 

B. General Prohibitions 

1. Untrue Statements and Omissions 

2. Unsubstantiated Material Statements of 

Fact 

3. Untrue or Misleading Implications or 

Inferences 

4. Failure To Provide Fair and Balanced 

Treatment of Material Risks or Material 

Limitations 

5. Anti-Cherry Picking Provisions: 

References to Specific Investment 

Advice and Presentation of Performance 

Results 

6. Otherwise Materially Misleading 

C. Conditions Applicable to Testimonials 

and Endorsements, Including 

Solicitations 

1. Overview 

2. Required Disclosures 

3. Adviser Oversight and Compliance 

4. Disqualification for Persons Who Have 

Engaged in Misconduct 

5. Exemptions 

D. Third-Party Ratings 

E. Performance Advertising 

1. Net Performance Requirement; 

Elimination of Proposed Schedule of 

Fees Requirement 

2. Prescribed Time Periods 

3. Statements About Commission Approval 

4. Related Performance 

5. Extracted Performance 

6. Hypothetical Performance 

F. Portability of Performance, Testimonials, 

Endorsements, Third-Party Ratings, and 

Specific Investment Advice 

G. Review and Approval of Advertisements 

H. Amendments to Form ADV 

I. Recordkeeping 

J. Existing Staff No-Action Letters 

K. Transition Period and Compliance Date 

L. Other Matters 

III. Economic Analysis 

A. Introduction 

B. Broad Economic Considerations 

C. Baseline 

1. Market for Investment Advisers for the 

Advertising Rule 

2. Market for Solicitation Activity 

3. RIA Clients 

D. Costs and Benefits of the Final Rule and 

Form Amendments 

1. Quantitative Estimates of Costs and 

Benefits 

2. Definition of Advertisement 

3. General Prohibitions 

4. Conditions Applicable to Testimonials 

and Endorsements, Including 

Solicitations 

5. Third-Party Ratings 

6. Performance Advertising 

7. Amendments to Form ADV 

8. Recordkeeping 

E. Efficiency, Competition, Capital 

Formation 

1. Efficiency 

2. Competition 

3. Capital Formation 

F. Reasonable Alternatives 

1. Reduce or Eliminate Specific Limitations 

on Investment Adviser Advertisements 

2. Bifurcate Some Requirements 

3. Hypothetical Performance Alternatives 

4. Alternatives to the Combined Marketing 

Rule 

5. Alternatives to Disqualification 

Provisions 

IV. Paperwork Reduction Act Analysis 

A. Introduction 

B. Rule 206(4)–1 

1. General Prohibitions 

2. Testimonials and Endorsements in 

Advertisements 

3. Third-Party Ratings in Advertisements 

4. Performance Advertising 

5. Total Hour Burden Associated With Rule 

206(4)–1 

C. Rule 206(4)–3 

D. Rule 204–2 

E. Form ADV 

V. Final Regulatory Flexibility Analysis 

A. Reason for and Objectives of the Final 

Amendments 

1. Final Rule 206(4)–1 

2. Final Rule 204–2 

3. Final Amendments to Form ADV 

B. Significant Issues Raised by Public 

Comments 

C. Legal Basis 

D. Small Entities Subject to the Rule and 

Rule Amendments 

1. Small Entities Subject to Amendments to 

Marketing Rule 

2. Small Entities Subject to Amendments to 

the Books and Records Rule 204–2 

3. Small Entities Subject to Amendments to 

Form ADV 

E. Projected Reporting, Recordkeeping and 

Other Compliance Requirements 

1. Final Rule 206(4)–1 

2. Final Amendments to Rule 204–2 

3. Final Amendments to Form ADV 

F. Duplicative, Overlapping, or Conflicting 

Federal Rules 

1. Final Rule 206(4)–1 

2. Final Amendments to Form ADV 

G. Significant Alternatives 

1. Final Rule 206(4)–1 

Statutory Authority 

Appendix A: Changes to Form ADV 

Appendix B: Form ADV Glossary of Terms 

I. Introduction 

We are adopting an amended rule, 

rule 206(4)–1, under the Advisers Act, 

which addresses advisers marketing 

their services to clients and investors 

(the ‘‘marketing rule’’). The marketing 

rule amends existing rule 206(4)–1 (the 

‘‘advertising rule’’), which we adopted 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13025 

2Advertisements by Investment Advisers, Release 

No. IA–121 (Nov. 1, 1961) [26 FR 10548 (Nov. 9, 

1961)] (‘‘Advertising Rule Adopting Release’’). 

3See Requirements Governing Payments of Cash 

Referral Fees by Investment Advisers, Release No. 

688 (July 12, 1979) [44 FR 42126 (Jul 18, 1979)] 

(‘‘1979 Adopting Release’’). 

4The advertising rule has been amended once, 

when the Commission revised the introductory text 

of paragraph (a) as part of a broader amendment of 

several rules under the Advisers Act to reflect 

changes made by the National Securities Market 

Improvement Act of 1996. Rules Implementing 

Amendments to the Investment Advisers Act of 

1940, Release No. IA–1633 (May 15, 1997) [62 FR 

28112, 28135 (May 22, 1997)] (‘‘Release 1633’’). We 

have not amended the solicitation rule since 

adoption. 

5The final rule covers marketing activities by 

investment advisers to clients and prospective 

clients as well as investors and prospective 

investors in private funds that those advisers 

manage. See 15 U.S.C. 80b–2(a)(29) (defining a 

‘‘private fund’’ as ‘‘an issuer that would be an 

investment company, as defined in section 3 of the 

Investment Company Act of 1940, but for section 

3(c)(1) or 3(c)(7) of that Act’’). Unless we specify 

otherwise, for purposes of this release, we refer to 

any of these persons generally as ‘‘investors,’’ and 

we refer specifically to investors in private funds 

managed by those advisers as ‘‘private fund 

investors.’’ 

6While we traditionally referred to those who 

engaged in compensated solicitation activity under 

the current solicitation rule as ‘‘solicitors,’’ we use 

the term ‘‘promoter’’ in this release to refer to a 

person providing a testimonial or endorsement, 

whether compensated or uncompensated. We also 

use the term ‘‘provider’’ at times when discussing 

a person providing an uncompensated testimonial 

or endorsement. 

7See Investment Adviser Advertisements; 

Compensation for Solicitations, Release No. IA– 

5407 (Nov. 4, 2019) [84 FR 67518 (Dec. 10, 2019)] 

(‘‘2019 Proposing Release’’). 

in 1961 to target advertising practices 

that the Commission believed were 

likely to be misleading.2 The rule also 

replaces rule 206(4)–3 (the ‘‘solicitation 

rule’’), which we adopted in 1979 to 

help ensure clients are aware that paid 

solicitors who refer them to advisers 

have a conflict of interest.3 We have not 

substantively updated either rule since 

adoption.4 In the decades since the 

adoption of both rules, however, 

advertising and referral practices have 

evolved. Simultaneously, the 

technology used for communications 

has advanced, the expectations of 

investors shopping for advisory services 

have changed, and the profiles of the 

investment advisory industry have 

diversified. 

Our marketing rule recognizes these 

changes and our experience 

administering the advertising and 

solicitation rules. Accordingly, the rule 

contains principles-based provisions 

designed to accommodate the continual 

evolution and interplay of technology 

and advice. The rule also contains 

tailored restrictions and requirements 

for certain types of advertisements, such 

as performance advertising, testimonials 

and endorsements, and third-party 

ratings. Compensated testimonials and 

endorsements, which include 

traditional referral and solicitation 

activity, will be subject to 

disqualification provisions. We believe 

the final marketing rule will allow 

advisers to provide existing and 

prospective investors with useful 

information as they choose among 

investment advisers and advisory 

services, subject to conditions that are 

reasonably designed to prevent fraud. 

Finally, we are adopting related 

amendments to Form ADV that are 

designed to provide the Commission 

with additional information about 

advisers’ marketing practices, and 

related amendments to the Advisers Act 

books and records rule, rule 204–2. 

Advertising and Solicitation Rules and 

Proposed Amendments 

Advertisements can provide existing 

and prospective investors with useful 

information as they contemplate 

whether to utilize and pay for 

investment advisory services, whether 

to approach particular investment 

advisers, and how to choose among 

their available options. At the same 

time, advertisements present risks of 

misleading investors because an 

investment adviser’s interest in 

attracting investors may conflict with 

the investors’ interests, and the adviser 

is in control of the design, content, 

format, media, timing, and placement of 

its advertisements. As a consequence, 

advertisements may mislead existing 

and prospective investors about the 

advisory services they will receive, 

including indirectly through the 

services provided to private funds.5 The 

advertising rule was designed to address 

the potential harm to investors from 

misleading advertisements. 

Advisers also attract investors by 

compensating individuals or firms to 

solicit new investors. Some investment 

advisers directly employ individuals to 

solicit new investors on their behalf, 

and some investment advisers arrange 

for related entities or third parties, such 

as broker-dealers, to solicit new 

investors. The person or entity 

compensated has a financial incentive 

to recommend the adviser to the 

investor.6 Without appropriate 

disclosure, this compensation creates a 

risk that an investor would mistakenly 

view the recommendation as being an 

unbiased opinion about the adviser’s 

ability to manage the investor’s assets 

and would rely on that recommendation 

more than the investor would if the 

investor knew of the incentive. The 

solicitation rule was designed to help 

expose to clients the conflicts of interest 

posed by cash compensation. 

The concerns that motivated the 

Commission to adopt the advertising 

and solicitation rules still exist today, 

but investment adviser marketing has 

evolved with advances in technology. In 

the decades since the adoption of both 

the advertising and solicitation rules, 

the use of the internet, mobile 

applications, and social media has 

become an integral part of business 

communications. Consumers today 

often rely on these forms of 

communication to obtain information, 

including reviews and referrals, when 

considering buying goods and services. 

Advisers and third parties also rely on 

these same types of outlets to attract and 

refer potential customers. 

The nature and profiles of the 

investment advisory industry and 

investors seeking those advisory 

services have also changed since the 

Commission adopted the advertising 

and solicitation rules. Some investors 

today rely on digital investment 

advisory programs, sometimes referred 

to as ‘‘robo-advisers,’’ for investment 

advice, which is provided exclusively 

through electronic platforms using 

algorithmic-based programs. In 

addition, passage of the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’) 

required many investment advisers to 

private funds that were previously 

exempt from registration to register with 

the Commission and become subject to 

additional provisions of the Advisers 

Act and the rules thereunder. Private 

funds and their advisers often hire 

promoters to obtain investors in the 

funds. Referral practices also have 

expanded to include, for example, 

various types of compensation, 

including non-cash compensation, in 

referral arrangements. 

In light of these developments, we 

proposed amendments to the 

advertising rule to: (i) Modify the 

definition of ‘‘advertisement’’ to be 

more ‘‘evergreen’’ in light of everchanging technology; (ii) replace four 

per se prohibitions with general 

prohibitions of certain advertising 

practices applicable to all 

advertisements; (iii) provide certain 

restrictions and conditions on 

testimonials, endorsements, and thirdparty ratings; and (iv) include tailored 

requirements for the presentation of 

performance results, based on an 

advertisement’s intended audience.7


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13026 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

8The comment letters on the 2019 Proposing 

Release (File No. S7–21–19) are available at https:// 

www.sec.gov/comments/s7-21-19/s72119.htm. 

9The feedback forms are available in the 

comment file at https://www.sec.gov/comments/s7- 

21-19/s72119.htm. 

10See, e.g., Comment Letter of Wellington 

Management Company LLP (Feb. 10, 2020) 

(‘‘Wellington Comment Letter’’); Comment Letter of 

Fidelity Management Research Company LLC (Feb. 

10, 2020) (‘‘Fidelity Comment Letter’’); 

11See, e.g., Comment Letter of Investment 

Adviser Association (Feb. 10, 2020) (‘‘IAA 

Comment Letter’’); Comment Letter of the National 

Society of Compliance Professionals (Feb. 7, 2020) 

(‘‘NSCP Comment Letter’’). 

12See, e.g., Comment Letter of LinkedIn 

Corporation (Feb. 10, 2020) (‘‘LinkedIn Comment 

Letter’’); Comment Letter of the North American 

Securities Administrators Association (NASAA) 

(Feb. 10, 2020) (‘‘NASAA Comment Letter’’). 

13See, e.g., Comment Letter of Financial Services 

Institute (Feb. 12, 2020) (‘‘FSI Comment Letter’’); 

Comment Letter of SIFMA Asset Management 

Group on proposed solicitation rule (Feb. 10, 2020) 

(‘‘SIFMA AMG Comment Letter I’’). 

14See, e.g., Comment Letter of Fried, Frank, 

Harris, Shriver & Jacobson LLP (Feb. 10, 2020) 

(‘‘Fried Frank Comment Letter’’); Comment Letter of 

Sidley Austin LLP (Feb. 10, 2020) (‘‘Sidley Austin 

Comment Letter’’). 

15See, e.g., Comment Letter of Credit Suisse 

Securities (USA) LLC (Feb. 10, 2020) (‘‘Credit 

Suisse Comment Letter’’); SIFMA AMG Comment 

Letter I. 

16See, e.g., Comment Letter of the Small Business 

Investor Alliance (Feb. 7, 2020) (‘‘SBIA Comment 

Letter’’); Comment Letter of the Consumer 

Federation of America (Feb. 10, 2020) (‘‘Consumer 

Federation Comment Letter’’). 

17See, e.g., Comment Letter of SIFMA Asset 

Management Group on proposed advertising rule 

(Feb. 10, 2020) (‘‘SIFMA AMG Comment Letter II’’); 

Comment Letter of Joseph H. Nesler (Jan. 15, 2020) 

(‘‘Nesler Comment Letter’’). 

18See e.g., FSI Comment Letter; SIFMA AMG 

Comment Letter II. 

19See, e.g., IAA Comment Letter; SIFMA AMG 

Comment Letter II; Comment Letter of Mercer 

Advisors (Feb. 10, 2020) (‘‘Mercer Comment 

Letter’’). See also FSI Comment Letter. 

20See e.g., SIFMA AMG Comment Letter II; FSI 

Comment Letter; IAA Comment Letter; Comment 

Letter of the Money Management Institute (Feb. 10, 

2020) (‘‘MMI Comment Letter’’); Nesler Comment 

Letter. 

21The final rule will apply to all investment 

advisers registered, or required to be registered, 

with the Commission. Like the proposal, the final 

rule will not apply to advisers that are not required 

to register as investment advisers with the 

Commission, such as exempt reporting advisers or 

state-registered advisers. 

22Hypothetical performance information that is 

provided in response to an unsolicited investor 

request or to a private fund investor in a one-onone communication is excluded from the first prong 

of the definition of advertisement. 

The proposed rule also would have 

required internal review and approval of 

most advertisements. Finally, we 

proposed amendments requiring each 

adviser to report additional information 

regarding its advertising practices in its 

Form ADV. 

Additionally, we proposed 

amendments to the solicitation rule to: 

(i) Expand the rule to cover solicitation 

arrangements involving all forms of 

compensation, rather than only cash 

compensation; (ii) expand the rule to 

apply to the solicitation of current and 

prospective investors in any private 

fund, rather than only to ‘‘clients’’ 

(including prospective clients) of the 

investment adviser; (iii) eliminate 

requirements duplicative of other rules; 

(iv) include exceptions for de minimis 

payments and certain non-profit 

programs; and (v) expand the types of 

disciplinary events that would trigger 

the rule’s disqualification provisions. 

We received more than 90 comment 

letters on the proposal.8 The 

Commission also received feedback 

flyers from individual investors on 

investment adviser marketing and from 

smaller advisers on the proposal’s 

effects on small entities.9 Commenters 

generally supported modernizing these 

rules and agreed with our general 

approach. Many commenters, however, 

expressed concern that several aspects 

of the proposed amendments to the 

advertising rule would increase an 

investment adviser’s compliance 

burden.10 For example, some 

commenters suggested removing the 

proposed internal pre-use review and 

approval requirement and narrowing the 

proposed definition of 

‘‘advertisement.’’ 11 Others requested 

that we provide additional guidance on 

various topics, such as how the general 

prohibitions will apply in certain 

scenarios.12 Commenters also expressed 

concern that the proposed amendments 

to the solicitation rule would 

significantly expand several aspects of 

the existing rule. For example, some 

commenters argued that the proposed 

definition of ‘‘solicitor’’ was too broad 

and suggested alternatives or 

limitations.13 Others disagreed with the 

proposed expansion of the rule to 

include non-cash compensation and 

solicitations of private fund investors.14

Commenters also recommended 

modifications to the disqualification 

provisions, such as aligning them with 

disqualification provisions in our other 

rules and limiting the scope of affiliate 

disqualification.15

Commenters generally supported our 

approach to permit testimonials and 

endorsements; 16 however, they 

highlighted the difficulty in assessing 

when compensated testimonials and 

endorsements under the proposed 

advertising rule would also trigger the 

application of the proposed solicitation 

rule.17 Commenters argued that 

applying both rules to the same conduct 

is duplicative and burdensome.18 Some 

commenters suggested that we regulate 

endorsements and testimonials only 

under the advertising rule,19 whereas 

others suggested various ways to limit 

the conduct that would be subject to 

both rules.20

Merged Marketing Rule 

After considering comments, we are 

adopting a rule with several 

modifications.21 We believe it is 

appropriate to regulate investment 

adviser advertising and solicitation 

activity through a single rule: The 

marketing rule. This approach is 

designed to balance the Commission’s 

goals of protecting investors from 

misleading advertisements and 

solicitations, while accommodating 

current marketing practices and their 

continued evolution. 

• The final marketing rule will 

include an expanded definition of 

‘‘advertisement,’’ relative to the current 

advertising rule, that will encompass an 

investment adviser’s marketing activity 

for investment advisory services with 

regard to securities. We have 

determined not to expand the definition 

of advertisement to include 

communications addressed to one 

person as proposed, and instead will 

retain the current rule’s exclusion of 

one-on-one communications from the 

definition, except with regard to 

compensated testimonials and 

endorsements and certain 

communications that include 

hypothetical performance 

information.22 In addition, the 

definition will not include 

communications designed to retain 

existing investors. The final definition 

also will include exceptions for 

extemporaneous, live, oral 

communications; and information 

contained in a statutory or regulatory 

notice, filing, or other required 

communication. 

• Largely as proposed, the final rule 

will apply to certain communications 

sent to clients and private fund 

investors, but will not apply to 

advertisements about registered 

investment companies or business 

development companies. 

• A set of seven principles-based 

general prohibitions will apply to all 

advertisements. These are drawn from 

historic anti-fraud principles under the 

Federal securities laws and are tailored 

specifically to the type of 

communications that are within the 

scope of the rule. 

• The final rule will permit an 

adviser’s advertisement to include 

testimonials and endorsements, subject 

generally to the following conditions: 

Required disclosures; adviser oversight 

and compliance, including a written 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13027 

23See final rule 206(4)–1(e)(1)(i) and (ii). 

24See final rule 206(4)–1(e)(1)(i). 

25See final rule 206(4)–1(e)(1)(i)(A) and (B). 

26See final rule 206(4)–1(e)(1)(ii). As discussed 

below, uncompensated testimonials and 

endorsements that are included in certain adviser 

communications would meet the first prong of the 

definition of advertisement. See infra ‘‘Adoption 

and entanglement’’ section. 

27See final rule 206(4)–1(e)(1)(ii). 

28See, e.g., SBIA Comment Letter; Consumer 

Federation Comment Letter; Comment Letter of the 

Institutional Limited Partners Association (Feb. 10, 

2020) (‘‘ILPA Comment Letter’’). 

29See, e.g., Wellington Comment Letter; Pickard 

Djinis Comment Letter; Comment Letter of Managed 

Funds Association and Alternative Investment 

Management Association (Feb. 10, 2020) (‘‘MFA/ 

AIMA Comment Letter I’’). 

30See, e.g., Fidelity Comment Letter; NSCP 

Comment Letter; IAA Comment Letter. 31See, e.g., NYC Bar Comment Letter; Comment 

Letter of the Financial Planning Association (Feb. 

10, 2020) (‘‘FPA Comment Letter’’). 

agreement for certain promoters; and, in 

some cases, disqualification provisions. 

We are adopting partial exemptions for 

de minimis compensation, affiliated 

personnel, registered broker-dealers, 

and certain persons to the extent they 

are covered by rule 506(d) of Regulation 

D under the Securities Act with respect 

to a securities offering. 

• An adviser’s advertisement may 

include a third-party rating, if the 

adviser forms a reasonable belief that 

the third-party rating clearly and 

prominently discloses certain 

information. 

• The final rule will apply to 

performance advertising and will 

require presentation of net performance 

information whenever gross 

performance is presented, and 

performance data over specific periods. 

In addition, the final rule will impose 

requirements on advisers that display 

related performance, extracted 

performance, hypothetical performance, 

and—in a change from the proposal— 

predecessor performance. We are not 

adopting, however, the proposed 

separate requirements for performance 

advertising for retail and non-retail 

investors. 

• We are amending the recordkeeping 

rule and Form ADV to reflect the final 

rule and enhance the data available to 

support our staff’s enforcement and 

examination functions. 

• In a change from the proposal, the 

final rule will not require investment 

advisers to review and approve their 

advertisements prior to dissemination. 

• Finally, certain staff no-action 

letters will be withdrawn in connection 

with the final rule as those positions are 

either incorporated into the final rule or 

will no longer apply. 

II. Discussion 

A. Scope of the Rule: Definition of 

‘‘Advertisement’’ 

1. Overview 

Under the final marketing rule, the 

definition of an advertisement includes 

two prongs.23 The first prong includes 

any direct or indirect communication an 

investment adviser makes that: (i) Offers 

the investment adviser’s investment 

advisory services with regard to 

securities to prospective clients or 

investors in a private fund advised by 

the investment adviser (‘‘private fund 

investors’’), or (ii) offers new investment 

advisory services with regard to 

securities to current clients or private 

fund investors.24 This prong will 

capture traditional advertising, and will 

not include one-on-one 

communications, unless the 

communication includes hypothetical 

performance information that is not 

provided: (i) In response to an 

unsolicited investor request or (ii) to a 

private fund investor. It also excludes (i) 

extemporaneous, live, oral 

communications; and (ii) information 

contained in a statutory or regulatory 

notice, filing, or other required 

communication, provided that such 

information is reasonably designed to 

satisfy the requirements of such notice, 

filing, or other required 

communication.25

The new second prong will cover 

compensated testimonials and 

endorsements, which will include a 

similar scope of activity as traditional 

solicitations under the current 

solicitation rule.26 This prong will 

include oral communications and oneon-one communications to capture 

traditional one-on-one solicitation 

activity, in addition to solicitations for 

non-cash compensation. It will exclude 

certain information contained in a 

statutory or regulatory notice, filing, or 

other required communication.27

2. Definition of Advertisement: 

Communications Other Than 

Compensated Testimonials and 

Endorsements 

Proposed rule 206(4)–1(e)(1) would 

have defined an advertisement as any 

communication, disseminated by any 

means, by or on behalf of an investment 

adviser, that offers or promotes the 

investment adviser’s investment 

advisory services or that seeks to obtain 

or retain one or more investment 

advisory clients or private fund 

investors, subject to certain enumerated 

exclusions. Although some commenters 

supported the proposed definition,28

most commenters stated that it was 

overly broad.29 Some commenters stated 

that the proposed definition would chill 

adviser communications to existing 

investors, increase compliance burdens 

for advisers, and complicate 

communications with various third 

parties.30

After considering comments, we are 

making several modifications to hone 

the scope of the rule to the 

communications that have a greater risk 

of misleading investors, ease 

compliance burdens that commenters 

suggested would result from the 

proposed rule’s scope, and facilitate 

communications with existing investors. 

a. Specific Provisions 

In a textual (but not substantive) 

change from the proposal, the final rule 

will not include the phrase 

‘‘disseminated by any means’’ and 

instead will reference any direct or 

indirect communication the adviser 

makes. We believe these two 

formulations carry the same meaning, 

but understand from commenters that 

the phrase ‘‘direct or indirect’’ is more 

familiar to advisers. This reference to 

direct or indirect communications will 

replace the current advertising rule’s 

requirement that an advertisement be a 

‘‘written’’ communication or a notice or 

other announcement ‘‘by radio or 

television.’’ We are deleting references 

in the current advertising rule to 

specific types of communications to 

ensure that the final rule reflects 

modern communication methods, rather 

than the methods that were most 

common when the Commission adopted 

the current rule (e.g., newspapers, 

television, and radio). Commenters 

generally did not oppose omitting the 

current rule’s references to specific 

methods of communication and 

supported such modernization of the 

current rule.31

This revision will expand the scope of 

the current rule to encompass all offers 

of an investment adviser’s investment 

advisory services with regard to 

securities regardless of how they are 

disseminated, with the limited 

exceptions discussed below. An adviser 

may disseminate such communications 

through emails, text messages, instant 

messages, electronic presentations, 

videos, films, podcasts, digital audio or 

video files, blogs, billboards, and all 

manner of social media, as well as by 

paper, including in newspapers, 

magazines, and the mail. We recognize 

that electronic media (including social 

media and other internet 

communications) and mobile 

communications play a significant role 

in current advertising practices. We also 

believe this revision will help the 


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32See infra ‘‘Adoption and entanglement’’ 

section. 

33See proposed rule 206(4)–1(e)(1). 

34See, e.g., SIFMA AMG Comment Letter II; FSI 

Comment Letter; Comment Letter of the CFA 

Institute (Feb. 24, 2020) (‘‘CFA Institute Comment 

Letter’’); Comment Letter of ICE Data Pricing & 

Reference Data, LLC (Feb. 10, 2020) (‘‘ICE Comment 

Letter’’). 

35See, e.g., LinkedIn Comment Letter; Comment 

Letter of Resolute Investment Managers (Feb. 10, 

2020) (‘‘Resolute Comment Letter’’); IAA Comment 

Letter. 

36See, e.g., Comment Letter of the American 

Investment Council (Feb. 10, 2020) (‘‘AIC Comment 

Letter’’); Nesler Comment Letter; SIFMA AMG 

Comment Letter II; CFA Institute Comment Letter. 

37Section 208 of the Advisers Act states that ‘‘[i]t 

shall be unlawful for any person indirectly, or 

through or by any other person, to do any act or 

thing which it would be unlawful for such person 

to do directly . . .’’ See, e.g., In the Matter of 

Profitek, Inc., Release No. IA–1764 (Sept. 29, 1998) 

(settled order) (The Commission brought an 

enforcement action against an investment adviser, 

asserting that it directly or indirectly distributed 

materially false and misleading advertisements, 

including by submitting performance information 

in questionnaires submitted to online databases that 

were made available to subscribers nationwide and 

by providing misleading performance information 

to a newspaper that reported the performance in an 

article.). 

38See infra ‘‘Adoption and entanglement’’ 

section. 

39An adviser’s ‘‘related person’’ is defined in 

Form ADV’s Glossary of Terms as ‘‘[a]ny advisory 

affiliate and any person that is under common 

control with [the adviser’s] firm.’’ Italicized terms 

are defined in the Form ADV Glossary. See Form 

ADV Glossary. 

40However, the adviser will remain responsible 

for the accuracy of the marketing material provided 

to and disseminated by the third party even if the 

third party makes formatting changes that do not 

affect the content of that marketing material or 

prominence of particular disclosures therein. 

41See, e.g., AIC Comment Letter; Comment Letter 

of JG Advisory Services, LLC (Jan. 9, 2020) (‘‘JG 

Advisory Comment Letter’’). 

42 In this discussion, the acquiring fund adviser 

(or the adviser to, or sponsor of, a feeder fund in 

a master-feeder structure) generally would be 

treated as an intermediary and not as an investor 

in the underlying fund (or the master fund in a 

master-feeder structure). 

definition remain evergreen in the face 

of evolving technology and methods of 

communication. 

i. Any Direct or Indirect Communication 

an Investment Adviser Makes 

The first prong of the final marketing 

rule’s definition of ‘‘advertisement’’ 

includes an adviser’s direct or indirect 

communications. In addition to 

communicating directly with 

prospective investors, we understand 

that investment advisers often provide 

intermediaries, such as consultants, 

other advisers (e.g., in a fund-of-funds 

or feeder funds structure), and 

promoters, with advertisements for 

dissemination. Those advertisements 

are indirect communications because 

they are statements provided by the 

adviser for dissemination by a third 

party. This aspect of the definition also 

will capture certain communications 

distributed by an adviser that 

incorporate statements or other content 

prepared by a third party.32

The final rule text reflects a change 

from the proposal, which would have 

applied to any communications ‘‘by or 

on behalf of’’ an adviser.33 Commenters 

generally suggested that we remove the 

‘‘on behalf of’’ clause from the 

definition, citing concerns that advisers 

would not be able to collaborate with 

third parties to prepare and disseminate 

advertising materials and that it would 

stifle communications between advisers 

and certain third parties.34 Certain 

commenters requested safe harbors for 

communications with the press and 

removal of profane or illegal materials.35

Commenters also requested clarification 

on how the rule would apply to fundsof-funds, model providers, solicitors, 

and employee use of social media.36

We believe communications that 

investment advisers use to offer their 

advisory services have an equal 

potential to mislead—and should be 

subject to the rule—regardless of 

whether the adviser communicates 

directly or indirectly through a third 

party, such as a consultant, 

intermediary, or related person.37

Likewise, an adviser should not be able 

to avoid application of the rule when it 

incorporates third-party content into its 

communications.38 To address 

commenters’ concerns about the clarity 

of the standard, however, we replaced 

‘‘on behalf of’’ with ‘‘directly or 

indirectly.’’ Our view is that these 

phrases largely have the same meaning, 

but that ‘‘directly or indirectly’’ is more 

commonly used, broadly understood, 

and consistent with the language in the 

current rule. In addition, we believe that 

the phrase ‘‘direct or indirect 

communication an investment adviser 

makes’’ better focuses on an adviser’s 

participation in making a particular 

communication subject to the rule. 

Whether a particular communication 

is a communication made by the adviser 

is a facts and circumstances 

determination. Where the adviser has 

participated in the creation or 

dissemination of an advertisement, or 

where an adviser has authorized a 

communication, the communication 

would be a communication of the 

adviser. For example, if an adviser 

provides marketing material to a third 

party for dissemination to potential 

investors, the communication is a 

communication made by the adviser. In 

addition, we would generally view any 

advertisement about the adviser that is 

distributed and/or prepared by a related 

person as an indirect communication by 

the adviser, and thus subject to the final 

rule.39 Although the final marketing rule 

will not require an adviser to oversee all 

activities of a third party, the adviser is 

responsible for ensuring that its 

advertisements comply with the rule, 

regardless of who creates or 

disseminates them. 

An adviser might collaborate with a 

third party to prepare marketing 

materials in other circumstances that 

would not constitute dissemination by 

an adviser. If an adviser provides 

comments on a marketing piece, but a 

third party does not accept the adviser’s 

comments or the third party makes 

unauthorized modifications, the adviser 

will not be responsible for the third 

party’s subsequent modifications that 

were made independently of the adviser 

and that the adviser did not approve.40

This analysis would be based on the 

facts and circumstances. Formal 

authorization of dissemination, or lack 

thereof, by the adviser is not dispositive, 

although it would be considered part of 

the analysis. 

Commenters sought clarification on 

how the definition of ‘‘advertisement’’ 

would apply in the fund-of-funds and 

master-feeder contexts.41 If an adviser to 

an underlying fund provides marketing 

materials to the adviser of a fund-offunds (or a feeder fund) and the adviser 

to the fund-of-funds (or a feeder fund) 

provides those materials to investors, 

the underlying fund adviser would be 

responsible for the material it prepared 

or authorized for distribution.42 The 

underlying fund adviser would not be 

responsible for modifications the 

adviser of the fund-of-funds made to the 

underlying fund adviser’s original 

advertisement if the underlying fund 

adviser did not approve the adviser’s 

edits. Similarly, a third-party model 

provider would not be responsible for 

modifications the end-user adviser 

made to the third-party model used in 

an advertisement if done without the 

model provider’s involvement or 

authorization. 

Adoption and Entanglement 

Depending on the particular facts and 

circumstances, third-party information 

also may be attributable to an adviser 

under the first prong of the final rule. 

For example, an adviser may distribute 

information generated by a third party 

or a third party could include 

information about an adviser’s 

investment advisory services in the 

third party’s materials. In these 

scenarios, whether the third-party 

information is attributable to the adviser 


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43See Interpretive Guidance on the Use of 

Company websites, Release No. IC–28351 (Aug. 1, 

2008) [73 FR 45862 (Aug. 7, 2008)] (‘‘2008 Release’’) 

(‘‘[W]hether third-party information is attributable 

to a company depends upon whether the company 

has: (1) involved itself in the preparation of the 

information, or (2) explicitly or implicitly endorsed 

or approved the information.’’); Use of Electronic 

Media, Release No. 34–42728 (Apr. 28, 2000) [65 FR 

25843 (May 4, 2000)] (‘‘2000 Release’’) at nn.52, 54; 

Use of Electronic Media for Delivery Purposes, 

Release No. 34–36345 (Oct. 6, 1995) [60 FR 53458 

(Oct. 13, 1995)] (‘‘1995 Release’’). 

44See 2008 Release, supra footnote 43. 

45See, e.g., In the Matter of BB&T Securities, LLC, 

Release No. IA–4506 (Aug. 25, 2016) (settled order) 

(The Commission brought an enforcement action 

against an SEC-registered investment adviser 

alleging that it negligently relied on a third party’s 

materially inflated, and hypothetical and 

backtested, performance track record in preparing 

advertisements that the adviser sent to advisory 

clients and prospective clients.). 

46See infra section II.B. 

47See 2000 Release, supra footnote 43 

(‘‘[L]iability under the ‘entanglement’ theory would 

depend upon an issuer’s level of pre-publication 

involvement in the preparation of the 

information.’’). 

48For example, an adviser could not have a 

policy to remove only negative comments about the 

adviser. 49We previously stated that an adviser should 

consider the application of rule 206(4)–1, including 

the existing prohibition of testimonials, before 

including hyperlinks to third-party websites on its 

website or in its electronic communications. See 

2008 Release, supra footnote 43. 50Other content that offers or promotes the 

adviser’s services on an adviser’s own website or 

social media page would likely meet the definition 

of ‘‘advertisement’’ under the final rule. 

51See supra ‘‘Adoption and entanglement’’ 

section (discussing an adviser’s ability to edit thirdparty material based on objective criteria). 

52See, e.g., SIFMA AMG Comment Letter II; 

LinkedIn Comment Letter; IAA Comment Letter. We 

believe that our modifications to the first prong of 

the definition of advertisement also will alleviate 

commenters’ concerns as there are now fewer 

scenarios in which communications on employee 

social media accounts would meet the definition of 

advertisement. 

will require an analysis of the facts and 

circumstances to determine (i) whether 

the adviser has explicitly or implicitly 

endorsed or approved the information 

after its publication (adoption) or (ii) the 

extent to which the adviser has involved 

itself in the preparation of the 

information (entanglement).43

An adviser ‘‘adopts’’ third-party 

information when it explicitly or 

implicitly endorses or approves the 

information.44 For example, if an 

adviser incorporates information it 

receives from a third party into its 

performance advertising, the adviser has 

adopted the third-party content, and the 

third-party content will be attributed to 

the adviser.45 An adviser is liable for 

such third-party content under the 

marketing rule just as it would be liable 

for content it produced itself.46 In 

addition, an adviser may have 

‘‘entangled’’ itself in a third-party 

communication if the adviser involves 

itself in the third party’s preparation of 

the information.47

Nevertheless, we would not view an 

adviser’s edits to an existing third-party 

communication to result in attribution 

of that communication to the adviser if 

the adviser edits a third party’s 

communication based on preestablished, objective criteria (i.e., 

editing to remove profanity, defamatory 

or offensive statements, threatening 

language, materials that contain viruses 

or other harmful components, spam, 

unlawful content, or materials that 

infringe on intellectual property rights, 

or editing to correct a factual error) that 

are documented in the adviser’s policies 

and procedures and that are not 

designed to favor or disfavor the 

adviser.48 In these circumstances, we 

would not view the adviser as endorsing 

or approving the remaining content by 

virtue of such limited editing. 

Guidance on Social Media 

Questions about whether a 

communication is attributable to an 

adviser may commonly arise in the 

context of an adviser’s use of websites 

or other social media. For example, an 

adviser might include a hyperlink in an 

advertisement to an independent web 

page on which third-party content sits. 

An adviser should consider the 

adoption and entanglement concepts 

discussed above to determine whether 

the hyperlinked third-party content 

would be attributed to the adviser.49 At 

the same time, an adviser’s hyperlink to 

third-party content that the adviser 

knows or has reason to know contains 

an untrue statement of material fact or 

materially misleading information 

would also be fraudulent or deceptive 

under section 206 of the Act and other 

applicable anti-fraud provisions. 

Whether content posted by third 

parties on an adviser’s own website or 

social media page would be attributed to 

the investment adviser also depends on 

the facts and circumstances surrounding 

the adviser’s involvement.50 For 

example, permitting all third parties to 

post public commentary to the adviser’s 

website or social media page would not, 

by itself, render such content 

attributable to the adviser, so long as the 

adviser does not selectively delete or 

alter the comments or their presentation 

and is not involved in the preparation 

of the content.51 We believe such 

treatment of third-party content on the 

adviser’s own website or social media 

page is appropriate even if the adviser 

has the ability to influence the 

commentary but does not exercise this 

authority. For example, if the social 

media platform allows the investment 

adviser to sort the third-party content in 

such a way that more favorable content 

appears more prominently, but the 

investment adviser does not actually do 

such sorting, then the ability to sort 

content would not, by itself, render such 

content attributable to the adviser. In 

addition, if an adviser merely permits 

the use of ‘‘like,’’ ‘‘share,’’ or ‘‘endorse’’ 

features on a third-party website or 

social media platform, we would not 

interpret the adviser’s permission as 

implicating the final rule. 

Conversely, if the investment adviser 

takes affirmative steps to involve itself 

in the preparation or presentation of the 

comments, to endorse or approve the 

comments, or to edit posted comments, 

those comments would be attributed to 

the adviser. This would apply to the 

affirmative steps an adviser takes both 

on its own website or social media 

pages, as well as on third-party 

websites. For example, if an adviser 

substantively modifies the presentation 

of comments posted by others by 

deleting or suppressing negative 

comments or prioritizing the display of 

positive comments, then we would 

attribute the comments to the adviser 

(i.e., the communication would be an 

indirect statement of the adviser) 

because the adviser would have 

modified third-party comments with the 

goal of marketing its advisory business. 

However, as discussed above, we would 

not view an adviser’s merely editing 

profane, unlawful, or other such content 

according to a neutral pre-existing 

policy as the adviser adopting the 

content. 

Some commenters sought assurances 

that the definition of advertisement 

would not cover an adviser’s associated 

persons’ activity on their personal social 

media accounts.52 We have concerns 

that, under certain circumstances, it 

could be difficult for an investor to 

differentiate a communication of the 

associated person in his/her personal 

capacity from a communication the 

associated person made for the adviser. 

With respect to social media postings to 

associated persons’ own accounts, it 

would be a facts and circumstances 

analysis relating to the adviser’s 

supervision and compliance efforts. If 

the adviser adopts and implements 

policies and procedures reasonably 

designed to prevent the use of an 

associated person’s social media 

accounts for marketing the adviser’s 

advisory services, we generally would 

not view such communication as the 

adviser marketing its advisory 


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53An associated person who, notwithstanding 

these policies and procedures, engages in 

communications inconsistent with the rule may, 

depending on the facts and circumstances, be held 

responsible for violations of the rule. 

54See, e.g., IAA Comment Letter; AICPA 

Comment Letter. 

55See, e.g., Comment Letter of Commonwealth 

Financial Network (Feb. 10, 2020) 

(‘‘Commonwealth Comment Letter’’) (stating that 

the lack of complete overlap with FINRA rules 

would make compliance especially burdensome for 

dual registrants); Comment Letter of the National 

Regulatory Services (Feb. 10, 2020) (‘‘NRS 

Comment Letter’’). Commenters also noted that 

advisers have adopted long-standing practices in 

reliance on the existing exclusion of one-on-one 

communications. See, e.g., Comment Letter of the 

New York City Bar (Feb. 10, 2020) (‘‘NYC Bar 

Comment Letter’’). 

56See, e.g., IAA Comment Letter (stating that the 

proposed rule ‘‘would blur the line between client 

servicing and marketing’’); Wellington Comment 

Letter; Fidelity Comment Letter; MFA/AIMA 

Comment Letter I. 

57See, e.g., CFA Institute Comment Letter; 

Comment Letter of the Council of Institutional 

Investors (Feb. 11, 2020) (‘‘CII Comment Letter’’). 

58See, e.g., SIFMA AMG Comment Letter II. 59As discussed below, we also have eliminated 

the element of the proposed rule that would apply 

to communications to retain investors. 60See proposed rule 206(4)–1(e)(1)(ii). We 

proposed to exclude from the definition of 

‘‘advertisement’’ any communication by an 

investment adviser ‘‘that does no more than 

respond to an unsolicited request’’ for ‘‘information 

specified in such request about the investment 

adviser or its services’’ other than a communication 

to a retail person that includes performance results 

or a communication that includes hypothetical 

performance. 

61See, e.g., Wellington Comment Letter; MFA/ 

AIMA Comment Letter I; IAA Comment Letter. 

62See final rule 206(4)–1(e)(1)(i)(A)–(C). 

63See Prohibited Advertisements, Release No. 

IA–119 (Aug. 8, 1961) [26 FR 7552, 7553 (Nov. 15, 

1961)]. 

64 Id. 

65See, e.g., section 206 of the Act; rule 206(4)– 

8 under the Act. 

66See, e.g., MFA/AIMA Comment Letter I; IAA 

Comment Letter (stating that the Commission 

should ‘‘make clear in the adopting release that the 

same communication to multiple natural persons 

representing a single institution or client/account 

counts as a communication to a single person’’). 

67See, e.g., rule 30e–1(f) under the Investment 

Company Act. 

68See, e.g., IAA Comment Letter (suggesting the 

more than 25 person threshold because FINRA rule 

2210 uses this approach and stating that 

consistency would ease compliance burdens). 

69See, e.g., FPA Comment Letter. 

services.53 To achieve effective 

supervision and compliance, an adviser 

may consider also prohibiting such 

communications, conducting periodic 

training, obtaining attestations, and 

periodically reviewing content that is 

publicly available on associated 

persons’ social media accounts. 

ii. To More Than One Person 

Consistent with the current rule’s 

exclusion of one-on-one 

communications, the first prong of the 

final definition of ‘‘advertisement’’ 

generally does not include 

communications to one person. While 

our proposed rule would have treated 

communications directed to ‘‘one or 

more’’ persons as advertisements, 

commenters generally opposed this 

expansion.54 In particular, commenters 

argued that subjecting one-on-one 

communications to the requirements of 

the proposed rule would create 

untenable burdens given the proposed 

review and approval obligation 

(including enhanced recordkeeping 

requirements).55 Commenters also 

stated that it would chill adviser/ 

investor communications.56 According 

to commenters, scoping a one-on-one 

communication into the rule would 

require advisers to review each 

communication to determine whether it 

is an advertisement, which could 

prevent an adviser from providing 

timely information to investors and 

satisfying its fiduciary obligations.57 We 

received comments that 

communications to existing investors 

are already subject to the anti-fraud 

provisions of the Advisers Act, and 

therefore communications to existing 

investors need not be subject to the final 

rule.58

After considering the comments, we 

have determined to exclude one-on-one 

communications from the first prong of 

the definition and retain the ‘‘more than 

one’’ language in the current advertising 

rule, unless such communications 

include hypothetical performance 

information that is not provided: (i) In 

response to an unsolicited investor 

request or (ii) to a private fund investor. 

We have made this change to avoid the 

possibility that the rule would impede 

typical communications between 

advisers and their existing and 

prospective investors. An adviser might 

have been dis-incentivized to 

communicate regularly with its 

investors if it believed it would have to 

analyze every communication for 

compliance with the proposed rule.59

Because we are excluding one-on-one 

communications from the first prong of 

the definition of advertisement under 

most circumstances, we are modifying 

the proposed exclusion for an adviser’s 

responses to unsolicited requests.60

Although commenters generally 

supported the exclusion and 

recommended expanding it,61 we 

believe excluding most one-on-one 

communications addresses commenter 

concerns in a more comprehensive 

manner than the unsolicited request 

exclusion would have addressed them. 

The definition will exclude an adviser’s 

responses to an unsolicited investor 

request for hypothetical performance 

information, as well as hypothetical 

performance information provided to a 

private fund investor in a one-on-one 

communication, as discussed below. 

Unless subject to this or another 

exclusion, the definition of 

advertisement will capture 

communications that include 

hypothetical performance information 

even in a one-on-one communication.62

We also recognize that advisers have 

one-on-one interactions with 

prospective investors and that 

prospective investors may ask questions 

of an adviser or ask for additional 

information. In adopting the current 

advertising rule, the Commission 

limited the definition of 

‘‘advertisement’’ due to concerns that a 

broad definition could encompass even 

‘‘face to face conversations between an 

investment counsel and his prospective 

client.’’ 63 The Commission stated that it 

would not include a ‘‘personal 

conversation’’ with a client or 

prospective client.64 We believe that the 

same concerns that influenced the 

Commission’s prior approach continue 

to exist. We also believe that the 

remaining provisions of the definition, 

as well as other provisions of the 

Federal securities laws, are adequate to 

satisfy our investor protection goals 

with respect to communications 

directed only to a single individual or 

entity.65

The one-on-one exclusion in the 

definition’s first prong applies 

regardless of whether the adviser makes 

the communication to a natural person 

with an account or multiple natural 

persons representing a single entity or 

account.66 The exclusion applies to a 

single adviser and a single investor. For 

example, if an adviser’s prospective 

investor is an entity, the exclusion 

permits the adviser to provide 

communications to multiple natural 

persons employed by or owning the 

entity without those communications 

being subject to the rule. For purposes 

of this exclusion, we also interpret the 

term ‘‘person’’ to mean one or more 

investors that share the same household. 

For example, a communication to a 

married couple that shares the same 

household would qualify for the one-onone exclusion.67

Some commenters advocated that we 

increase the ‘‘more than one’’ threshold 

from the current rule to 

communications with ‘‘more than ten’’ 

or ‘‘more than 25’’ persons.68 They 

argued that such a change would reduce 

compliance costs and better align with 

traditional concepts of advertising.69 We 

decline to make this change. The 


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70See, e.g., NSCP Comment Letter. 

71The fact that there may be some similarities in 

the information provided in one-on-one 

communications, however, will not result in the 

application of the rule to those communications. 

72 In addition, the communication does not fall 

within the definition of advertisement because the 

purpose of the communication is not to offer 

services to a new investor or to provide new 

services to an existing investor. See infra section 

II.A.2.a.iv. 

73See Resolute Comment Letter (seeking 

clarification on the treatment of ‘‘account 

statements and similar reports intended for NonRetail Persons, such as public entities, that are 

required to make such information publicly 

available’’). If the entity is an existing investor of 

the adviser, communications to the entity would 

not be considered an advertisement unless the 

communications offer or promote new advisory 

products or services of the adviser. 

74See also supra section II.A.2.a.i for a discussion 

of an adviser’s direct or indirect communications. 

75See infra section II.E.6. These communications 

would be eligible for the exclusions from the 

definition of advertisement for extemporaneous, 

live, oral communications and regulatory notices in 

final rule 206(4)–1(e)(1)(i)(A) and (B). 

76See 2019 Proposing Release, supra footnote 7, 

at section II.A.2. (proposing that communications to 

any person that contain hypothetical performance 

would not qualify for the unsolicited request 

exclusion to the extent they contain such results); 

proposed rule 206(4)–1(e)(1)(ii)(B). 

77See IAA Comment Letter; ILPA Comment 

Letter. 78See IAA Comment Letter; Comment Letter of 

Managed Funds Association and Alternative 

Investment Management Association (Sept. 11, 

2020) (‘‘MFA/AIMA Comment Letter III’’). 79Any affirmative effort by the investment 

adviser intended or designed to induce an investor 

to request hypothetical performance information 

would render the request solicited and thus not 

eligible for this exclusion. 

exclusion from the first prong of the 

definition of advertisement for one-onone communications will allow an 

adviser to engage in routine investor 

communications and have personal 

conversations with prospective 

investors, without subjecting those 

communications to the final marketing 

rule’s requirements. However, we 

continue to believe that the final rule 

should cover typical marketing 

communications, even if sent to a 

limited number of persons. Creating a 

higher threshold, as suggested by 

commenters, may incentivize advisers 

to limit communications to just below 

the threshold number of persons, and 

may defeat the purposes of our final 

rule. 

While the first prong of the final rule 

will generally not apply to 

communications to one person, changes 

in technology since the adoption of the 

existing rule permit advisers to create 

communications that appear to be 

personalized to single investors and are 

‘‘addressed to’’ only one person, but are 

actually widely disseminated to 

multiple persons. While 

communications such as bulk emails or 

algorithm-based messages are nominally 

directed at or ‘‘addressed to’’ only one 

person, they are in fact widely 

disseminated to numerous investors and 

therefore would be subject to the final 

rule.70 Similarly, customizing a 

template presentation or mass mailing 

by filling in the name of an investor 

and/or including other basic 

information about the investor would 

not result in a one-on-one 

communication. 

Likewise, an adviser cannot use 

duplicate inserts in an otherwise 

customized communication in an effort 

to circumvent application of the rule.71

For example, if an adviser maintains a 

database of performance information 

inserts or tables that it uses in otherwise 

customized investor communications, 

the adviser must treat the duplicated 

inserts as advertisements subject to the 

rule. Of course, if the adviser provides 

an existing investor with performance 

information pertaining to the investor’s 

account, the rule would not apply 

because this is a one-on-one 

communication.72

One commenter expressed concern 

that the public dissemination of a 

seemingly one-on-one communication 

could subject the communication to the 

final rule.73 We believe that if, for 

example, an adviser responds to a 

request for proposal (‘‘RFP’’) from an 

entity and the entity subsequently 

makes such responses available to the 

public pursuant to a Freedom of 

Information Act request or other public 

disclosure requirements, this would not 

be an advertisement merely by virtue of 

the entity’s disclosure.74 An adviser 

should consider adopting compliance 

policies and procedures that are 

reasonably designed to determine 

whether a communication nominally 

directed to a single person is actually a 

communication to more than one 

person, or contains duplicated inserts as 

part of that communication. In these 

circumstances, the duplicated 

information is an advertisement because 

it is sent to more than one person and 

would not qualify for the exclusion. 

Because of the specific concerns 

raised by hypothetical performance, 

hypothetical performance information 

would not qualify for the one-on-one 

exclusion unless provided in response 

to an unsolicited investor request or to 

a private fund investor.75 Hypothetical 

performance included in all other oneon-one communications that offer 

investment advisory services with 

regard to securities must be presented in 

accordance with the requirements 

discussed below. 

We proposed a similar approach for 

hypothetical performance provided in 

response to an unsolicited request under 

the proposed definition of 

advertisement.76 Some commenters 

suggested that the Commission permit 

an adviser to provide hypothetical 

performance in response to unsolicited 

requests to eliminate the need to assess 

the requirements related to hypothetical 

performance.77 These commenters 

stated that the need to assess these 

requirements would slow down the flow 

of information to investors, require 

investors to provide more information 

earlier in the diligence process, or limit 

the hypothetical performance 

information shared in response to such 

an unsolicited request. Some 

commenters stated that private fund 

investors often seek hypothetical 

performance information, particularly 

targets and projections, to evaluate 

private fund investments.78 After 

considering these comments, we believe 

that, in most circumstances, the 

protections for hypothetical 

performance should be available to 

investors receiving communications that 

include offers of investment advisory 

services with regard to securities, to the 

extent such offers include hypothetical 

performance information. We believe 

our modifications to the first prong of 

the definition of advertisement and to 

the requirements for presenting 

hypothetical performance, discussed 

below, will reduce the associated 

compliance burdens for providing 

hypothetical performance information 

to investors and will, therefore, alleviate 

some of commenters’ concerns. 

However, where an investor 

affirmatively seeks hypothetical 

performance information from an 

investment adviser and the investment 

adviser has not directly or indirectly 

solicited the request, hypothetical 

performance information provided in 

response to the request will be excluded 

from the definition of advertisement 

under the final rule.79 In the case of an 

unsolicited request, an investor seeks 

hypothetical performance information 

for the investor’s own purposes, rather 

than responding to a communication 

disseminated by an adviser offering its 

investment advisory services with 

regard to securities. Similarly, where the 

hypothetical performance information is 

provided in a one-on-one 

communication to a private fund 

investor, we believe a private fund 

investor will have the ability and 

opportunity to ask questions and assess 

the limitations of this information. In 

these limited circumstances, we do not 

believe it is necessary to treat the 

hypothetical performance information 


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80The hypothetical performance information 

would be subject to the Advisers Act’s anti-fraud 

provisions and rule 206(4)–8 under the Advisers 

Act. 

81See proposed rule 206(4)–1(e)(1). 

82See, e.g., MFA/AIMA Comment Letter I; 

Comment Letter of Association for Corporate 

Growth (Feb. 10, 2020) (‘‘ACG Comment Letter’’). 

83Under the current advertising rule, an 

‘‘advertisement’’ includes any written 

communication addressed to more than one person, 

or any notice or other announcement in any 

publication or by radio or television, which offers 

‘‘any other investment advisory service with regard 

to securities.’’ See current rule 206(4)–1. 

84See 2019 Proposing Release, supra footnote 7, 

at section II.A.2. 

85See SIFMA AMG Comment Letter II; FSI 

Comment Letter. 

86See SEC v. C.R. Richmond & Co., 565 F.2d 

1101, 1105 (9th Cir. 1977) (‘‘Investment advisory 

material which promotes advisory services for the 

purpose of inducing potential clients to subscribe 

to those services is advertising material within [the 

current rule].’’). 

87See NYC Bar Comment Letter; ACG Comment 

Letter. 

88See section 206 of the Act; rule 206(4)–8 under 

the Act. See also Commission Interpretation 

Regarding Standard of Conduct for Investment 

Advisers, Release No. IA–5248 (June 5, 2019) [84 FR 

33669 (July 12, 2019)] (‘‘Fiduciary Interpretation’’) 

(stating that ‘‘[t]he investment adviser’s fiduciary 

duty is broad and applies to the entire adviserclient relationship.’’), at n.17 (citing SEC v. Lauer, 

2008 WL 4372896, at 24 (S.D. Fla. Sept. 24, 2008) 

‘‘ ‘Section 206 of the Advisers Act does not require 

that the activity be ‘in the offer or sale of any’ 

security or ‘in connection with the purchase or sale 

of any security.’ ’ ’’). 

89As discussed below, the definition of 

advertisement in the final rule also will not include 

communications designed to ‘‘retain’’ investors. See 

infra section II.A.2.a.iv. 

90See, e.g., Wellington Comment Letter; IAA 

Comment Letter; JG Advisory Comment Letter 

(stating that ‘‘the rule should treat communications 

to existing investors differently from 

communications to prospective investors’’). 

91See, e.g., SIFMA AMG Comment Letter II 

(discussing market commentary, investment 

outlooks, performance reviews); JG Advisory 

Comment Letter (seeking clarification on whether 

the proposed definition would scope in monthly or 

quarterly letters to existing investors where such 

letters discuss account performance and include 

market commentary). 

92See, e.g., MFA/AIMA Comment Letter I. 

93See, e.g., MMI Comment Letter. 

94See, e.g., Wellington Comment Letter; IAA 

Comment Letter; Pickard Djinis Comment Letter. 

95Our staff has indicated that it would not 

recommend enforcement action under the current 

rule with respect to written communications by an 

adviser to an existing investor about the 

performance of securities in the investor’s account 

because such communications would not be 

‘‘offers’’ of advisory services, and instead are ‘‘part 

of’’ those advisory services (unless the context in 

which the communication is provided suggests 

otherwise). See Investment Counsel Association of 

America, Inc., SEC Staff No-Action Letter (Mar. 1, 

2004) (‘‘ICAA Letter’’). Any staff guidance or noaction letters discussed in this release represent the 

views of the staff of the Division of Investment 

Management. They are not a rule, regulation, or 

statement of the Commission. Furthermore, the 

Commission has neither approved nor disapproved 

their content. Staff guidance has no legal force or 

effect; it does not alter or amend applicable law, 

and it creates no new or additional obligations for 

any person. 

as an advertisement subject to the 

rule.80

iii. Offers Investment Advisory Services 

With Regard to Securities to Prospective 

Clients or Investors in a Private Fund 

Advised by the Investment Adviser 

The marketing rule’s definition of 

‘‘advertisement’’ includes 

communications that offer the 

investment adviser’s investment 

advisory services. As discussed in more 

detail below, we are implementing a 

number of changes from the proposal, 

which would have defined 

advertisements to include 

communications that offer or promote 

the investment adviser’s investment 

advisory services or that seek to obtain 

or retain one or more investment 

advisory clients or investors in any 

pooled investment vehicle advised by 

the investment adviser.81 First, we are 

limiting the application of this element 

of the definition to communications 

directed to prospective clients or 

prospective private fund investors, 

rather than existing clients or private 

fund investors to avoid an overbroad 

application of the rule. Accordingly, 

this aspect of the final rule will retain 

the current rule’s scope. 

Second, we also are not adopting the 

‘‘or promote’’ wording from the 

proposed definition of advertisement. 

Commenters generally opposed 

including the term ‘‘promote,’’ 

suggesting that this term could expand 

the definition of ‘‘advertisement’’ to 

cover certain materials not subject to the 

current rule,82 the text of which is 

limited to communications that ‘‘offer’’ 

advisory services.83 As we indicated in 

the proposal, the ‘‘offer or promote’’ 

clause reflects the current rule’s 

application and was designed to capture 

communications that are commonly 

considered advertisements.84 We added 

the ‘‘or promote’’ wording to the 

proposed definition for clarity, but after 

considering comments we realize this 

wording may instead cause confusion. 

For example, commenters sought 

clarification that statements about an 

advisory firm’s culture, philanthropy, or 

community activity would not fall 

within the definition of 

advertisement.85 We did not intend for 

our proposed definition and the 

inclusion of the term ‘‘promote’’ to 

include such communications. 

Accordingly, the final rule will not 

include the term ‘‘promote’’ as it is our 

intent to retain the current rule’s scope 

in this respect.86

Third, consistent with the current 

rule, we are limiting the application of 

the definition to offers about an 

investment adviser’s investment 

advisory services with regard to 

securities. We were persuaded by 

commenters who urged us to retain the 

current rule’s scope, arguing that 

expanding the definition to cover 

services that are not related to securities 

could result in an overbroad application 

of the rule.87 Importantly, however, the 

anti-fraud provisions of the Act and 

related rules continue to apply to an 

adviser’s advertisements and other 

communications about its other nonsecurities related services.88

Finally, the definition will not 

include communications that seek to 

obtain one or more investment advisory 

clients or investors in any pooled 

investment vehicle advised by the 

investment adviser. We determined that 

this clause was superfluous of the rest 

of the definition; we believe these 

communications are captured within an 

adviser’s offer of investment advisory 

services with regard to securities to 

prospective investors in a private fund 

advised by the adviser.89

iv. Offers New Investment Advisory 

Services With Regard to Securities to 

Current Clients or Investors in a Private 

Fund Advised by the Investment 

Adviser 

The proposed definition of 

‘‘advertisement’’ included 

communications that seek ‘‘to obtain or 

retain’’ investors. Commenters generally 

stated that the ‘‘or retain’’ clause would 

unnecessarily include communications 

made in the ordinary course of an 

adviser providing services to current 

investors as all communications with 

current investors are, at least in part, 

designed to both service and retain 

investors.90

Several commenters asked us to 

confirm the scope of the definition as 

applied to communications with 

existing investors.91 For example, some 

commenters suggested an exclusion for 

all communications with existing 

investors,92 while others supported a 

more limited exclusion for routine 

investor communications.93

Commenters generally agreed that the 

rule should treat communications with 

existing investors that offer new or 

additional advisory services as 

advertisements.94 Commenters that 

supported a complete or partial 

exclusion for communications to 

existing investors stated that such 

communications are part of the advisory 

service and not advertisements.95


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96See, e.g., section 206 of the Advisers Act; rule 

206(4)–8 under the Advisers Act. 

97See Fiduciary Interpretation, supra footnote 88. 

See also IAA Comment Letter; Pickard Djinis 

Comment Letter. 

98Their exclusion from the definition of 

advertisement will not prevent these account 

statements or transaction reports from being subject 

to the other provisions of the Federal securities 

laws, including section 17(a) of the Securities Act 

or section 10(b) of the Exchange Act (and rule 

10b–5 thereunder), to the extent those provisions 

would otherwise apply. Likewise, regardless of 

whether a communication to an existing or 

prospective investor is an ‘‘advertisement’’ under 

the marketing rule, the communication is subject to 

the anti-fraud provisions of section 206 of the Act 

and the aforementioned provisions of the Federal 

securities laws. 

99See, e.g., SIFMA AMG Comment Letter II; JG 

Advisory Comment Letter; MMI Comment Letter; 

IAA Comment Letter; MFA/AIMA Comment Letter 

I. 

100See SIFMA AMG Comment Letter II. 

101See, e.g., SIFMA AMG Comment Letter II; 

Mercer Comment Letter; IAA Comment Letter; 

Wellington Comment Letter. 

102See, e.g., MMI Comment Letter (emphasizing 

the importance of allowing general market 

commentary to provide investors with the tools to 

challenge the assumptions of those who counsel 

them on financial management). 

103As discussed above, the rule also excludes 

from the first prong of the advertisement definition 

a communication that includes hypothetical 

performance that is provided in response to an 

unsolicited investor request for such information or 

to a private fund investor in a one-on-one 

communication. See final rule 206(4)– 

1(e)(1)(i)(C)(1) and (2). 

104See, e.g., MFA/AIMA Comment Letter I; AIC 

Comment Letter (stating that ‘‘written materials 

prepared in conjunction with any live oral 

communications should not be considered 

‘advertisements’ and should be able to rely on the 

exclusion if (i) they are in draft form, (ii) they are 

internal documents not created for distribution, or 

(iii) all or portions of their content may not be 

provided to any prospective or current investor.’’). 

105See SIFMA AMG Comment Letter II (arguing 

that it is not clear how to define communications 

that are broadcast and widely disseminated versus 

those that are not); AIC Comment Letter. 

106See, e.g., NASAA Comment Letter; CFA 

Comment Letter; ILPA Comment Letter. 

We agree that the rule should treat 

only those communications that offer 

new or additional advisory services 

with regard to securities to current 

investors as advertisements because 

they raise the same concerns as other 

advertisements. Our intent is not to chill 

ordinary course communications with 

current investors. We believe that other 

protections prevent advisers from 

engaging in activities that mislead or 

deceive existing investors.96 For 

example, existing and prospective 

advisory clients receive the anti-fraud 

protections of the Advisers Act and an 

adviser’s fiduciary duty.97 Accordingly, 

under the final rule a communication to 

a current investor is an advertisement 

when it offers new or additional 

investment advisory services with 

regard to securities. We believe that this 

modification will allow advisers to 

continue to provide current investors 

with timely information regarding their 

accounts and the market without 

subjecting those communications to the 

marketing rule.98

In summary, we view an adviser 

seeking to offer new or additional 

investment advisory services with 

regard to securities to current investors 

as posing the same risks to investors as 

an adviser seeking to offer such services 

to new investors and therefore we 

believe this activity warrants the same 

treatment under the final marketing 

rule. 

v. Brand Content, General Educational 

Material, and Market Commentary 

Other commenters asked us to 

confirm that brand content, general 

educational material, and market 

commentary are not advertisements 

under the rule.99 Whether a 

communication is an advertisement 

depends on the facts and circumstances 

(e.g., whether the communication 

‘‘offers’’ the adviser’s investment 

advisory services with regard to 

securities). Generally, generic brand 

content, educational material, and 

market commentary would not meet the 

revised definition of an advertisement. 

Brand content. Determining whether a 

communication including ‘‘brand’’ 

content (e.g., displays of the advisory 

firm name in connection with 

sponsoring sporting events, supporting 

community service activities, or 

supporting philanthropic efforts) is an 

advertisement would depend on the 

facts and circumstances.100 If such a 

communication is designed to raise the 

profile of the adviser generally, but does 

not offer any investment advisory 

services with regard to securities, the 

communication would not fall within 

the definition of an advertisement under 

the rule. For example, a communication 

that simply notes that an event is 

‘‘brought to you by XYZ Advisers’’ 

would not qualify as an advertisement, 

as it is not offering any advisory services 

with regard to securities. 

General educational information and 

market commentary. We believe that the 

same analysis applies for 

communications that provide only 

general educational information and 

market commentary.101 Educational 

communications that are limited to 

providing general information about 

investing, such as information about 

types of investment vehicles, asset 

classes, strategies, certain geographic 

regions, or commercial sectors, do not 

constitute offers of an adviser’s 

investment advisory services with 

regard to securities. 

Similarly, materials that provide an 

adviser’s general market commentary 

(including during press interviews) are 

unlikely to offer advisory services with 

regard to securities. Market commentary 

aims to inform current and prospective 

investors, including private fund 

investors, of market and regulatory 

developments in the broader financial 

ecosystem. These materials also help 

current investors interpret market and 

regulatory shifts by providing context 

when reviewing investments in their 

portfolios, and educate investors.102 In 

contrast, for example, we would view an 

article or white paper that provides 

general market commentary and 

concludes with a description of how the 

adviser’s securities-related services can 

help prospective investors invest in the 

market as offering the adviser’s services. 

Accordingly, that portion of the white 

paper would be an advertisement. 

b. Exclusions 

The rule will generally exclude two 

types of communications from the first 

prong of the definition of advertisement: 

(i) Extemporaneous, live, oral 

communications; and (ii) information 

required by statute or regulation.103

i. Extemporaneous, Live, Oral 

Communications 

In a change from the proposal, the 

definition of advertisement will not 

include extemporaneous, live, oral 

communications, regardless of whether 

they are broadcast and regardless of 

whether they take place in a one-on-one 

context and involve discussion of 

hypothetical performance. We proposed 

an exclusion for live, oral 

communications that are not broadcast 

on radio, television, the internet, or any 

other similar medium. Commenters 

generally supported the exclusion, but 

had questions about certain aspects. For 

example, some commenters expressed 

concern about the treatment of written 

materials that accompany or are used to 

prepare for oral presentations, stating 

that treating such materials as 

advertisements would hamper an 

adviser’s ability to prepare for a 

presentation.104 Other commenters 

questioned the scope of the exclusion, 

with some arguing that it was too 

narrow 105 and others arguing that it was 

too broad.106

The goal of the exclusion for live, oral 

communications was to avoid treating 

extemporaneous statements as 

advertisements, in light of the 

difficulties in ensuring that they comply 

with the requirements of the rule, and 

to avoid chilling adviser 

communications with investors. If 


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107A communication need not be in-person to 

qualify for the exclusion so long as it is live and 

oral. For example, a phone call or live video 

communication between an adviser and an investor 

could qualify for this exclusion. 

108As discussed in the recordkeeping section 

below, a live, oral communication by an adviser 

that is not extemporaneous (but that otherwise 

satisfies the definition of advertisement) would be 

an advertisement and a record of the advertisement 

must be maintained pursuant to rule 204– 

2(a)(11)(i)(A). The record of the advertisement 

could be a copy of the prepared remarks, other 

written preparatory materials, or a recording of the 

oral communication. 

109See, e.g., AIC Comment Letter (stating that live 

written communications (e.g., live text chats) 

should also qualify for the exclusion in order to 

reflect modern communication methods). 

110We consider a communication to still be 

‘‘oral’’ even if closed captioning is used, but not if 

the oral communication is transcribed and the 

transcription is then directly or indirectly 

redistributed by the adviser. See, e.g., Mercer 

Comment Letter (seeking clarification that closed 

captioning would not prevent a communication 

from qualifying for the exclusion). 

111See, e.g., SIFMA AMG Comment Letter II; 

Fidelity Comment Letter. 112See, e.g., Fidelity Comment Letter (noting that 

(i) advisers may use various forms of technology to 

communicate with clients, including web chats or 

videos and (ii) further limiting the exclusion 

‘‘would capture routine communications between 

advisers and their clients merely because of the 

medium in which they are being conducted.’’); 

SIFMA AMG Comment Letter II (arguing that it is 

not clear how to define communications that are 

broadcast and widely disseminated versus those 

that are not). 

113See, e.g., SIFMA AMG Comment Letter II; 

Consumer Federation Comment Letter. 

114See, e.g., SIFMA AMG Comment Letter II; 

Fidelity Comment Letter. 

115Final rule 206(4)–1(e)(1)(i)(B). As with the 

exclusion for extemporaneous, live, oral 

communications, the exclusion for regulatory 

notices will apply regardless of whether the notice 

includes a discussion of hypothetical performance. 

116Proposed rule 206(4)–1(e)(1)(iv). 

117See, e.g., Mercer Comment Letter; NRS 

Comment Letter. 

118See, e.g., Comment Letter of Ropes & Gray LLP 

(Feb. 10, 2020) (‘‘Ropes & Gray Comment Letter’’); 

(noting that the proposal raises questions as to what 

information is required in Commission filings, 

especially for publicly traded advisers); Comment 

Letter of BlackRock, Inc. (Feb. 10, 2020) 

(‘‘BlackRock Comment Letter’’) (same); SIFMA 

AMG Comment Letter II (noting that advisers are 

already subject to legal duties and potential liability 

for information included in regulatory filings 

making it unlikely that advisers would include 

excess information in such filings). 

119See final rule 206(4)–1(e)(1)(i)(B). 

120See Form CRS Relationship Summary; 

Amendments to Form ADV, Release No. IA–5247 

(June 5, 2019) [88 FR 33573 (July 12, 2019)] (‘‘Form 

remarks are extemporaneous, they 

cannot be simultaneously monitored for 

regulatory compliance, and to require 

otherwise may simply cause advisers to 

cease extemporaneous speech to the 

overall detriment of investors. However, 

we believe that communications 

prepared in advance can and should be 

subject to the rule. Accordingly, the 

final exclusion will apply only to 

extemporaneous, live, oral 

communications.107

Extemporaneous communications do 

not include prepared remarks or 

speeches, such as those delivered from 

scripts.108 In addition, slides or other 

written materials that are distributed or 

presented to the audience would also be 

included as advertisements if they 

otherwise meet the definition. On the 

other hand, live, extemporaneous, oral 

discussions with a group of investors or 

interviews with the press that are not 

based on prepared remarks will be 

eligible for the exclusion. This approach 

aligns with the purpose of the 

exclusion, which is to avoid a chilling 

effect on extemporaneous, oral speech 

that might occur if such 

communications were required to 

comply with the requirements of the 

final rule. 

Some commenters recommended that 

we further expand the exclusion to 

apply to certain written 

communications.109 While we 

appreciate that other modern 

communication methods facilitate 

instantaneous written conversations 

(e.g., text messages, chat), this exclusion 

is limited to extemporaneous, live, oral 

communications, because in those 

circumstances a speaker often does not 

have sufficient time to edit and reflect 

on the content of the communication.110

Some commenters suggested that we 

exclude all broadcast communications 

and adopt an approach similar to 

FINRA.111 Commenters also sought 

guidance on the meaning of the 

following terms: ‘‘broadcast’’ 112 and 

‘‘widely disseminated.’’ 113 In response 

to commenters’ concerns, we are not 

adopting the requirement that the live, 

oral communication is ‘‘not broadcast.’’ 

We believe the concerns that prompted 

this exclusion apply equally to 

extemporaneous, live, oral 

communications regardless of whether 

they are broadcast. We also believe that 

the exclusion should not allow an 

adviser to avoid application of the rule 

for a previously prepared live, oral 

communication in a non-broadcast 

setting, such as a luncheon seminar 

designed to attract new investors. In 

addition, commenters raised a variety of 

concerns with identifying whether a 

communication is broadcast in light of 

modern media tools, suggesting that line 

drawing as to when a communication is 

broadcast may be challenging in 

practice.114 As a result, the exclusion 

will apply to a broadcast 

communication, such as a webcast, that 

is an extemporaneous, live, oral 

communication. 

The exclusion will apply to ‘‘live’’ 

oral communications, as proposed. 

Accordingly, previously recorded oral 

communications disseminated by the 

adviser would not qualify as live 

because the adviser had time to review 

and edit the recording before such 

dissemination and thus can ensure 

compliance with the marketing rule. In 

these circumstances, an adviser would 

need to treat its subsequent 

dissemination of the recording as an 

advertisement under the rule if the 

recording offers the adviser’s investment 

advisory services with regard to 

securities. However, we believe that an 

oral communication would be ‘‘live’’ 

even if there is a time lag (e.g., 

streaming delay), a translation program 

is used, or adaptive technology is used 

to create a personal transcription (e.g., 

voice to text technology or other tools 

that assist the deaf, hard-of-hearing, or 

hearing loss communities). 

ii. Information Contained in a Statutory 

or Regulatory Notice, Filing, or Other 

Required Communication 

The final rule excludes from the 

definition of advertisement 

‘‘[i]nformation contained in a statutory 

or regulatory notice, filing, or other 

required communication, provided that 

such information is reasonably designed 

to satisfy the requirements of such 

notice, filing, or other required 

communication.’’ 115 In response to 

commenters, we have broadened the 

proposed exclusion, which would have 

applied to ‘‘[a]ny information required 

to be contained in a statutory or 

regulatory notice, filing, or other 

communication.’’ 116 Commenters 

generally supported the proposed 

exclusion,117 but recommended we 

expand it to ease compliance burdens 

and avoid duplicative regulation that 

would have resulted from applying 

another layer of review to mandatory 

filings.118

Specifically, commenters stated that 

compliance personnel would have 

difficulty determining exactly which 

information contained in a regulatory 

filing is strictly and explicitly required 

by applicable law versus which 

information is not (and would therefore 

be subject to the rule). In response to 

these comments, we broadened the 

exclusion to cover information in a 

statutory or regulatory, notice, filing or 

other required communication, 

provided the information is reasonably 

designed to satisfy the requirements, 

rather than information required to be 

contained in such a communication.119

For example, information reasonably 

designed to satisfy the requirements of 

Form ADV Part 2 or Form CRS will not 

be an advertisement.120


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CRS Adopting Release’’) (noting that the 

relationship summary is designed to serve as 

disclosure, rather than marketing material). 

121However, information that is required to be 

provided or offered by the final rule will not qualify 

for this exclusion. For example, final rule 206(4)– 

1(d)(2) requires an adviser to provide performance 

results over one-, five-, and ten-year periods. This 

information is part of the advertisement and subject 

to the rule. 

122Final rule 206(4)–1(e)(1)(ii). 

123See id. The definition of advertisement’s 

second prong includes a testimonial or 

endorsement for which an adviser directly or 

indirectly provides de minimis compensation (as 

defined below). However, these types of 

testimonials and endorsements will be exempt from 

some of the final rule’s prescribed conditions for 

testimonials and endorsements. See infra section 

II.C.5. 

124Final rule 206(4)–1(e)(17)(i). We proposed to 

define ‘‘testimonial’’ as ‘‘any statement of a client’s 

or investor’s experience with the investment 

adviser or its advisory affiliates, as defined in the 

Form ADV Glossary of Terms.’’ See proposed rule 

206(4)–1(e)(15). 

125Final rule 206(4)–1(e)(5)(i). We proposed to 

define ‘‘endorsement’’ as ‘‘any statement by a 

person other than a client or investor indicating 

approval, support, or recommendation of the 

investment adviser or its advisory affiliates, as 

defined in the Form ADV Glossary of Terms.’’ See 

proposed rule 206(4)–1(e)(2). To align the 

definitions of testimonial and endorsement better, 

and address situations where an endorser who is 

not a client nevertheless provides statements about 

the endorser’s experience with the adviser, the final 

definition of endorsement includes any statement 

made by a non-investor that describes the 

endorser’s experience with the adviser or its 

supervised persons, like under the definition of 

testimonial. 

126Final rule 206(4)–1(e)(5)(i) and (17)(i). Under 

the final rule, supervised person has the same 

meaning as in section 2(a)(25) of the Act. Final rule 

206(4)–1(e)(16). See also proposed rule 206(4)– 

1(e)(2) and (15) (referring to advisory affiliates). 

127See Pickard Djinis Comment Letter. 

128See Comment Letter of William A. Jacobson, 

Esq., Clinical Professor of Law, Cornell Law School, 

and Director, Cornell Securities Law Clinic (Feb. 3, 

2020) (‘‘Prof. Jacobson Comment Letter’’). 

129See SIFMA AMG Comment Letter II. 

130Complete or partial client lists that do no more 

than identify certain of the adviser’s clients or 

private fund investors will not be treated as 

testimonials. See also 2019 Proposing Release, 

supra footnote 7, at 78. 

131See Dan Gallagher, Staff No-Action Letter 

(pub. avail. July 10, 1995) (stating that the staff 

could not assure that it would not recommend 

enforcement action for a violation of rule 206(4)– 

1 if the letter writer used client testimonials 

describing its character and skills in relation to 

matters other than the letter writer’s role as an 

investment adviser). See also Guidance on the 

Testimonial Rule and Social Media, Division of 

Investment Management Guidance Update No. 

2014–04 (Mar. 2014) (‘‘IM Staff Social Media 

Guidance’’) (withdrawing staff position in the 

Gallagher Staff No-Action Letter). See infra section 

II.J. 

132Final rule 206(4)–1(e)(5)(ii) and (iii), and 

(e)(17)(ii) and (iii). See also proposed rule 206(4)– 

3(c)(4) (proposing to define ‘‘solicitor’’ as ‘‘any 

person who, directly or indirectly, solicits any 

client or private fund investor for, or refers any 

client or private fund investor to, an investment 

adviser’’). Both the proposal’s definition of 

‘‘solicitor’’ and the final rule’s inclusion of 

solicitation and referral activities are drawn from 

the current cash solicitation rule’s definition of 

‘‘solicitor,’’ with the exception that the current rule 

does not apply to solicitation of private fund 

investors. See rule 206(4)–3(d)(1). 

This exclusion will apply to 

information that an adviser provides to 

an investor under any statute or 

regulation under Federal or state law, 

including rules promulgated by 

regulatory agencies. We generally do not 

believe that communications that are 

prepared as a requirement of statutes, 

rules, or regulations should be viewed 

as advertisements under the final 

rule.121 However, if an adviser includes 

in such a communication information 

that is not reasonably designed to satisfy 

its obligations under applicable law, 

and such additional information offers 

the adviser’s investment advisory 

services with regard to securities, then 

that information will be considered an 

‘‘advertisement’’ for purposes of the 

rule. 

3. Definition of Advertisement: 

Compensated Testimonials and 

Endorsements, Including Solicitations 

To reflect the merger of the two rules, 

the final rule’s definition of 

‘‘advertisement’’ includes a new second 

prong that applies to ‘‘any endorsement 

or testimonial for which an investment 

adviser provides compensation, directly 

or indirectly’’ subject to an exclusion for 

certain regulatory notices, filings, and 

other required communications.122 A 

compensated testimonial or 

endorsement will meet the definition of 

advertisement’s second prong regardless 

of whether the communication is made 

orally or in writing, to one or more 

persons.123 By contrast, an 

uncompensated testimonial or 

endorsement would have to meet the 

elements of prong one in order to be 

considered an ‘‘advertisement.’’ 

a. Definitions of Testimonial and 

Endorsement 

The final definition of testimonial 

includes any statement by a current 

client or private fund investor about the 

client’s or private fund investor’s 

experience with the investment adviser 

or its supervised persons.124 The 

definition of endorsement includes any 

statement by a person other than a 

current client or private fund investor 

that indicates approval, support, or 

recommendation of the investment 

adviser or its supervised persons or 

describes that person’s experience with 

the investment adviser or its supervised 

persons.125 This scope of how these 

activities are defined is similar to the 

proposal, with a few changes described 

below, including adding solicitation and 

referral activities drawn from the 

proposed definition of solicitor. 

These definitions include statements 

about the adviser’s ‘‘supervised 

persons,’’ rather than the proposed 

inclusion of statements about the 

adviser’s ‘‘advisory affiliates.’’ 126 One 

commenter recommended this change, 

stating that an endorsement or 

testimonial regarding a supervised 

person is more likely to provide relevant 

information to an investor than a 

statement about an adviser’s advisory 

affiliate.127

We received a variety of comments 

about the statements these definitions 

would capture. One commenter 

supported a broad approach that would 

include statements about an adviser’s 

traits, such as trustworthiness, to reflect 

the commenter’s belief that prospective 

clients typically select an adviser based 

on emotion.128 Another commenter 

requested that we limit the definitions 

to include only statements that 

explicitly discuss the adviser’s services 

or capabilities as an adviser.129

Under the final marketing rule, 

testimonials and endorsements will 

include opinions or statements by 

persons about the investment advisory 

expertise or capabilities of the adviser or 

its supervised persons.130 Testimonials 

and endorsements also include 

statements in an advertisement about an 

adviser or its supervised person’s 

qualities (e.g., trustworthiness, 

diligence, or judgment) or expertise or 

capabilities in other contexts, when the 

statements suggest that the qualities, 

capabilities, or expertise are relevant to 

the advertised investment advisory 

services. We believe that an investor 

would likely perceive these statements 

as relevant to the adviser’s investment 

advisory services.131

The definitions of testimonial and 

endorsement under the final rule also 

include solicitation and referral 

activities drawn from the proposed 

definition of solicitor.132 After 

considering comments on the 

overlapping scope of testimonials, 

endorsements, and solicitations under 

the proposed advertising and 

solicitation rules, we are adding 

solicitation activities to the definitions 

of testimonial and endorsement. The 

definition of testimonial includes any 

statement by a current client or private 

fund investor that directly or indirectly 

solicits any investor to be the adviser’s 

client or a private fund investor, or 

refers any investor to be the adviser’s 

client or a private fund investor. The 

definition of endorsement includes any 

such statements by a person other than 

a current client or private fund investor. 

This change will address compensated 


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133See 2019 Proposing Release, supra footnote 7, 

at section II.A.4 and II.B.2 and text accompanying 

n.172. 

134See id. at n.372. The proposed solicitation rule 

would have applied to an adviser’s direct and 

indirect compensation to a solicitor for any 

solicitation activities. See proposed rule 206(4)– 

3(a). The current cash solicitation rule also covers 

direct and indirect cash compensation. See rule 

206(4)–3(a). Similarly, our proposed advertising 

rule would have required disclosure, if applicable, 

that cash or non-cash compensation has been 

provided by or on behalf of the adviser in 

connection with obtaining or using the testimonial 

or endorsement. See proposed rule 206(4)– 

1(b)(1)(ii). 

135See Consumer Federation Comment Letter; 

Mercer Comment Letter. 

136See MFA/AIMA Comment Letter I; MMI 

Comment Letter (stating that the rule should not 

apply to an adviser that sends a gift to a third-party 

adviser or broker-dealer with which it routinely 

does business, and such third party completely 

unrelatedly refers a client to the adviser, unless the 

third party has a reasonable expectation that it will 

receive some form of compensation from the 

adviser in exchange for that referral). 

137See IAA Comment Letter (also recommending 

that the rule exclude refer-a-friend programs that 

involve a small amount of compensation per 

referral). While the final marketing rule will apply 

to all compensated refer-a-friend programs 

(regardless of the form of compensation), we expect 

that many advisers that engage in these programs 

will fall under the de minimis exemption, and be 

subject to fewer conditions than other compensated 

testimonials and endorsements. See infra footnote 

481. 

138See SIFMA AMG Comment Letters I & III; FSI 

Comment Letter. 

139See infra section II.A.4. 

140See 2019 Proposing Release, supra footnote 7, 

at nn.357 and 358 and accompanying text 

(discussing, for example, refer-a-friend programs). 

141Advisers are currently required to disclose to 

clients in the Form ADV brochure if they consider, 

in selecting or recommending broker-dealers, 

whether they or a related person receives client 

referrals from a broker-dealer or third party. As 

proposed, broker-dealers or dual registrants that 

receive brokerage for solicitation of client accounts 

in wrap fee programs that they do not sponsor will 

be subject to the final marketing rule if they solicit 

those clients to participate in the wrap fee program. 

See 2019 Proposing Release, supra footnote 7, at 

section II.B.2. 

142Although commenters did not specifically 

address to what extent compensation paid to an 

adviser’s personnel, such as an employee, would 

implicate the proposed solicitation rule, we are 

clarifying that compensation for purposes of prong 

two of the definition of advertisement will not 

include regular salary or bonuses paid to an 

adviser’s personnel for their investment advisory 

activities or for clerical, administrative, support or 

similar functions. 

143See, e.g., MMI Comment Letter; MFA/AIMA 

Comment Letter I (discussing training for certain 

fund-of-funds arrangements); SIFMA AMG 

Comment Letter III (encouraging the Commission to 

draw from a FINRA 2016 proposal relating to noncash compensation, which the commenter states 

includes conditions such as prior approval, 

attendance not being preconditioned on the 

achievement of certain sales targets, appropriate 

location (whether an office or other facility) and no 

payment for additional guests). 

144See 2019 Proposing Release, supra footnote 7, 

at n.360. 

145See SIFMA AMG Comment Letters I & III 

(requesting alignment with FINRA’s 2016 non-cash 

compensation rule proposal); FSI Comment Letter. 

146See, e.g., Regulation Best Interest, Release No. 

34–86031 (June 5, 2019) [84 FR at 33400 (July 12, 

2019)] (‘‘Regulation Best Interest Release’’) 

(adopting rule 15l–1 under the Exchange Act, 

testimonials and endorsements under 

one rule with one set of conditions. For 

example, a person providing an 

endorsement or testimonial under the 

final rule might be a firm that solicits for 

an adviser (such as a broker-dealer or a 

bank), an individual at a soliciting firm 

who engages in solicitation activities for 

an adviser (such as a bank 

representative or an individual 

registered representative of a brokerdealer), or both. Other examples could 

be an unaffiliated fund-of-funds or a 

feeder fund that solicits investors in an 

underlying fund or a master fund, 

respectively. 

b. Cash and Non-Cash Compensation 

The second prong of the final 

marketing rule’s definition of 

advertisement is triggered by any form 

of compensation—whether cash or noncash—that an adviser provides, directly 

or indirectly, for an endorsement or 

testimonial. This mirrors the types of 

compensation that we stated would 

trigger the proposed solicitation rule 

and the proposed advertising rule’s 

compensation disclosure requirement in 

connection with a testimonial, 

endorsement, or third-party rating.133

As we stated about both proposed rules, 

compensation an adviser provides, 

directly or indirectly, for these activities 

can incentivize a person to provide a 

positive statement about, solicit an 

investor for, or refer an investor to, the 

investment adviser.134 Therefore, we 

believe that the marketing rule’s 

protections should apply. 

Some commenters agreed that noncash compensation creates the same 

conflicts of interest as cash 

compensation for solicitation.135 These 

commenters also agreed that investors 

should be made aware of the solicitor’s 

conflict of interest regardless of the form 

of compensation. Other commenters, 

however, raised concerns about 

extending the rule to cover certain forms 

of non-cash compensation, such as gifts 

and entertainment,136 or nontransferable advisory fee waivers in 

connection with refer-a-friend 

arrangements.137 Some commenters 

argued that the final rule should only 

apply to solicitations for which the 

adviser provides incentive-based 

compensation tied to the funding of an 

advisory account and the solicitation 

activities are directed at specific 

clients.138 Commenters generally 

opposed applying the proposed 

solicitation rule to communications to 

investors in private funds, which we 

address below.139

Forms of compensation under the 

final marketing rule will include fees 

based on a percentage of assets under 

management or amounts invested, flat 

fees, retainers, hourly fees, reduced 

advisory fees, fee waivers, and any other 

methods of cash compensation, and 

cash or non-cash rewards that advisers 

provide for endorsements and 

testimonials, including referral and 

solicitation activities.140 They also 

include directed brokerage that 

compensates brokers for soliciting 

investors,141 sales awards or other 

prizes, gifts and entertainment, such as 

outings, tours, or other forms of 

entertainment that an adviser provides 

as compensation for testimonials and 

endorsements. In addition, compensated 

endorsements and testimonials may or 

may not be contingent on the 

endorsement or testimonial resulting in 

a new advisory relationship or a new 

investment in a private fund. We believe 

that non-cash compensation, including 

forms of entertainment, can incentivize 

persons to provide a positive statement 

about an adviser, or make a referral or 

solicitation on an adviser’s behalf and 

should be included in the rule to make 

clients aware of such incentive. 

Whether an adviser provides cash or 

non-cash compensation in exchange for 

a testimonial or endorsement depends 

on the particular facts and 

circumstances.142

Some commenters requested that we 

exclude training or meetings that 

educate solicitors about the adviser’s 

services, even if there are some 

incidental benefits associated with such 

training.143 We continue to believe, as 

we stated in the 2019 Proposing Release, 

that attendance at training and 

education meetings, including 

company-sponsored meetings such as 

annual conferences, will not be noncash compensation, provided that 

attendance at these meetings or 

trainings is not provided in exchange for 

solicitation activities.144

Some commenters also raised 

concerns about potentially conflicting 

regulations for advisers dually 

registered as broker-dealers with respect 

to the inclusion of sales awards as noncash compensation under the proposed 

solicitation rule.145 While we 

acknowledge that other Commission 

rules for broker-dealers address 

concerns underlying non-cash 

compensation in the context of 

recommendations, the final marketing 

rule covers a broader range of activities 

and types of promoters.146 Thus, we do 


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requiring broker-dealers to establish written 

policies and procedures reasonably designed to 

identify and eliminate any sales contests, sales 

quotas, bonuses, and non-cash compensation that 

are based on the sale of specific securities or the 

sale of specific types of securities within a limited 

period of time, noting that these compensation 

practices create high-pressure situations for 

associated persons to increase the sales of specific 

securities or specific types of securities within a 

limited period of time and thus compromise the 

best interests of their retail customers). The policies 

and procedures required thereunder must also be 

reasonably designed to identify and mitigate any 

conflicts of interest associated with the brokerdealer’s recommendations to retail customers that 

create an incentive for the broker-dealer’s 

associated persons to place their interest or the 

interest of the broker-dealer ahead of the retail 

customer’s interest. Id. 

147See id. Regulation BI defines a retail customer 

as a ‘‘natural person, or the legal representative of 

such natural person.’’ See id., at 768. 

148See, e.g., MFA/AIMA Comment Letter I; 

Fidelity Comment Letter; Fried Frank Comment 

Letter; IAA Comment Letter; Mercer Comment 

Letter; SIFMA AMG Comment Letter I. 

149See, e.g., SIFMA AMG Comment Letters I & III; 

FSI Comment Letter. 

150See SIFMA AMG Comment Letter III. 

151See, e.g., MFA/AIMA Comment Letter I; 

Mercer Comment Letter. 

152We would expect that, where required, the 

written agreement would be evidence of such a 

mutual understanding in most circumstances. See 

infra section II.C.3. 

153For example, an adviser will be subject to the 

rule’s provisions for compensated testimonials and 

endorsements when the adviser’s parent company 

pays a third party to endorse the adviser to the third 

party’s network of members that are prospective 

clients. See final rule 206(4)–1(b). Such indirect 

compensation could include the adviser’s parent 

company providing representatives to the third 

party and compensating them to promote the 

adviser’s business. 

154See, e.g., FSI Comment Letter; SIFMA AMG 

Comment Letter I; MFA/AIMA Comment Letter I; 

Fried Frank Comment Letter; IAA Comment Letter. 

155See Commonwealth Comment Letter. This 

commenter stated that such operators typically offer 

to ‘‘match’’ an investor with an adviser. When an 

investor clicks on a link, the investor provides 

information to the operator (e.g., age, investable 

assets, and goals) and the operator matches the 

investor to one or more advisers participating in the 

service. Advisers generally pay a flat fee and/or a 

per-lead fee to receive matches of potential 

investors from the operator. 

156See MMI Comment Letter (stating that in some 

cases, the operator charges an administrative or 

service fee to the investment advisers whose 

products and services are accessible through the 

operator). 

157See final rule 206(4)–1(e)(5)(ii) and (iii) and 

(17)(ii) and (iii). 

158See final rule 206(4)–1(5)(i) and (17)(i). 

159See final rule 206(4)–1(e)(1)(ii). 

not believe that an exemption for sales 

awards or contests from the final 

marketing rule would be appropriate on 

these grounds. As discussed further 

below, however, we are adopting a 

partial exemption for broker-dealers 

from the rule’s disqualification 

provisions. We are also adopting partial 

exemptions from the disclosure 

provisions when a broker-dealer 

provides a testimonial or endorsement 

to a retail customer that is a 

recommendation subject to Regulation 

Best Interest (‘‘Regulation BI’’) under the 

Securities Exchange Act of 1934 (the 

‘‘Exchange Act’’) and from certain 

disclosure requirements when a brokerdealer provides a testimonial or 

endorsement to a person that is not a 

retail customer (as that term is defined 

in Regulation BI).147

Other commenters stated non-cash 

compensation could capture benefits 

that advisers provide in the ordinary 

course of business unrelated to any 

solicitation activity.148 Relatedly, some 

commenters considered our proposed 

view of ‘‘indirect’’ compensation overly 

broad, particularly with respect to noncash compensation.149 These 

commenters recommended that we 

apply the final rule only to 

compensation an adviser provides to a 

solicitor after its solicitation activities, 

unless the solicitation agreement 

between the adviser and solicitor 

specifically includes compensation 

provided prior to the solicitation; or 

replace the solicitation rule’s reference 

to compensation that an adviser 

provides ‘‘indirectly’’ with 

compensation that is direct or ‘‘in 

connection with solicitation 

activities.’’ 150 Others expressed 

concerns that, under our proposed 

solicitation rule, every mutually 

beneficial arrangement between an 

investment adviser and a potential 

facilitator of client relationships would 

be subject to scrutiny for indicia of quid 

pro quo solicitation.151

We believe the timing of 

compensation relative to an 

endorsement or testimonial is relevant 

in determining whether an adviser is 

providing compensation for the 

testimonial or endorsement. In addition, 

we believe that there will be a mutual 

understanding of a quid pro quo, 

whether explicit or inferred based on 

facts and circumstances, for most 

compensated endorsements or 

testimonials.152 However, we decline to 

draw bright lines around either the 

timing of the compensation or the 

establishment of a mutual 

understanding. We believe such bright 

lines would unnecessarily limit the final 

rule and would encourage advisers to 

structure their arrangements to avoid 

application of the rule in situations 

where it would otherwise apply. In 

addition, we believe that in many cases 

compensation will be in connection 

with testimonials and endorsements. 

We decline to remove the word 

‘‘indirectly’’ from the rule for the same 

reasons discussed above.153

c. Activities That Constitute a 

Testimonial or Endorsement 

Some commenters requested guidance 

on whether certain activities would 

constitute solicitation or referral 

activities under the proposed 

amendments to the solicitation rule.154

Since the combined marketing rule 

includes statements that solicit 

investors for, or refer investors to, an 

investment adviser as testimonials or 

endorsements, we are addressing these 

comments in the context of these 

definitions. 

For example, some commenters 

questioned whether lead-generation 

firms or adviser referral networks 

(collectively, ‘‘operators’’) would fall 

into the scope of the rule. One 

commenter described these operators as 

networks operated by non-investors 

where an adviser compensates the 

operator to solicit investors for, or refer 

investors to, the adviser.155 Another 

commenter described these operators as 

for-profit or non-profit entities that 

make third-party advisory services (such 

as model portfolio providers) accessible 

to investors, and stated that the 

operators do not promote or recommend 

particular services or products 

accessible on the platform.156 In both 

examples, the operator’s website likely 

meets the final marketing rule’s 

definition of endorsement. An operator 

may tout the advisers included in its 

network, and/or guarantee that the 

advisers meet the network’s eligibility 

criteria. In addition, because operators 

typically offer to ‘‘match’’ an investor 

with one or more advisers compensating 

it to participate in the service, operators 

typically engage in solicitation or 

referral activities.157

Similarly, a blogger’s website review 

of an adviser’s advisory service would 

be a testimonial or an endorsement 

under the final marketing rule because 

it indicates approval, support, or a 

recommendation of the investment 

adviser, or because it describes its 

experience with the adviser.158 If the 

adviser directly or indirectly 

compensates the blogger for its review, 

for example by paying the blogger based 

on the amount of assets deposited in 

new accounts from client referrals or the 

number of accounts opened, the 

testimonial or endorsement will be an 

advertisement under the definition’s 

second prong.159 Depending on the facts 

and circumstances, a lawyer or other 

service provider that refers an investor 

to an adviser, even infrequently, may 


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13038 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

160However, such a communication would be an 

advertisement under the first prong of the definition 

of ‘‘advertisement.’’ See supra section II.A.2. 

161See Nesler Comment Letter. 

162See IAA Comment Letter (alternately 

requesting, in the absence of an exclusion, 

clarification as to status under the proposed 

solicitation rule). This commenter stated that these 

agents facilitate submissions by investment advisers 

in the RFP process and prepare reports for 

prospective investors regarding investment advisers 

under consideration. Furthermore, in many cases 

the adviser must enter into an agreement with the 

agent to participate in the RFP process. 

163We understand that the consultant is typically 

not an advisory client of the advisers it selects to 

participate in the RFP process, and therefore the 

final rule’s testimonial provision would usually not 

apply. 

164Though a quid pro quo is not always 

determinative of whether the compensation element 

of this prong of the definition of advertisement is 

satisfied, these facts suggest a lack of quid pro quo 

and, without more, would not implicate the second 

prong of the definition. The adviser in this scenario 

will likely also not implicate the first prong of the 

definition of advertisement because the adviser is 

not making a direct or indirect communication to 

more than one person that offers the investment 

adviser’s investment advisory services with regard 

to securities to investors. See final rule 206(4)– 

1(e)(1)(i). See also supra section II.A.2. 

165See final rule 206(4)–1(e)(1)(ii). 

166See Credit Suisse Comment Letter (citing the 

‘‘robust regulatory framework’’ already applicable 

to SEC-registered broker-dealers); MFA/AIMA 

Comment Letter I. 

167See infra section II.C.5. 168See id. 169See 2019 Proposing Release, supra footnote 7, 

at n.346. Two commenters argued that, as a matter 

of statutory interpretation, solicitors fall within the 

Act’s definition of ‘‘person associated with an 

investment adviser.’’ See SIFMA AMG Comment 

Letter II; Credit Suisse Comment Letter. 170 Depending on the facts and circumstances, a 

promoter may also be acting as an investment 

adviser under applicable state law. 171Commission staff previously stated that a 

person providing advice to a client as to the 

selection or retention of an investment manager or 

managers also, under certain circumstances, would 

be deemed to be ‘‘advising’’ others within the 

meaning of section 202(a)(11) of the Act. See 

Applicability of the Investment Advisers Act to 

Financial Planners, Pension Consultants, and Other 

Persons Who Provide Investment Advisory Services 

as a Component of Other Financial Services, 

Release No. IA–1092 (Oct. 8, 1987) [52 FR 38400 

(Oct. 16, 1987)], at footnote 6 and accompanying 

text. However, solicitation of clients may not 

involve providing investment advice on behalf of an 

adviser. See Release 1633, supra footnote 4, at text 

accompanying n.123. See also Commission 

Interpretation Regarding the Solely Incidental Prong 

of the Broker-Dealer Exclusion to the Definition of 

Investment Adviser, Release No. IA–5249 (June 5, 

2019) [84 FR 33669 (July 12, 2019)]. 

also meet the rule’s definition of 

testimonial or endorsement. 

On the other hand, where an adviser 

pays a third-party marketing service or 

news publication to prepare content for 

and/or disseminate a communication, 

we generally would not treat this 

communication as an endorsement 

under the second prong of the definition 

of ‘‘advertisement.’’ 160 Similarly, a noninvestor selling an adviser a list 

containing the names and contact 

information of prospective investors 

typically would not, without more, meet 

the definition of endorsement.161 This 

activity typically would not fall within 

the plain text of the definition of 

endorsement (e.g., the seller does not 

indicate approval, support, or 

recommendation of the investment 

adviser, or describe its experience with 

the adviser, or engage in the solicitation 

or referral activities described therein). 

One commenter requested an 

exclusion from the definition of solicitor 

under the proposed solicitation rule for 

an investment consultant that 

administers a RFP to aid one or more 

investors in selecting an investment 

adviser or a private fund investment 

vehicle.162 The commenter stated that 

the investor typically hires the 

consultant (the ‘‘agent’’), subject to the 

understanding that the investor will 

only enter into a transaction with an 

investment adviser that agrees to pay 

the expenses of the agent for providing 

this service.163 In these circumstances, 

we do not believe the adviser typically 

compensates the agent to endorse the 

adviser because the investor engages the 

agent to evaluate the adviser based on 

criteria that the investor provides.164

d. Exclusion for Regulatory 

Communications; Inclusion of One-onOne and Extemporaneous, Live, Oral 

Communications 

The second prong of the definition of 

advertisement excludes any information 

contained in a statutory or regulatory 

notice, filing, or other required 

communication, provided that such 

information is reasonably designed to 

satisfy the requirements of such notice, 

filing, or other required 

communication.165 As with the same 

exclusion in the first prong of the 

definition, this exclusion reflects our 

belief that communications that are 

prepared as a requirement of statutes, 

rules, or regulations should not be 

viewed as advertisements under the 

rule. 

Unlike the first prong of the definition 

of advertisement, however, this prong 

does not exclude extemporaneous, live, 

oral communications or one-on-one 

communications. These types of 

communications are precisely what the 

second prong of the definition seeks to 

address, along with other types of 

endorsement and testimonial activities. 

The current solicitation rule has also 

addressed these types of 

communications. In addition, the 

second prong does not exclude 

communications that include 

hypothetical performance information. 

Compensated testimonials and 

endorsements have the potential to 

mislead given a promoter’s financial 

incentive to recommend the adviser. 

Without appropriate safeguards, a 

compensated testimonial or 

endorsement creates a risk that the 

investor would mistakenly view the 

promoter’s recommendation as being an 

unbiased opinion about the adviser’s 

ability to manage the investor’s assets 

and would rely on that recommendation 

more than the investor otherwise would 

if the investor knew of the promoter’s 

incentive. 

Finally, some commenters requested 

an exclusion from the proposed 

solicitation rule for persons registered 

with the Commission as broker-dealers 

under the Exchange Act.166 We continue 

to believe that the final rule’s investor 

protections should apply to 

compensated endorsements and 

testimonials by any person, including a 

registered broker-dealer. However, we 

are adopting a partial exemption from 

the rule’s disqualification provisions for 

certain compensated testimonials and 

endorsements made by a registered 

broker-dealer.167 We also are adopting a 

partial exemption from the rule’s 

disclosure provisions when a brokerdealer provides a testimonial or 

endorsement to a retail customer that is 

a recommendation subject to Regulation 

BI.168

e. Investment Adviser and Broker-Dealer 

Status and Registration for Persons Who 

Provide Endorsements or Testimonials 

We proposed to withdraw our 

position that a solicitor who engages in 

solicitation activities in accordance with 

paragraph (a)(2)(iii) of the cash 

solicitation rule will be, at least with 

respect to those activities, an associated 

person of an investment adviser and 

therefore will not be required to register 

individually under the Advisers Act 

solely as a result of those activities (the 

‘‘1979 position’’).169 Although the 1979 

position will no longer apply upon the 

rescission of the current solicitation 

rule, we are not adopting a similar 

position with respect to endorsements 

and testimonials under the final 

marketing rule. 

A promoter may, depending on the 

facts and circumstances, be acting as an 

investment adviser within the meaning 

of section 202(a)(11) of the Act.170

Investment adviser status and 

registration questions require analysis of 

the applicable facts and circumstances, 

including, for example, whether a 

person is ‘‘advising’’ others within the 

meaning of section 202(a)(11) of the 

Act.171 A promoter also may be acting 

as a broker or dealer within the meaning 


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172An adviser’s registration with the Commission 

covers its supervised persons, provided that their 

advisory activities are undertaken on the adviser’s 

behalf. 

173Most states impose registration, licensing, or 

qualification requirements on investment adviser 

representatives who have a place of business in the 

state, regardless of whether the investment adviser 

is registered with the Commission or the state. See 

Staff of the U.S. Securities and Exchange 

Commission, Study on Investment Advisers and 

Broker-Dealers As Required by Section 913 of the 

Dodd-Frank Wall Street Reform and Consumer 

Protection Act (Jan. 2011), available at https://

www.sec.gov/news/studies/2011/913studyfinal.pdf, 

at 86. See also rule 203A–3(a)(1) (definition of 

‘‘investment adviser representative’’). In some 

states, a third-party solicitor will be subject to state 

qualification requirements to the extent state 

investment adviser statutes apply to solicitors. See 

Release 1633, supra footnote 4, at text 

accompanying n.125. 

174See Nesler Comment Letter (arguing that an 

SEC-registered adviser should be entitled to treat a 

non-employee solicitor as an ‘‘associated person’’ as 

long as the adviser exercises control and 

supervision over such solicitor in connection with 

the performance of its solicitation activities). 

175See Pickard Djinis Comment Letter (describing 

that solicitors that perform paid unscripted media 

campaigns on behalf of advisers, may not be under 

the adviser’s control). Such a paid solicitor may not 

be a ‘‘person associated with the investment 

adviser,’’ depending on the facts and circumstances. 

176See rule 204A–1(a) (requiring adviser codes of 

ethics that, among other things, require supervised 

persons to comply with applicable Federal 

securities laws). 

177See proposed rule 206(4)–3(c)(2). 

178See proposed rule 206(4)–1(e)(9). See also 

definition of ‘‘pooled investment vehicle’’ in rule 

206(4)–8 under the Act. 

179Commenters recommended that the final rule 

exclude all communications to investors in RICs 

and BDCs because the statutory anti-fraud 

provisions and other Commission rules apply to 

these communications. See, e.g., IAA Comment 

Letter; Comment Letter of the European Fund and 

Asset Management Association (Feb. 13, 2020) 

(‘‘EFAMA Comment Letter’’) (suggesting that the 

final rule also exclude non-U.S. funds that are 

publicly offered (including UCITS)); ICI Comment 

Letter (recommending that the Commission exclude 

all registered fund communications from the scope 

of the rule, including sales literature subject to rule 

34b–1 under the Investment Company Act and 

generic advertisements subject to rule 135a under 

the Securities Act). Given the regulatory framework 

applicable to communications to investors in RICs 

and BDCs, we do not believe the additional 

protections of the Advisers Act marketing rule are 

necessary. 

180See 2019 Proposing Release, supra footnote 7, 

at section II.A.; proposed rule 206(4)–1(e)(9). 

181See 2019 Proposing Release, supra footnote 7, 

at section II.B.3. 

182See Item 8 of Form N–1A. See also FINRA rule 

2341(l)(4) (generally prohibiting member firms from 

accepting any cash compensation from an 

investment company, an adviser to an investment 

company, a fund administrator, an underwriter or 

any affiliated person (as defined in section 2(a)(3) 

of the Investment Company Act) of such entities 

unless such compensation is described in a current 

prospectus of the investment company). 

183See, e.g., AIC Comment Letter; MFA/AIMA 

Comment Letter I; Comment Letter of the National 

Venture Capital Association (Feb. 14, 2020) 

(‘‘NVCA Comment Letter’’); IAA Comment Letter. 

184See, e.g., AIC Comment Letter (citing rule 

206(4)–1(a)(5) and rule 206(4)–8 under the Advisers 

Act); NVCA Comment Letter (citing rule 

156(b)(3)(ii) under the Securities Act). 

185See, e.g., ILPA Comment Letter; SBIA 

Comment Letter. See also Consumer Federation 

Comment Letter; EFAMA Comment Letter 

(supporting additional protections for investors in 

pooled investment vehicles, but seeking an 

exception for certain non-U.S. domiciled funds). 

186Section 206(4) of the Advisers Act authorizes 

the Commission to adopt rules and regulations that 

‘‘define, and prescribe means reasonably designed 

to prevent, such acts, practices, and courses of 

business as are fraudulent, deceptive, or 

manipulative.’’ 15 U.S.C. 80b–6(4). See rule 206(4)– 

8(a)(1). We are adopting this rule under the same 

authority of section 206(4) of the Advisers Act on 

which we relied in adopting rule 206(4)–8. See 

Prohibition of Fraud by Advisers to Certain Pooled 

Investment Vehicles, Release No. IA–2628 (Aug. 3, 

2007) [75 FR 44756 (Aug. 9, 2007)]. 

of section 3(a)(4) or 3(a)(5) of the 

Exchange Act, for example, when 

soliciting investors for, or referring 

investors to, an adviser or a private fund 

advised by the adviser. Any promoter 

must determine whether it is subject to 

statutory or regulatory requirements 

under Federal law, including the 

requirement to register as an investment 

adviser pursuant to the Act and/or as a 

broker-dealer pursuant to section 15(a) 

of the Exchange Act, respectively. If the 

promoter is a supervised person of the 

adviser for which it is providing a 

testimonial or endorsement, the 

promoter does not need to separately 

register with the Commission as an 

investment adviser solely as a result of 

his or her activities as a promoter.172 A 

promoter also must determine whether 

it is subject to certain state law and 

certain FINRA rules, including any 

applicable state licensing requirements 

applicable to individuals.173 To be clear, 

we are not making a presumption that 

a person providing an endorsement or 

testimonial meets the definition of 

investment adviser or broker-dealer and 

must register under the Act or the 

Exchange Act, respectively. Nor are we 

making a presumption that such person 

may or may not be an associated person 

of a registered investment adviser. 

Indeed, we agree that some promoters 

may meet the definition of associated 

person of an investment adviser 

depending on the facts and 

circumstances.174 Others may not.175

Under the final marketing rule, if an 

adviser determines that a person 

providing an endorsement or 

testimonial is an associated person, the 

adviser should have requisite control of 

such person.176

4. Investors in Private Funds 

Both prongs of the definition of 

‘‘advertisement’’ will expressly include 

marketing communications to private 

fund investors. The term ‘‘private fund’’ 

is defined in section 202(a)(29) of the 

Advisers Act and means an issuer that 

would be an investment company, as 

defined in section 3 of the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’), but for section 3(c)(1) 

or 3(c)(7) of that Act. This is consistent 

with the scope of the proposed 

amendments to the solicitation rule.177

We are not adopting the broader scope 

of the proposed amendments to the 

advertising rule, which generally would 

have applied to advertisements sent to 

investors in ‘‘pooled investment 

vehicles,’’ as defined in rule 206(4)–8 

under the Act.178 In connection with 

these changes, we have eliminated the 

need for the proposed exclusion for 

advertisements, other sales materials, 

and sales literature of registered 

investment companies (‘‘RICs’’) and 

business development companies 

(‘‘BDCs’’) that are within the scope of 

rule 482 or 156 under the Securities Act 

of 1933 (‘‘Securities Act’’).179

Although we used different terms in 

each proposal, the scope of the 

proposals effectively would have 

covered only certain communications to 

private fund investors. In our 

advertising rule proposal, we included 

all pooled investment vehicles and then 

excepted RIC or BDC advertisements 

that were subject to rule 482 or 156 

under the Securities Act.180 We did not 

seek to apply the proposed solicitation 

rule to promotional activity involving 

RICs and BDCs because we believed that 

the primary goal of the proposal was 

already satisfied by other regulatory 

requirements.181 Most notably, 

prospective investors in RICs and BDCs 

sold through a broker-dealer or other 

financial intermediary already receive 

disclosure about the conflicts of interest 

that may be created due to the fund or 

its related companies paying the 

intermediary for the sale of its shares 

and related services.182

Commenters generally opposed 

applying the two rules to 

communications to private fund 

investors.183 They stated that existing, 

general anti-fraud provisions provide 

sufficient protection and any additional 

regulation would be unnecessary and 

duplicative.184 Other commenters 

supported explicitly including private 

funds in the scope of the rules, arguing 

that doing so would provide important 

protections to investors in these 

funds.185

We recognize that rule 206(4)–8 

prohibits advisers to private funds from 

making misstatements or materially 

misleading statements to investors in 

those vehicles.186 An adviser’s general 

anti-fraud obligations to investors in 

private funds under rule 206(4)–8 

parallel an adviser’s general anti-fraud 


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187For example, rule 206(4)–8 prohibits 

investment advisers to pooled investment vehicles 

from engaging in any act, practice, or course of 

business that is fraudulent, deceptive, or 

manipulative with respect to any investor or 

prospective investor in the pooled investment 

vehicle. The final rule will include more specific 

provisions in the context of advertisements. See 

final rule 206(4)–1(b) through (d). To the extent that 

an advertising practice would violate a specific 

restriction imposed by the final rule, rule 206(4)– 

8 may already prohibit the practice. 

188We recognize that a single investor could 

invest in both private funds managed by the adviser 

and other products (e.g., separately managed 

accounts) managed by the adviser. The final rule 

would ensure that advisers apply the same 

principles-based framework across products and 

services, which could reduce advisers’ compliance 

burdens. 

189See MFA/AIMA Comment Letter III. But see 

supra footnotes 183–184. 

190See SBIA Comment Letter; NRS Comment 

Letter. 

191These communications also are subject to 

various statutory and regulatory anti-fraud 

provisions, such as section 17(a) of the Securities 

Act, section 10(b) of the Exchange Act, and rule 

10b–5 thereunder. 

192See infra sections II.E. and II.G. See also NYC 

Bar Comment Letter (discussing the administrative 

and compliance burdens and costs associated with 

applying the standards for Retail Advertisements 

and Non-Retail Advertisements (each as defined 

below) for private funds under the proposed 

advertising rule). 

193See, e.g., MFA/AIMA Comment Letter I; AIC 

Comment Letter; Proskauer Comment Letter. 

194PPMs are subject to the anti-fraud provisions 

of the Federal securities laws. See also supra 

footnote 88 (discussing an adviser’s fiduciary 

duties). Whether particular information included in 

a PPM constitutes an advertisement of the adviser 

depends on the relevant facts and circumstances. 

For example, if a PPM contained related 

performance information of separate accounts the 

adviser manages, that related performance 

information is likely to constitute an advertisement. 

195See, e.g., MFA/AIMA Comment Letter I; IAA 

Comment Letter; ILPA Comment Letter (seeking 

clarification that non-promotional material 

contained in a data room would not be subject to 

the rule). 

196See, e.g., EFAMA Comment Letter (supporting 

the Commission’s proposal to increase protections 

to investors in collective investment schemes, but 

recommending that the Commission exclude (i) 

non-U.S. domiciled publicly offered, closed-end 

and open-end investment funds, including UCITS, 

and (ii) alternative investment funds and other nonU.S. domiciled funds that would be an investment 

company, as defined in section 3 of the Investment 

Company Act, but for sections 3(c)(1) or 3(c)(7) of 

that Act); ILPA Comment Letter (recommending 

expanding to funds excluded from the definition of 

investment company by reason of section 3(c)(5) or 

3(c)(11) of the Investment Company Act). 

197See Sidley Austin Comment Letter; see also 

Registration Under the Advisers Act of Certain 

Hedge Fund Advisers, Release No. IA–2333 (Dec. 2, 

2004) [69 FR 72054, 72072 (Dec. 10, 2004)] (‘‘Hedge 

Fund Adviser Release’’). 

198See IAA Comment Letter; EFAMA Comment 

Letter. 

199See Exemptions for Advisers to Venture 

Capital Funds, Private Fund Advisers With Less 

Than $150 Million in Assets Under Management, 

and Foreign Private Advisers, Release No. IA–3222 

obligations to all clients and prospective 

clients under section 206 of the Act. 

Accordingly, although the final 

marketing rule overlaps with the 

prohibitions in rule 206(4)–8 in certain 

circumstances, just as it overlaps with 

section 206 with respect to an adviser’s 

clients and prospective clients, we 

believe it is important from an investor 

protection standpoint to delineate these 

obligations to all investors in the 

advertising context and provide a 

framework for an adviser’s 

advertisements to comply with these 

obligations. 

By including marketing 

communications to private fund 

investors, the final rule will provide 

more specificity (and certainty) 

regarding what we believe to be untrue 

or misleading statements that advisers 

must avoid in their advertisements.187

The general prohibitions, for example, 

will provide advisers with a principlesbased framework to assess private fund 

advertisements and will provide greater 

clarity, compared to the anti-fraud 

provisions of the Act, on marketing 

practices that are likely misleading.188

This approach is consistent with some 

commenters who stated that the 

Commission should finalize rules in a 

manner that provides guidance to 

advisers on how to comply with a 

principles-based approach without 

creating overly prescriptive 

requirements that can be difficult to 

apply in practice.189

We understand that many private 

fund advisers already consider the 

current staff positions related to the 

current advertising rule when preparing 

their marketing communications.190 As 

a result, we believe that our application 

of the final rule to advertisements to 

private fund investors would result in 

limited additional regulatory or 

compliance costs for many of these 

advisers. 

We also believe that the modifications 

from the proposal will reduce potential 

costs and alleviate commenters’ 

concerns regarding the application of 

the final rule to an adviser’s 

advertisements to private fund 

investors. For example, the first prong of 

the definition of advertisement will not 

include one-on-one communications to 

private fund investors or 

communications with existing investors; 

as such, those communications will be 

subject to rule 206(4)–8 and not the 

advertising rule.191 The first prong of 

the definition of advertisement also 

excludes live, oral, extemporaneous 

communications. Further, we are not 

adopting a requirement for an adviser to 

pre-review all advertisements prior to 

dissemination or requirements for retail 

versus non-retail advertisements, as 

discussed below.192 Collectively, we 

believe these changes appropriately 

scope advertisements that would be 

subject to the rule. 

Not all communications to private 

fund investors would be advertisements 

under the final rule. Most commenters 

stated that private placement 

memoranda (‘‘PPMs’’) should not be 

treated as advertisements.193 We agree 

that information included in a PPM 

about the material terms, objectives, and 

risks of a fund offering is not an 

advertisement of the adviser.194 Private 

fund account statements, transaction 

reports, and other similar materials 

delivered to existing private fund 

investors, and presentations to existing 

clients concerning the performance of 

funds they have invested in (for 

example, at annual meetings of limited 

partners) also would not be considered 

advertisements under the final rule. 

However, pitch books or other materials 

accompanying PPMs could fall within 

the definition of an advertisement. 

Some commenters sought clarification 

that due diligence rooms and their 

contents would not be considered 

advertisements.195 While due diligence 

rooms themselves are not 

advertisements, it is possible that some 

of the information they contain could 

qualify as an advertisement if the 

materials satisfy the requirements of the 

advertisement definition. 

Some commenters recommended 

expanding the final rule to other types 

of unregistered pooled investment 

vehicles, and one commenter specified 

which other types of unregistered 

pooled investment vehicles should be 

subject to the rule.196 While these 

commenters generally supported the 

idea of extending the scope of the rule, 

they did not explain why. Accordingly, 

we believe that the scope of the final 

rule is appropriate at this time. 

A commenter specifically sought 

confirmation that the proposed rules 

would not apply to an adviser whose 

principal office and place of business is 

outside the United States (offshore 

adviser) with regard to any of its nonU.S. clients even if the non-U.S. client 

is a fund with U.S. investors.197 This 

commenter and others also asked the 

Commission to clarify the application of 

the proposals to communications with 

non-U.S. investors in funds domiciled 

outside of the United States.198 We have 

previously stated, and continue to take 

the position, that most of the 

substantive provisions of the Advisers 

Act do not apply with respect to the 

non-U.S. clients (including funds) of a 

registered offshore adviser.199 This 


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(June 22, 2011) [76 FR 39645 (July 6, 2011)] (Most 

of the substantive provisions of the Advisers Act do 

not apply to the non-U.S. clients of a non-U.S. 

adviser registered with the Commission.); Hedge 

Fund Adviser Release, supra footnote 197 (stating 

that the following rules under the Advisers Act 

would not apply to a registered offshore adviser, 

assuming it has no U.S. clients: Compliance rule, 

custody rule, and proxy voting rule and stating that 

the Commission would not subject an offshore 

adviser to the rules governing adviser advertising 

[17 CFR 275.206(4)–1], or cash solicitations [17 CFR 

275.206(4)–3] with respect to offshore clients); 

American Bar Association, SEC Staff No-Action 

Letter (Aug. 10, 2006) (confirming that the 

substantive provisions of the Act do not apply to 

offshore advisers with respect to those advisers’ 

offshore clients (including offshore funds) to the 

extent described in those letters and the Hedge 

Fund Adviser Release); IM Information Update No. 

2017–03. 

200See Hedge Fund Adviser Release, supra 

footnote 197 (noting that U.S. investors in an 

offshore fund generally would not expect the full 

protection of the U.S. securities laws and that U.S. 

investors may be precluded from an opportunity to 

invest in an offshore fund if their participation 

would result in full application of the Advisers Act 

and rules thereunder, but that a registered offshore 

adviser would be required to comply with the 

Advisers Act and rules thereunder with respect to 

any U.S. clients it may have). 

201See, e.g., Hedge Fund Adviser Release supra 

footnote 197. 

202See SEC v. Steadman, 967 F.2d 636, 647 (D.C. 

Cir. 1992). As we noted when we adopted rule 

206(4)–8, the court in Steadman analogized section 

206(4) of the Advisers Act to section 17(a)(3) of the 

Securities Act, which the Supreme Court had held 

did not require a finding of scienter (citing Aaron 

v. SEC, 446 U.S. 680 (1980)). See also Steadman at 

643, n.5. In discussing section 17(a)(3) and its lack 

of a scienter requirement, the Steadman court 

observed that, similarly, a violation of section 

206(2) of the Advisers Act could rest on a finding 

of simple negligence. See also Fiduciary 

Interpretation, supra footnote 88, at n.20. 

203See, e.g., Wellington Comment Letter; ILPA 

Comment Letter; IAA Comment; NRS Comment 

Letter; and NAPFA Comment Letter. 

204See, e.g., MFA/AIMA Comment Letter I; 

Comment Letter of Managed Funds Association and 

Alternative Investment Management Association 

(May 8, 2020) (‘‘MFA/AIMA Comment Letter II’’). 

One commenter also argued that withdrawing the 

SEC staff no-action letters would create confusion 

and lack of guidance. NYC Bar Comment Letter 

(citing, for example, Clover Capital Mgmt., Inc., SEC 

Staff No-Action Letter (Oct. 28, 1986) (‘‘Clover 

Letter’’), Stalker Advisory Services, SEC Staff NoAction Letter (Jan. 18,1994) (Stalker Letter’’), F. 

Eberstadt & Co., Inc., SEC Staff No-Action Letter 

(July 2, 1978) (‘‘Eberstadt Letter’’), TCW Group, SEC 

Staff No-Action Letter (Nov. 7, 2008) (‘‘TCW 

Letter’’), and Franklin Management, Inc., SEC Staff 

No-Action Letter (Dec. 10, 1998) (‘‘Franklin 

Letter’’). However, we do not view the principles 

of the general prohibitions to be substantive 

departures from the positions in existing staff noaction letters and guidance. 

205The nature of the audience would be relevant 

if an adviser chooses to tailor the content of an 

advertisement to a specific audience because the 

content is not appropriate for a broader audience. 

FINRA has a similar requirement under its General 

Standards regarding Communications with the 

Public. See FINRA rule 2210(d)(1)(E) (‘‘Members 

must consider the nature of the audience to which 

the communication will be directed and must 

provide details and explanations appropriate to the 

audience.’’). 

206Final rule 206(4)–1(a)(1). 

approach was designed to provide 

appropriate flexibility where an adviser 

has its principal office and place of 

business outside of the United States.200

We believe it is appropriate to continue 

to apply this approach in this context. 

For an adviser whose principal office 

and place of business is in the United 

States (onshore adviser), the Advisers 

Act and rules thereunder apply with 

respect to the adviser’s U.S. and nonU.S. clients.201

B. General Prohibitions 

We are adopting, largely as proposed, 

the general prohibitions of certain 

marketing practices as a means 

reasonably designed to prevent 

fraudulent, deceptive, or manipulative 

acts. We believe these practices are 

associated with a significant risk of 

being false or misleading. We therefore 

believe it is in the public interest to 

prohibit these practices, rather than 

permit them subject to specified 

conditions. The general prohibitions 

will apply to all advertisements to the 

extent that an adviser directly or 

indirectly disseminates such 

advertisement. Specifically, in any 

advertisement, an adviser may not: 

(1) Include any untrue statement of a 

material fact, or omit to state a material 

fact necessary in order to make the 

statement made, in the light of the 

circumstances under which it was 

made, not misleading; 

(2) Include a material 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; 

(3) Include 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 investment adviser; 

(4) Discuss any potential benefits to 

clients or investors connected with or 

resulting from the investment adviser’s 

services or methods of operation 

without providing fair and balanced 

treatment of any material risks or 

material limitations associated with the 

potential benefits; 

(5) Include a reference to specific 

investment advice provided by the 

investment adviser where such 

investment advice is not presented in a 

manner that is fair and balanced; 

(6) Include or exclude performance 

results, or present performance time 

periods, in a manner that is not fair and 

balanced; or 

(7) Otherwise be materially 

misleading. 

As noted in the proposal, to establish 

a violation of the rule, the Commission 

will not need to demonstrate that an 

investment adviser acted with scienter; 

negligence is sufficient.202

Many commenters supported the 

prohibitions’ principles-based 

framework.203 However, other 

commenters found the proposed general 

prohibitions confusing and redundant 

and suggested streamlining them into 

fewer standards (or eliminating them 

altogether) and relying on the general 

anti-fraud standard instead.204 After 

considering comments, we are making 

certain modifications, as discussed 

below. We continue to believe that 

prohibiting certain marketing practices 

is appropriate and that the final 

provisions provide important 

requirements for investment advisers 

and protections for investors. In our 

view, the general prohibitions provide 

greater clarity on marketing practices 

that are likely misleading compared to 

just relying on the anti-fraud provisions 

of the Act. We also believe that the 

general prohibitions we are adopting 

provide appropriate flexibility and 

regulatory certainty for advisers 

considering how to market their 

investment advisory services. 

In applying the general prohibitions, 

an adviser should consider the facts and 

circumstances of each advertisement. 

The nature of the audience to which the 

advertisement is directed is a key factor 

in determining how the general 

prohibitions should be applied.205 For 

instance, the amount and type of 

information that may need to be 

included in an advertisement directed at 

retail investors may differ from the 

information that may need to be 

included in an advertisement directed at 

sophisticated institutional investors. 

We discuss below each of the general 

prohibitions and the comments we 

received. 

1. Untrue Statements and Omissions 

As proposed, the final rule will 

prohibit advertisements that include 

any untrue statements of a material fact, 

or that omit a material fact necessary in 

order to make the statement made, in 

the light of the circumstances under 

which it was made, not misleading.206

One commenter argued that this 

prohibition would be duplicative of 

sections 206(1) and (2) of the Advisers 

Act, which prohibit advisers from 

‘‘employ[ing] any device, scheme or 

artifice to defraud any client or 

prospective client’’ and ‘‘engag[ing] in 

any transaction, practice, or course of 

business which operates as a fraud or 

deceit upon any client or prospective 


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207NYC Bar Comment Letter. This commenter 

also noted that section 206(4) prohibits investment 

advisers from ‘‘engag[ing] in any act, practice, or 

course of business which is fraudulent, deceptive, 

or manipulative.’’ 

208While we acknowledge there may be 

circumstances that are covered by both the antifraud prohibitions and this provision, we believe 

that this provision helps provide specificity when 

addressing an adviser’s marketing activities. In 

addition, to the extent possible, this rule can serve 

as a resource for identifying an adviser’s obligations 

with respect to marketing generally, and thus we 

believe that retaining this general prohibition will 

serve to assist advisers in meeting their compliance 

obligations. 

209Current rule 206(4)–1(a)(5) prohibits an 

advertisement that contains any untrue statement of 

a material fact and uses similar wording as other 

anti-fraud provisions in the Federal securities laws. 

See, e.g., 17 CFR 240.10b–5; 15 U.S.C. 77q(a)(2); 17 

CFR 230.156(a); rule 206(4)–8. 

210When we use the phrase ‘‘false or misleading 

statements’’ in this release, we are referring to this 

general prohibition against advertisements that 

include any untrue statements of a material fact, or 

omissions of a material fact necessary in order to 

make a statement, in the light of the circumstances 

under which it was made, not misleading. 

211Although one commenter stated that an 

adviser should be required to show returns of an 

appropriate benchmark for the same periods as 

presented for the adviser’s performance, we do not 

believe that it is necessary to prescribe such 

disclosures and that such decisions should be left 

at the discretion of the adviser, subject to the 

general prohibitions of the final rule and the general 

anti-fraud provisions of the Federal securities laws. 

See CFA Institute Comment Letter. Accordingly, we 

are not requiring the inclusion of a relevant index 

or benchmark to avoid making any presentation of 

performance misleading. 

212See current rule 206(4)–1(a)(4); see also Dow 

Theory Forecasts, Inc., SEC Staff No-Action Letter 

(May 21, 1986) (‘‘Dow Theory Letter’’) (staff 

declined to provide no-action recommendation 

where an offer for ‘‘free’’ subscription was subject 

to conditions). 213An adviser’s use of graphs, charts, or formulas 

to represent, directly or indirectly, that such graphs, 

charts, or formulas can in and of themselves be 

used to determine which securities to buy or sell, 

or when to buy or sell them, is explicitly prohibited 

in the current rule. See current rule 206(4)–1(a)(3) 

(also prohibiting an advertisement from 

representing, directly or indirectly, that any graph, 

chart, formula or other device being offered will 

assist any person in making his own decisions as 

to which securities to buy, sell, or when to buy or 

sell them, without disclosing the limitations and 

difficulties with respect to the use of such a graph, 

chart, formula or other device). 

214See proposed rule 206(4)–1(a)(2). 

215See, e.g., MFA/AIMA Comment Letter I 

(stating that this requirement would greatly increase 

cost and operational burdens and curb the flow of 

information to clients and investors); FPA Comment 

Letter; NVCA Comment Letter; Fried Frank 

Comment Letter. 

216See MFA/AIMA Comment Letter I; Fried 

Frank Comment Letter. 

217See, e.g., MFA/AIMA Comment Letter I; FPA 

Comment Letter; Fried Frank Comment Letter. 

218For example, we would view performance 

returns included in an advertisement to be material 

statements of fact that an adviser would need a 

reasonable basis for believing that it will be able to 

substantiate. Because current rule 204–2(a)(16) 

already requires the maintenance of records ‘‘to 

support the basis for or demonstrate the calculation 

of the performance or rate of return of any or all 

managed accounts or securities recommendations 

in any . . . advertisement,’’ we believe that any 

recordkeeping burden related to performance 

information included in an advertisement will not 

be significantly new or altered. See current rule 

204–2(a)(16). Final rule 204–2(a)(16) will similarly 

require advisers to retain records or documents 

necessary to form the basis for or demonstrate the 

calculation of the performance or rate of return of 

any or all managed accounts, portfolio or securities 

recommendations presented in any advertisement. 

See final rule 204–2(a)(16). 

219Final rule 206(4)–1(a)(2). Demand by the 

Commission includes demand by the Commission’s 

client.’’ 207 However, we view this 

prohibition as complementary to, rather 

than duplicative of, the statutory antifraud prohibitions cited by the 

commenter.208 We continue to believe 

that this prohibition, together with the 

other general prohibitions under the 

rule, is appropriately designed to 

prevent fraud under the Act, specifically 

in the context of marketing. Moreover, 

this provision retains the substance of 

current rule 206(4)–1(a)(5).209

As with similar anti-fraud provisions 

in the Federal securities laws, whether 

a statement is false or misleading 

depends on the context in which the 

statement or omission is made.210 For 

example, as under the current rule, 

advertising that an adviser’s 

performance was positive during the 

last fiscal year may be misleading if the 

adviser omitted that an index or 

benchmark consisting of a substantively 

comparable portfolio of securities 

experienced significantly higher returns 

during the same period. To avoid 

making a misleading statement, the 

adviser in this example could include 

the relevant index or benchmark or 

otherwise disclose that the adviser’s 

performance, although positive, 

significantly underperformed the 

market.211

Under the final rule, it would be 

misleading for an adviser to compensate 

a person to refer investors to the adviser 

by stating that the person had a 

‘‘positive experience’’ with the adviser 

when such person is not a client or 

private fund investor of the adviser for 

its advisory services. To avoid making 

such a statement misleading, the adviser 

could disclose that the experience does 

not relate to any advisory services. It 

would also be misleading for an adviser 

to use a promoter’s testimonial or 

endorsement that the adviser knows or 

reasonably should know to be 

fraudulent, misleading, or untrue, 

regardless of whether the adviser 

compensates the promoter. For instance, 

an adviser may not provide a 

testimonial on its website where a client 

falsely claims that the client has worked 

with the adviser for over 20 years when 

the adviser has only been in business for 

five years. 

The current rule contains an explicit 

prohibition on advertisements that 

contain statements to the effect that a 

report, analysis, or other service will be 

furnished free of charge, unless the 

analysis or service is actually free and 

without condition.212 We continue to 

believe that this practice will be 

captured by the final rule’s prohibition 

on untrue statements or omissions. As a 

result, the final rule will not contain 

separate explicit prohibitions of such 

statements. In addition, depending on 

the disclosures provided and the extent 

to which an adviser in fact does provide 

investment advice solely based on such 

materials, it may be false or misleading 

under this provision to represent, 

directly or indirectly, in an 

advertisement that any graph, chart, or 

formula can by itself be used to 

determine which securities to buy or 

sell.213

2. Unsubstantiated Material Statements 

of Fact 

The proposed rule would have 

prohibited advertisements that include 

any material claim or statement that is 

unsubstantiated.214 Commenters argued 

that the proposed ‘‘substantiation’’ 

requirement would be overly 

burdensome.215 For example, two 

commenters argued that it would 

require advisers to obtain evidence to 

support every claim or statement in an 

advertisement out of uncertainty as to 

what might be ‘‘material.’’ 216

Commenters also found the requirement 

unclear, questioning whether, for 

example, such a prohibition would 

effectively foreclose any statements of 

opinion.217 We are sensitive to 

commenters’ concerns regarding the 

burdens and lack of clarity of this 

proposed provision. As a result, we are 

making two changes to the requirement. 

First, we are limiting the 

substantiation requirement to matters of 

material fact rather than any material 

claim or statement. We do not believe 

that this would be unduly burdensome 

for advisers as such material statements 

of fact, as opposed to opinions, should 

be verifiable. For instance, material facts 

might include a statement that each of 

its portfolio managers holds a particular 

certification or that it offers a certain 

type or number of investment products. 

Claims about performance would also 

be statements about material facts.218

Conversely, statements that clearly 

provide an opinion would not be 

statements of material fact. 

Second, we are requiring advisers to 

have a reasonable basis to believe that 

they can substantiate material claims of 

fact upon demand by the 

Commission.219 This change is designed 


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examiners or other representatives. The adviser’s 

obligation to produce such materials on demand 

will last as long as the relevant advertisement needs 

to be retained under the recordkeeping rule. See 

current rule 204–2(e)(1). 

220See, e.g., MFA/AIMA Comment Letter I; 

NVCA Comment Letter. 

221Some advisers likely will (and some already 

do) maintain records to substantiate nonperformance material statements of fact included in 

an advertisement when the advertisement is 

created; however, this is not required as long as the 

adviser has a reasonable basis for believing it will 

be able to substantiate the information upon 

demand by the Commission. 

222See proposed rule 206(4)–1(a)(3). 

223See Flexible Plan Investments Comment Letter 

II. 

224Final rule 206(4)–1(a)(3). An adviser’s 

statements in an advertisement also are subject to 

section 208(a) of the Act, which generally states that 

it is unlawful for a registered investment adviser to 

represent or imply that it has been sponsored, 

recommended, or approved by any agency of the 

United States. Section 208(b) of the Act generally 

states that Section 208(a) shall not be construed to 

prohibit a person from stating that he is registered 

with the Commission as an investment adviser if 

the statement is true and if the effect of his 

registration is not misrepresented. Nevertheless, an 

adviser’s use of the phrase ‘‘registered investment 

adviser’’ (or the initials ‘‘RIA’’ or ‘‘R.I.A.’’) to state 

or imply that it has a level of professional 

competence, education or other special training 

could be misleading under the final rule. 

225CFA Institute Comment Letter. 

226See, e.g., Clover Letter (stating the use of 

performance results in an advertisement in the 

staff’s view would be false or misleading if it 

implies, or a reader would infer from it, something 

about the adviser’s competence or about future 

investment results that would not be true had the 

advertisement included all material facts); Stalker 

Letter (stating that copies of articles printed in 

independent publications that contain performance 

information of an adviser would be prohibited if 

they implied false or misleading information absent 

additional facts); Eberstadt Letter (stating that 

advertisements could be misleading if they imply 

positive facts about the adviser when additional 

facts, if also provided, would cause the implication 

not to arise). 

227See In the Matter of Spear & Staff, Inc., Release 

No. IA–188 (Mar. 25, 1965) (settled order) (the 

Commission brought an enforcement action against 

an investment adviser asserting, in part, that the 

adviser’s advertisements, which recounted a 

number of factually accurate stories highlighting the 

outstanding investment success of certain selected 

clients collectively created ‘‘illusory hopes of 

immediate and substantial profit’’). 

228See AIC Comment Letter (‘‘The Proposing 

Release does not suggest how an adviser may 

ascertain whether a testimonial is representative of 

that adviser’s investors. Such a determination may 

require that an adviser poll or survey a material 

sample of its investors.’’); IAA Comment Letter; 

SIFMA AMG Comment Letter I; Comment Letter of 

Truth in Advertising, Inc. (Feb. 10, 2020) (‘‘TINA 

Comment Letter’’). 

229See SIFMA AMG Comment Letter II and IAA 

Comment Letter. 

230See, e.g., IAA Comment Letter; SIFMA AMG 

Commenter Letter I. 

to reduce burdens on advisers and allow 

them to avoid the need to develop and 

maintain a file of substantiating 

materials for every advertisement.220

Advisers would be able to 

demonstrate this reasonable belief in a 

number of ways. For example, they 

could make a record contemporaneous 

with the advertisement demonstrating 

the basis for their belief.221 An adviser 

might also choose to implement policies 

and procedures to address how this 

requirement is met. However, if an 

adviser is unable to substantiate the 

material claims of fact made in an 

advertisement when the Commission 

demands it, we will presume that the 

adviser did not have a reasonable basis 

for its belief. We believe that the burden 

on advisers to have a reasonable basis 

for believing they will be able to 

substantiate a material statement of fact 

upon demand by the Commission is 

justified by the importance of ensuring 

that advisers do not advertise material 

claims of fact that cannot be 

substantiated and the need to facilitate 

our staff’s examination of advisers. 

3. Untrue or Misleading Implications or 

Inferences 

The proposed rule would have 

prohibited any advertisement that 

includes an untrue or misleading 

implication about, or is reasonably 

likely to cause an untrue or misleading 

inference to be drawn concerning, a 

material fact relating to an investment 

adviser.222 After considering comments, 

we are adopting this prohibition but 

modifying it to add the reasonableness 

standard to ‘‘implication,’’ and not only 

to ‘‘inference.’’ 223 Accordingly, the final 

rule will prohibit an adviser from 

including, in any advertisement, 

information that would reasonably be 

likely to cause an untrue or misleading 

implication or inference to be drawn 

concerning a material fact relating to an 

investment adviser.224

One commenter suggested eliminating 

this prohibition altogether and instead 

relying on the prohibition against 

untrue statements or omissions, stating 

that it is difficult to enforce when 

something is ‘‘implied’’ or 

‘‘inferred.’’ 225 However, we continue to 

believe that this prohibition 

appropriately addresses certain 

activities that would not be subject to 

the first prohibition, such as those 

raised in previous staff no-action 

letters.226 For example, this provision 

will prohibit an adviser from making a 

series of statements in an advertisement 

that literally are true when read 

individually, but whose overall effect is 

reasonably likely to create an untrue or 

misleading inference or implication 

about the investment adviser.227 For 

instance, if an adviser were to state 

accurately in an advertisement that it 

has ‘‘more than a hundred clients that 

have stuck with me for more than ten 

years,’’ we believe it may create a 

misleading implication if the adviser 

actually has a very high turnover rate of 

clients. Additionally, this provision will 

prohibit an adviser from stating that all 

of its clients have seen profits, even if 

true, without providing appropriate 

disclosures if it only has two clients, as 

it may be reasonably likely to cause a 

misleading inference by potential 

clients that they would have a high 

chance of profit by hiring the adviser as 

well. 

Commenters requested more guidance 

regarding when advertised testimonials 

would comply with this general 

prohibition.228 Two commenters argued 

that it would effectively eliminate an 

adviser’s ability to use testimonials if 

advisers had to present negative 

testimonials alongside positive ones, 

particularly in the context of online and 

social media platforms.229

We do not believe that the general 

prohibition requires an adviser to 

present an equal number of negative 

testimonials alongside positive 

testimonials in an advertisement, or 

balance endorsements with negative 

statements in order to avoid giving rise 

to a misleading inference, as certain 

commenters suggested.230 Rather, the 

general prohibition requires the adviser 

to consider the context and totality of 

information presented such that it 

would not reasonably be likely to cause 

any misleading implication or inference. 

General disclaimer language (e.g., ‘‘these 

results may not be typical of all 

investors’’) would not be sufficient to 

overcome this general prohibition. 

However, one approach that we believe 

would generally be consistent with the 

general prohibitions would be for an 

adviser to include a disclaimer that the 

testimonial provided was not 

representative, and then provide a link 

to, or other means of accessing (such as 

oral directions to go to the relevant parts 

of an adviser’s website), all or a 

representative sample of the 

testimonials about the adviser. 

As discussed in further detail in 

section II.B.5. below, we believe this 

provision (along with the other 

provisions discussed below) will 

prohibit ‘‘cherry picking’’ of past 

investments or investment strategies of 

the adviser—that is, including favorable 

results while omitting unfavorable ones 

in a manner that is not fair and 

balanced. 

4. Failure To Provide Fair and Balanced 

Treatment of Material Risks or Material 

Limitations 

The proposed rule would have 

prohibited advertisements that discuss 


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231Proposed rule 206(4)–1(a)(4). 

232See final rule 206(4)–1(a)(4). 

233See, e.g., Ropes & Gray Comment Letter and 

MFA/AIMA Comment Letter I. 

234See MFA/AIMA Comment Letter I. 

235CFA Institute Comment Letter. 

236See, e.g., Fidelity Comment Letter; Ropes & 

Gray Comment Letter; IAA Comment Letter; 

Comment Letter of T. Rowe Price (Feb. 10, 2020) 

(‘‘T. Rowe Price Comment Letter’’); LinkedIn 

Comment Letter; SIFMA AMG Comment Letter II. 

237See, e.g., MFA/AIMA Comment Letter I; 

LinkedIn Comment Letter; Ropes & Gray Comment 

Letter. 

238Final rule 206(4)–1(a)(4). For the sake of 

clarity, the materiality standard will explicitly 

apply to both the risks and the limitations. 

239As we discussed in the proposal, this general 

prohibition was drawn from FINRA rule 2210’s 

general standards. See FINRA rule 2210(d)(1)(D). 

The final rule’s use of ‘‘fair and balanced’’ is more 

closely aligned with FINRA 2210, and accordingly, 

we believe that advisers that are familiar with those 

standards may be able to use that experience as a 

guide in complying with this requirement. 

240For example, if an adviser states that it will 

reduce an investor’s taxes through its tax-loss 

harvesting strategies, the adviser should also 

discuss the associated material risks or material 

limitations, including that any reduction in taxes 

would depend on an investor’s tax situation. 

241 In addition to hyperlinks, advisers may use 

other tools to provide investors with layered 

disclosure, including QR codes or mouse-over 

windows. 

242See CFA Institute Comment Letter. 

243See rule 156(b)(3)(i); FINRA rule 2210(d)(1). 

244See final rule 206(4)–1(a)(5). 

or imply any potential benefits 

connected with or resulting from the 

investment adviser’s services or 

methods of operation without clearly 

and prominently discussing associated 

material risks or other limitations 

associated with the potential benefits.231

We are generally retaining this 

requirement with some modifications in 

response to comments.232

Some commenters suggested 

eliminating this prohibition, arguing 

that it is redundant since Form ADV 

Part 2 already requires the disclosure of 

material risks.233 Commenters also 

expressed concern that this prohibition 

would expand the amount of required 

disclosures, dramatically lengthen 

advertisements, and overwhelm the 

content included in the 

advertisement.234 One commenter 

recommended removing ‘‘or imply’’ 

from this prohibition, stating that it 

would be difficult for the Commission 

staff to prove something is implied.235

Several commenters requested that the 

Commission permit the use of 

hyperlinks and layered disclosures to 

satisfy the requirement that the 

necessary disclosures be made ‘‘clearly 

and prominently,’’ arguing that such an 

approach would be consistent with the 

Commission’s stated goal of 

modernizing the advertising rule.236

Commenters also suggested that 

requiring an adviser to include detailed 

risk disclosures required under the 

proposed general prohibition in a clear 

and prominent manner may not be 

feasible in certain formats without the 

use of hyperlinks.237

In response to these concerns, we 

have modified this provision to prohibit 

advertisements that discuss any 

potential benefits connected with or 

resulting from the investment adviser’s 

services or methods of operation 

without providing fair and balanced 

treatment of any material risks or 

material limitations associated with the 

potential benefits.238 We continue to 

believe that advertisements should 

provide an accurate portrayal of both 

the risks and benefits of the adviser’s 

services. However, as proposed, the 

prohibition may have led advisers to 

provide overly voluminous disclosure of 

associated material risks, as well as 

overly inclusive disclosure of ‘‘other 

limitations.’’ We believe this could have 

resulted in lengthy, boilerplate 

disclosure that could reduce the 

salience of the risk and limitation 

information for investors. 

Because we are requiring fair and 

balanced treatment of material risks or 

material limitations associated with the 

benefits advertised, we no longer 

believe the requirement to ‘‘clearly and 

prominently’’ provide material risk 

disclosures is necessary.239 The 

proposed prohibition was designed to 

mitigate the risk that an adviser’s 

advertisement might discuss only the 

benefits of its services but not include 

sufficient information about the material 

risks that the client may face. We 

believe that the requirement to provide 

benefits and material risks in a fair and 

balanced manner similarly achieves this 

goal. In addition, it will promote a more 

digestible discussion for investors by 

making clear that advisers need not 

discuss every potential risk or limitation 

in detail, but must instead discuss the 

material risks and material limitations 

associated with the benefits in a fair and 

balanced manner.240

We expect that this approach will 

help facilitate layered disclosure. For 

example, an advertisement could 

comply with this requirement by 

identifying one benefit of an adviser’s 

services, accompany the discussion of 

the benefit with fair and balanced 

treatment of material risks associated 

with that benefit within the four corners 

of that advertisement, and then include 

a hyperlink 241 to additional content that 

discusses additional benefits and 

additional risks of the adviser’s services 

in a fair and balanced manner. So long 

as each layer of a layered advertisement 

complies with the requirement to 

provide benefits and risks in a fair and 

balanced manner, providing hyperlinks 

to additional content would meet the 

requirement of this general prohibition. 

However, an adviser should not use 

layered disclosure or hyperlinks to 

obscure important information. For 

instance, it would not be sufficient to 

advertise only an adviser’s past profits 

on a web page and then include a 

hyperlink to another page that included 

all material risks and material 

limitations as that would violate the fair 

and balanced presentation requirement. 

We are also removing the term 

‘‘imply’’ from this general prohibition, 

which a commenter found unclear.242

Removing the term imply will make this 

provision more consistent with similar 

requirements with which many advisers 

are already familiar.243 In addition, we 

believe that the other general 

prohibitions (including the prohibition 

on information that could cause a 

misleading implication or inference to 

be drawn), address the concerns that led 

us to include the term imply in this 

general prohibition at proposal. 

We believe this prohibition differs in 

scope from the disclosures required by 

Form ADV. For example, Item 8 of Form 

ADV Part 2A requires material risk 

disclosures more specifically with 

respect to investing in securities and 

certain investment strategies and risks 

involved. Moreover, an investment 

adviser must provide its brochure 

prepared in accordance with Form ADV 

to its clients, but not to investors in 

private funds it manages. The marketing 

rule’s prohibition requires risk 

disclosures related to any potential 

benefits advertised to both clients and 

private fund investors. We believe that 

providing such disclosures in 

advertisements is necessary in order to 

avoid misleading potential investors as 

well as existing investors in connection 

with new services or investments. 

5. Anti-Cherry Picking Provisions: 

References to Specific Investment 

Advice and Presentation of Performance 

Results 

The final rule contains, as proposed, 

two other provisions designed to 

address concerns about investment 

advisers presenting potentially cherrypicked information in advertisements. 

a. References to Specific Investment 

Advice 

As proposed, the final rule will 

prohibit a reference in an advertisement 

to specific investment advice that is not 

presented in a fair and balanced 

manner.244 Commenters supported 


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245See, e.g., MFA/AIMA Comment Letter I; IAA 

Comment Letter; T. Rowe Price Comment Letter. 

246NRS Comment Letter. 

247See, e.g., ILPA Comment Letter (requesting 

clarification in the context of private equity funds); 

NASAA Comment Letter; Consumer Federation 

Comment Letter. 

248See MFA/AIMA Comment Letter I; T. Rowe 

Price Comment Letter (noting that an adviser could 

mention security selections in a fair and balanced 

manner without complying with past staff 

positions). 

249See NASAA Comment Letter. The phrase ‘‘fair 

and balanced’’ is used in FINRA rule 2210, which 

requires, among other things, that broker-dealer 

communications ‘‘must be fair and balanced and 

must provide a sound basis for evaluating the facts 

in regard to any particular security or type of 

security, industry, or service.’’ See FINRA rule 

2210(d)(1)(A). 

250For selecting and presenting performance 

information, these factors are in addition to the 

requirements and restrictions on presentation of 

performance discussed in section II.A.5. See final 

rule 206(4)–1(c). In addition, other provisions of the 

general prohibitions may prohibit a reference to 

specific investment advice, depending on the facts 

and circumstances. See 2019 Proposing Release, 

supra footnote 7. 

251As stated in the proposal, an adviser may 

consider the current rule’s required disclosures 

when furnishing a list of all past specific 

recommendations made by the adviser within the 

immediately preceding period of not less than one 

year. See rule 206(4)–1(a)(2). However, the final 

rule will not require that an adviser include such 

disclosures, and such disclosures will not be the 

only way of satisfying paragraph (a)(4). 

252An investment adviser should be mindful of 

the general prohibitions when selecting the 

measurement periods as well. 

253Our staff has previously stated that it would 

not recommend enforcement action under rule 

206(4)–1 relating to an advertisement that includes 

performance-based past specific recommendations 

based on certain representations, including that the 

adviser would use objective, non-performance 

based criteria to select the specific securities that it 

lists and discusses in the advertisement. See 

Franklin Letter. Although an adviser may find such 

staff positions helpful in complying with the final 

rule, the final rule does not include requirements 

corresponding to the specific representations in the 

Franklin letter. 

254See AIC Comment Letter; ILPA Comment 

Letter. 

255See final rule 206(4)–1(d). 

256See MFA/AIMA Comment Letter I; T. Rowe 

Price Comment Letter. 

257For example, our staff has stated that it would 

not recommend enforcement action under the 

Continued 

replacing the current rule’s per se 

prohibition against past specific 

recommendations with this principlesbased restriction on the presentation of 

specific investment advice.245 One 

commenter also supported the new fair 

and balanced standard.246 However, 

some commenters requested more 

guidance on how to satisfy the fair and 

balanced standard.247 Other 

commenters requested clarification that 

the principles from certain staff noaction letters would not be the sole 

means to comply with the fair and 

balanced standard.248 One commenter 

asked whether we intend to incorporate 

the body of judicial or administrative 

decisions regarding FINRA rule 2210 

and other similar provisions.249

We continue to believe this limitation 

requiring advertisements to have only 

fair and balanced inclusions of, or 

references to, specific investment advice 

is appropriate. The factors relevant to 

when an advertisement’s presentation of 

specific investment advice is fair and 

balanced will vary depending on the 

facts and circumstances. We provide 

examples of such factors below to 

illustrate the principles.250 While in 

some cases advisers may wish to 

consider FINRA’s interpretations related 

to the meaning of ‘‘fair and balanced’’ 

for issues we have not specifically 

addressed, FINRA Rule 2210 and its 

body of decisions are not controlling or 

authoritative interpretations with 

respect to our final rule. 

i. Examples Regarding the Presentation 

of Past Specific Investment Advice 

An advertisement that references 

favorable or profitable past specific 

investment advice without providing 

sufficient information and context to 

evaluate the merits of that advice is not 

fair and balanced. For example, an 

adviser may wish to share a ‘‘thought 

piece’’ to describe the specific 

investment advice it provided in 

response to a major market event. This 

would be permissible under the final 

rule, provided the advertisement 

included disclosures with appropriate 

contextual information for investors to 

evaluate those recommendations (e.g., 

the circumstances of the market event, 

such as its nature and timing, and any 

relevant investment constraints, such as 

liquidity constraints, during that time). 

One practice currently used by 

advisers is to provide unfavorable or 

unprofitable past specific investment 

advice in addition to the favorable or 

profitable advice.251 An adviser also 

may consider listing some, or all, of the 

specific investment advice of the same 

type, kind, grade, or classification as 

those specific investments presented in 

the advertisement. 

As an example, an investment adviser 

might provide a list of certain 

investments it recommended based 

upon certain selection criteria, such as 

the top holdings by value in a given 

strategy at a given point in time. The 

criteria investment advisers use to 

determine such lists in an 

advertisement, as well as how the 

criteria are applied, should produce fair 

and balanced results. We continue to 

believe that consistent application of the 

same selection criteria across 

measurement periods limits an 

investment adviser’s ability to reference 

specific investment advice in a manner 

that unfairly reflects only positive or 

favorable results.252 For example, in 

deciding what to include in an 

advertisement, an adviser may wish to 

apply non-performance related selection 

criteria across portfolio holdings, such 

as listing them on an alphabetical or 

rotational basis.253

Some commenters questioned 

whether this aspect of the final rule 

would permit case studies, which are 

popular in the private equity 

industry.254 We believe that case studies 

and any other similar information about 

the performance of portfolio companies 

are specific investment advice, subject 

to this general prohibition. For example, 

it would not be fair and balanced for an 

adviser to present, in an advertisement, 

case studies only reflecting profitable 

investments (when there are also similar 

unprofitable investments). To meet the 

fair and balanced standard, an adviser 

may, for example, disclose the overall 

performance of the relevant investment 

strategy or private fund for at least the 

relevant period covered by the list of 

investments. Case studies that include 

performance information also will be 

subject to the final rule’s restrictions 

and requirements for performance 

advertising.255

In determining how to present 

information in a fair and balanced 

manner, advisers should consider the 

facts and circumstances of the 

advertisement, including the nature and 

sophistication of the audience. For 

example, in an advertisement intended 

for a retail investor, an adviser may 

include certain disclosures to help the 

investor understand that past specific 

investment advice does not guarantee 

future results such as an explanation of 

the particular or unique circumstances 

of the previous investment advice and 

how those circumstances are no longer 

relevant. Less detailed disclosure may 

be needed in an advertisement solely for 

sophisticated institutional investors, 

who more likely understand the risks 

associated with past specific investment 

advice. 

In response to the commenters who 

asked for clarification that the methods 

described in past staff no-action letters 

on presenting past specific 

recommendations would not be the only 

way to meet the fair and balanced 

standard,256 we are not prescribing any 

of the factors in those letters under the 

final rule. While advisers may wish to 

refer to these letters for examples, we 

agree with commenters that an adviser 

may satisfy the fair and balanced 

standard in other ways.257


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current rule with respect to charts in an 

advertisement containing an adviser’s best and 

worst performers in certain circumstances. See the 

TCW Letter. Our staff has also stated that it would 

not recommend enforcement action under current 

rule 206(4)–1 relating to an advertisement that 

includes performance-based past specific 

recommendations if the adviser uses objective, nonperformance based criteria to select the specific 

securities that it lists and discusses in the 

advertisement in certain circumstances. See 

Franklin Letter. 

258We understand there has been confusion 

under the current advertising rule’s prohibition 

against past specific ‘‘recommendations’’ as to 

whether an adviser makes a ‘‘recommendation’’ 

when it implements its strategy in a discretionary 

account because an adviser would not contact its 

client to make a recommendation that the client 

then either chooses to implement or decline. We 

believe an adviser’s recommendation, or investment 

advice, is implicit in the exercise of discretion. 

259See final rule 206(4)–1(a)(6). 

260See Ropes & Gray Comment Letter. 

261Consumer Federation Comment Letter; 

NASAA Comment Letter. 

262CFA Institute Comment Letter; Ropes & Gray 

Comment Letter; NASAA Comment Letter; ILPA 

Comment Letter. 

263An advertisement that includes only favorable 

performance results or excludes only unfavorable 

performance results may also be ‘‘misleading’’ to 

the extent that such an advertisement would 

reasonably be likely to cause an untrue or 

misleading implication or inference to be drawn 

concerning the investment adviser that would not 

be implied or inferred were certain additional 

facts—i.e., any performance results excluded from 

the advertisement—disclosed. See final rule 206(4)– 

1(a)(3). 

264See Amendments to Investment Company 

Advertising Rules, Release No. IC–26195 (Oct. 3, 

2003) [68 FR 57760 (Oct. 6, 2003)]. 

265Final rule 206(4)–1(a)(7). 

266See final rule 206(4)–1(a)(1). 

267Statements made by an adviser that would be 

prohibited under the final rule’s general 

prohibitions of certain marketing practices would 

also be prohibited in an adviser’s advertisement if 

made by a third party in a covered testimonial or 

endorsement. For example, as we stated in the 

Proposing Release, we would generally view an 

advertisement as unlikely to be presented in a 

manner that is fair and balanced if it contains a 

testimonial, endorsement, or third-party rating that 

references performance information or specific 

investment advice provided by the adviser that was 

profitable but is not representative of the experience 

of the adviser’s investors. 2019 Proposing Release, 

supra footnote 7, at section II.A.2.e. 

268Final rule 206(4)–1(b). 

269See, e.g., Consumer Federation Comment 

Letter; IAA Comment Letter; LinkedIn Comment 

Letter; Fidelity Comment Letter; TINA Comment 

Letter. 

The final rule applies to any reference 

in an advertisement to specific 

investment advice given by the 

investment adviser, regardless of 

whether the investment advice is 

current or occurred in the past. This 

provision will apply regardless of 

whether the advice was acted upon, or 

reflected actual portfolio holdings, or 

was profitable. In addition, the 

provision applies to discretionary 

investments because the adviser is 

implementing its recommendation or 

advice in such a context.258 We 

continue to believe that including 

current as well as past references to 

specific investment advice in the final 

rule is appropriate because it avoids 

questions about when a current 

recommendation becomes past, which 

arise under the current advertising rule. 

In addition, we continue to believe that 

selective references to current 

investment recommendations in 

advertisements could mislead investors 

in the same manner as selective 

references to past recommendations. 

b. Presentation of Performance Results 

As proposed, the final rule will 

prohibit an investment adviser from 

including or excluding performance 

results, or presenting performance time 

periods, in a manner that is not fair and 

balanced in an advertisement.259 One 

commenter supported the proposed 

prohibition,260 while two others argued 

that the fair and balanced standard is 

subjective and difficult to enforce in this 

context.261 Some commenters requested 

more guidance by way of example to 

demonstrate how performance 

advertising could comply with the fair 

and balanced standard.262

We continue to believe that this 

prohibition appropriately addresses the 

concern that an adviser may ‘‘cherrypick’’ the periods used to generate 

performance results in 

advertisements.263 As with specific 

investment advice, the factors that are 

relevant to whether an advertisement’s 

reference to performance information is 

presented in a fair and balanced manner 

will vary based on the facts and 

circumstances. For example, presenting 

performance results over a very short 

period of time (e.g., two months), or 

over inconsistent periods of time, may 

result in performance portrayals that are 

not reflective of the adviser’s general 

results and thus generally would not be 

fair and balanced. Additionally, an 

advertisement that highlights one period 

of extraordinary performance with only 

a footnote disclosure of unusual 

circumstances that have contributed to 

such performance may not be fair and 

balanced, depending on whether there 

are other sufficient clear and prominent 

disclosures, as discussed below.264

In cases where additional information 

is necessary for an investor to assess 

performance results, failure to provide 

such information in an advertisement is 

not consistent with the fair and 

balanced standard. For example, in 

order to provide investors with a fair 

and balanced portrayal of its 

performance results, an adviser should 

consider providing information related 

to the state of the market at the time, 

any unusual circumstances, and other 

material factors that contributed to such 

performance. In section II.E, we discuss 

further specific requirements and 

conditions for portrayals of certain types 

of performance in advertisements that 

we are also adopting as part of this final 

rule. 

6. Otherwise Materially Misleading 

Finally, we are adopting a catch-all 

provision, as proposed, that will 

prohibit any advertisement that is 

otherwise materially misleading.265 We 

did not receive any comments on this 

catch-all provision. We continue to 

believe this prohibition will help ensure 

that materially misleading practices not 

specifically covered by the other 

prohibitions will be addressed. For 

example, if an adviser provided accurate 

disclosures, but presented them in an 

unreadable font, such an advertisement 

would be materially misleading and 

prohibited under this provision. 

Because we are prohibiting a variety 

of specific types of advertisement 

practices within the general 

prohibitions, most of which include an 

element of materiality, as discussed 

above, we are focusing the catch-all 

provision on only those advertisements 

that are otherwise materially 

misleading. We continue to believe that 

limiting the catch-all to materially 

misleading advertisements will be more 

appropriate within the overall structure 

of the prohibitions while still achieving 

our goal of prohibiting misleading 

conduct that may affect an investor’s 

decision-making process. We also 

continue to believe that, in light of the 

rule’s prohibition on making untrue 

statements and omissions of material 

fact, including ‘‘false’’ is unnecessary in 

the catch-all provision as it is already 

covered by another prohibition.266

C. Conditions Applicable to 

Testimonials and Endorsements, 

Including Solicitations 

1. Overview 

Consistent with the proposal, the final 

rule permits advisers to include 

testimonials and endorsements in an 

advertisement, subject to the rule’s 

general prohibitions and additional 

conditions.267 These conditions differ 

depending on whether the testimonial 

or endorsement is compensated or 

uncompensated, which is similar to the 

framework we proposed.268

Numerous commenters supported the 

proposed expansion from the current 

advertising rule to permit advisers to 

include testimonials and endorsements 

in advertisements.269 Commenters 


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270See Consumer Federation Comment Letter; 

IAA Comment Letter. 

271See Comment Letter of TABR Capital 

Management, LLC (Jan. 6, 2020); Comment Letter of 

the Institute for the Fiduciary Standard (Feb. 10, 

2020) (‘‘Fiduciary Institute Comment Letter’’). 

272See NAPFA Comment Letter; Mercer 

Comment Letter (arguing that permitting paid 

endorsements will lead to largest advisers vying for 

endorsements from celebrities and popular 

‘‘financial gurus’’). 

273See supra section II.A.3. 

274Final rule 206(4)–1(e)(6) and (16). 

275See final rule 206(4)–1(b) (imposing 

disclosure, adviser oversight, and disqualification 

conditions). This approach derives from the current 

solicitation rule. See also final rule 206(4)– 

1(b)(4)(i). 

276Final rule 206(4)–1(b)(1). We proposed the 

final disclosure requirements separately under the 

proposed amendments to the advertising rule and 

solicitation rule. The proposed advertising rule 

amendments would have required disclosures that: 

(1) The testimonial was given by a client or 

investor, and the endorsement was given by a nonclient or non-investor, as applicable; and (2) if 

applicable, cash or non-cash compensation has 

been provided by or on behalf of the adviser in 

connection with obtaining or using the testimonial 

or endorsement. See proposed rule 206(4)–1(b)(1). 

The proposed amendments to the solicitation rule 

would have required disclosure of the terms of the 

compensation arrangement and description of any 

material conflicts of interest. See proposed rules 

206(4)–3(a)(1)(iii)(D) and (E). 

277See proposed rule 206(4)–3(a)(1)(iii)(F). 

278See NAPFA Comment Letter; Mercer 

Comment Letter. 

279MMI Comment Letter; Mercer Comment 

Letter. 

280FINRA’s rule 2210(d)(6) requires, among other 

things, that a testimonial disclose the following: (i) 

The fact that it may not be representative of the 

experience of other customers; (ii) the fact that the 

testimonial is no guarantee of future performance or 

success; and (iii) if more than $100 in value is paid 

for the testimonial, the fact that it is a paid 

testimonial. FINRA rule 2210(d)(6)(B). 

281For example, unlike under FINRA rule 2210, 

an adviser would be required to disclose the 

material terms of compensation for a testimonial, 

even where a person receives de minimis 

compensation, under the final marketing rule. 

282See final rule 206(4)–1(b)(1)(i). If the promoter 

provides the disclosures, the investment adviser 

Continued 

explained that consumer preferences 

have shifted to rely increasingly on 

third-party resources to inform 

purchasing decisions.270 Other 

commenters opposed permitting any 

testimonials or endorsements, paid or 

unpaid, in adviser advertisements.271

These commenters were concerned that 

permitting advisers to advertise paid 

testimonials and endorsements would 

increase puffery and cause a ‘‘race to the 

bottom’’ for advisers seeking paid 

endorsements.272

As discussed above, we have 

expanded the definitions of both 

testimonial and endorsement to include 

certain solicitation activity.273 This 

expansion recognizes the overlap 

between our approach to solicitation 

under the proposal and compensated 

testimonials and endorsements.274 It is 

also designed to capture solicitation 

activities that previously have been 

subject to the cash solicitation rule and 

subject them to the marketing rule. The 

final rule includes conditions for an 

adviser’s use of testimonials and 

endorsements designed to address 

concerns raised by commenters. These 

conditions include disclosure 

requirements to make prospective 

clients and investors aware of the 

conflicts of interest associated with 

testimonials and endorsements and a 

requirement that an investment adviser 

have a reasonable basis to believe that 

the testimonial or endorsement 

complies with the marketing rule. In 

addition, because we believe 

compensated testimonials and 

endorsements present a heightened risk 

for conflicts and misleading investors, 

the final rule will prevent advisers from 

using certain compensated testimonials 

and endorsements made by certain ‘‘bad 

actors’’ and other ineligible persons. 

The final rule will also require that an 

investment adviser have a written 

agreement with certain persons giving a 

testimonial or endorsement for 

compensation above the de minimis 

threshold.275

2. Required Disclosures 

The final rule will require 

advertisements that include any 

testimonials or endorsements to provide 

disclosures of certain information 

similar to what was proposed under 

each of the advertising and solicitation 

rules, subject to certain exceptions, as 

discussed below. Specifically, the final 

rule will require that the investment 

adviser disclose, or reasonably believe 

that the person giving the testimonial or 

endorsement discloses, the following at 

the time the testimonial or endorsement 

is disseminated: 

(i) Clearly and prominently: 

(A) That the testimonial was given by 

a current client or private fund investor, 

and the endorsement was given by a 

person other than a current client or 

private fund investor, as applicable; 

(B) That cash or non-cash 

compensation was provided for the 

testimonial or endorsement, if 

applicable; and 

(C) A brief statement of any material 

conflicts of interest on the part of the 

person giving the testimonial or 

endorsement resulting from the 

investment adviser’s relationship with 

such person; 

(ii) The material terms of any 

compensation arrangement including a 

description of the compensation 

provided or to be provided, directly or 

indirectly, to the person for the 

testimonial or endorsement; and 

(iii) A description of any material 

conflicts of interest on the part of the 

person giving the testimonial or 

endorsement resulting from the 

investment adviser’s relationship with 

such person and/or any compensation 

arrangement.276

We are not adopting the proposed 

requirement under the solicitation rule 

to disclose the amount of any additional 

cost to the investor as a result of 

solicitation for the reasons discussed 

below.277 We believe that disclosures 

are needed to inform and protect 

investors effectively when they are 

presented with testimonials and 

endorsements. We also share the 

concerns raised by some commenters 

that permitting paid testimonials and 

endorsements would increase the 

likelihood that personal bias will 

mislead investors.278 To address these 

issues in particular, we are adopting two 

disclosure requirements that we 

proposed under the solicitation rule— 

the disclosure of compensation 

arrangements and material conflicts of 

interest—under the final rule. We 

believe that these disclosures will 

benefit investors by providing them 

with a fuller context when presented 

with a testimonial or endorsement, 

without overly burdening those 

providing the testimonial or 

endorsement. 

Some commenters suggested that we 

should align our disclosure approach 

with FINRA’s rule 2210 to ease the 

compliance burdens of investment 

advisers that are registered brokerdealers or affiliated with brokerdealers.279 However, instead of aligning 

our disclosures with FINRA’s, such as 

FINRA’s specific, standardized 

disclosures in rule 2210(d)(6),280 we 

believe the final rule should provide 

advisers with a broad framework within 

which to determine how best to present 

testimonials and endorsements so they 

are not false or misleading. Accordingly, 

we are not adopting standardized 

disclosure requirements under our final 

rule. As a result, dually registered 

advisers and broker-dealers, that are not 

subject to the exemptions discussed 

below, that provide testimonials and 

endorsements with the disclosures 

required by FINRA should consider 

what additional or different disclosures 

they would need to make to comply 

with the final marketing rule.281

a. Clearly and Prominently 

The final rule will require that 

particular disclosures with respect to 

testimonials and endorsements be made 

clearly and prominently.282 The 


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must reasonably believe that the promoter provides 

such disclosures clearly and prominently. See final 

rule 206(4)–1(b)(1). 

283See proposed rule 206(4)–1(b)(1). 

284See proposed rule 206(4)–3(a)(1)(iii). 

285We believe this will help reduce the risk of 

having misleading testimonials or endorsements in 

addition to the general prohibitions, which prohibit 

advertisements from being materially false or 

misleading. See 206(4)–1(a). 

286See infra section II.C.2.f. (discussing oral 

testimonials and endorsements). The discussion in 

this section also applies to other parts of the final 

rule that include a clear and prominent disclosure 

standard, including the required disclosures related 

to third-party ratings and predecessor performance. 

Accordingly, such required disclosures should be 

included within the advertisement. 

287See section II.B.4. (discussing commenters’ 

concerns with respect to the clear and prominent 

standard). See, e.g., MMI Comment Letter; T. Rowe 

Price Comment Letter; Fidelity Comment Letter; 

IAA Comment Letter. 

288See final rule 206(4)–1(b)(1)(i)(A) through (C). 

289Accordingly, in the case of a compensated oral 

testimonial or endorsement, the adviser may, 

instead of recording and retaining the entire oral 

testimonial or endorsement, make and keep a 

record of the disclosures provided to investors. See 

final rule 204–2(a)(11)(i)(A)(2). See also infra 

section II.C.2.f and II.I. (discussing oral testimonials 

and endorsements). If an adviser or promoter 

provides an investor with written disclosures in 

connection with an oral testimonial or 

endorsement, instead of delivering the disclosures 

orally, the adviser or promoter should alert the 

investor to the importance of the disclosures, 

particularly with respect to the disclosures that 

must be provided clearly and prominently. See final 

rule 206(4)–1(b)(1)(i). If an adviser did not inform 

the investor about the importance of such 

disclosures, it would violate the general prohibition 

against false or misleading statements. See final rule 

206(4)–1(a)(1). 

290An advertisement intended to be viewed on a 

mobile device, for example, may meet the standard 

in a different way than one intended to be seen as 

a print advertisement (e.g., a person viewing a 

mobile device could be automatically redirected to 

the required disclosure before viewing the 

substance of an advertisement). 

291See infra section II.C.2.a.i. through iii. 

(discussing status as a client or non-client, fact of 

compensation, and statement of material conflicts 

of interest). 

292See, e.g., Fidelity Comment Letter; IAA 

Comment Letter; SIFMA AMG Comment Letter II 

(suggesting that we adopt, or adopt an approach 

consistent with, the FTC approach to hyperlinks). 

See also Federal Trade Commission, Dot Com 

Disclosures Guidance Update (Mar. 2013). While 

the FTC guidance permits the use of hyperlinks, it 

generally allows the use of hyperlinks to provide 

disclosures that are ‘‘not integral to the triggering 

claim’’ and places a number of conditions on the 

ability to provide hyperlinks. 

293Final rule 206(4)–1(b)(1)(i)(A). See proposed 

rule 206(4)–1(b)(1)(i). The promoter may be an 

entity or a natural person. 

294Client status will be assessed at the time that 

a testimonial or endorsement is disseminated. 

However, depending on the facts and 

circumstances, a former client may be considered 

a client for these purposes. For example, if a person 

is giving a statement about his or her recent prior 

experience with the adviser, the communication 

could be treated as a testimonial. 

proposed advertising rule would have 

required clear and prominent disclosure 

of: (1) Whether the testimonial or 

endorsement was given by a client or 

investor or a non-client or investor; and 

(2) if applicable, that compensation was 

provided by or on behalf of the adviser 

in connection with the testimonial or 

endorsement.283 The proposed 

solicitation rule would have required 

that, under the terms of the written 

agreement, the solicitor or adviser 

provide the investor at the time of 

solicitation activities with a separate 

disclosure that includes, among other 

matters, the terms of any compensation 

arrangement, including a description of 

the compensation provided or to be 

provided to the solicitor, and a 

description of any potential material 

conflicts of interest on the part of the 

solicitor resulting from the investment 

adviser’s relationship with the solicitor 

and/or the compensation 

arrangement.284 In merging the two 

rules under the final rule, we have 

determined to preserve that testimonials 

and endorsements must provide for 

certain concise disclosures to be made 

clearly and prominently as well as for 

certain additional disclosures to be 

made at the time the testimonial or 

endorsement is disseminated. 

We continue to believe that certain 

required disclosures should be made 

clearly and prominently to help prevent 

misleading testimonials and 

endorsements.285 In addition to the two 

disclosures required under the proposed 

advertising rule, we also are requiring 

that a brief statement of any material 

conflicts of interest on the part of the 

person giving the testimonial or 

endorsement be made clearly and 

prominently. In order to be clear and 

prominent, the disclosures must be at 

least as prominent as the testimonial or 

endorsement. In other words, we believe 

that the ‘‘clear and prominent’’ standard 

requires that the disclosures be included 

within the testimonial or endorsement, 

or in the case of an oral testimonial or 

endorsement, provided at the same 

time.286

As discussed above, many 

commenters requested more flexibility 

with respect to hyperlinked disclosures 

under the clear and prominent 

standard.287 With respect to the 

disclosures for testimonials and 

endorsements that are subject to the 

clear and prominent standard, we 

believe such disclosures must be 

provided clearly and prominently 

within the testimonial or 

endorsement.288 Specifically, we believe 

such disclosures should appear close to 

the associated statement such that the 

statement and disclosures are read at the 

same time, rather than referring the 

reader somewhere else to obtain the 

disclosures. In cases in which an oral 

testimonial or endorsement is provided, 

it would be consistent with the clear 

and prominent standard if the 

disclosures are provided in a written 

format, so long as they are provided at 

the time of the testimonial or 

endorsement.289 The requirement to 

provide the disclosures with respect to 

testimonials and endorsements ‘‘clearly 

and prominently’’ may necessitate 

formatting and tailoring based on the 

form of the communication.290

However, after considering comments, 

we are requiring advisers to provide 

only certain disclosures regarding 

testimonials and endorsements clearly 

and prominently, as discussed in more 

detail below.291 We believe that the 

disclosures required to be provided 

clearly and prominently are integral to 

the concerns associated with 

testimonials and endorsements in an 

advertisement. Our approach is 

consistent with the Federal Trade 

Commission’s (‘‘FTC’’) guidance, which 

also requires disclosures that are 

integral to the claim to accompany the 

claim to prevent deception.292 We also 

believe that these disclosures can be 

provided succinctly within the 

testimonial or endorsement such that 

advisers may advertise their services 

using modern technology and platforms 

that limit the size or characters of an 

advertisement. Moreover, we expect that 

succinctly providing these disclosures 

will promote their salience and impact. 

Other required disclosures, which 

provide investors with additional useful 

information but that are not integral to 

the concerns related to these 

advertisements, may be provided 

through hyperlinks, in a separate 

disclosure document or any other 

similar methods. 

i. Status as a Client or Non-Client 

Similar to what we proposed under 

the advertising rule, the final rule will 

require clear and prominent disclosure 

that a testimonial was given by a current 

client or investor, and that an 

endorsement was given by a person 

other than a current client or 

investor.293 We believe that this 

disclosure will provide investors with 

important context for weighing the 

relevance of the testimonial or 

endorsement. For example, an investor 

might reasonably give more weight to a 

statement made about an adviser by a 

current investor rather than someone 

who was never an investor.294

Additionally, without clearly attributing 

an endorsement to someone other than 

an investor, the advertisement could 

mislead investors who may assume the 


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295Testimonials and endorsements are subject to 

the rule’s general prohibitions. Whether a 

testimonial or endorsement would reasonably be 

likely to cause an untrue or misleading implication 

or inference to be drawn concerning a material fact 

relating to the investment adviser would depend on 

the facts and circumstances. For instance, it would 

be misleading for an adviser to provide investors 

with a testimonial claiming a positive experience 

with the adviser by a former client, without 

mentioning that the person has not been a client for 

20 years. 

296See proposed rule 206(4)–3(a)(1)(iii)(B). The 

proposed rule would have also required disclosure 

of the adviser’s name. Proposed rule 206(4)– 

3(a)(1)(iii)(A). 

297Final rule 206(4)–1(b)(1)(i) through (ii). The 

proposed advertising rule would have only required 

disclosure of the client or non-client status of the 

person providing the testimonial or endorsement 

and whether compensation has been provided for 

the testimonial or endorsement. See proposed rule 

206(4)–1(b)(1). 

298 In the case of testimonials and endorsements 

where compensation paid is above the de minimis 

threshold, advisers are required to maintain a 

written agreement with a promoter. See final rule 

206(4)–1(b)(2)(ii) and (b)(4)(i). In such cases, the 

agreement would provide a record of the name of 

such promoter. See rule 204–2(a)(10), which 

currently requires that advisers retain ‘‘[a]ll written 

agreements (or copies thereof) entered into by the 

investment adviser with any client or otherwise 

relating to the business of such investment adviser 

as such.’’ 

299Final rule 206(4)–1(b)(1)(i)(B). See proposed 

rule 206(4)–1(b)(1)(ii). 

300Consumer Federation Comment Letter; SBIA 

Comment Letter. 

301Consumer Federation Comment Letter. 

302Final rule 206(4)–1(b)(1)(i)(C). 

303We expect this brief statement of any material 

conflicts of interest to be substantially shorter than 

the description of any material conflicts of interest 

that is required, as discussed below. See final rule 

206(4)–1(b)(1)(ii). 

304See final rule 206(4)–1(b)(1)(iii). 

305Final rule 206(4)–1(b)(1)(ii). 

306See proposed rule 206(4)–3(a)(1)(iii)(D). 

307See, e.g., Comment Letter of Flexible Plan 

Investments, Ltd. on proposed solicitation rule 

(Feb. 10, 2020) (‘‘Flexible Plan Investments 

Comment Letter I’’); Comment Letter of Proskauer 

Rose LLP (Feb. 10, 2020) (‘‘Proskauer Comment 

Letter’’). 

308Flexible Plan Investments Comment Letter I. 

309This is consistent with the Commission’s 

position regarding the disclosure requirements 

under the existing cash solicitation rule. See 1979 

Adopting Release, supra footnote 3, at text 

accompanying nn.15 and 16. 

310This is similar to the Commission’s position 

under the existing cash solicitation rule. See 1979 

Adopting Release, supra footnote 3, at text 

accompanying nn.15 and 16. 

endorsement reflects the endorser’s 

experience as an investor.295

The proposed solicitation rule would 

have required disclosure of the name of 

the solicitor.296 However, similar to the 

proposed advertising rule, the final rule 

will not require the disclosure of the 

name of the promoter.297 We did not 

receive any comments on the 

requirement under the proposed 

solicitation rule to disclose the name of 

the solicitor. We expect that advisers 

may still choose to disclose the full 

name of the promoter because 

disclosing the name of the promoter 

could help an investor assess the 

reputation or other qualifications of the 

person. However, we believe our final 

approach is appropriate for privacy 

reasons and takes into account cases 

where a promoter may not wish to give 

his or her name.298 We also believe that 

in cases where a name is not provided, 

the rule’s general prohibitions will 

protect investors from fraudulent or 

misleading testimonials or 

endorsements. An investor may also 

give less weight to that particular 

testimonial or endorsement. 

ii. Fact of Compensation 

Similar to what we proposed under 

the advertising rule, the final rule will 

require clear and prominent disclosure 

that cash or non-cash compensation was 

provided for the testimonial or 

endorsement, if applicable.299 Similar to 

the disclosure of a promoter’s status as 

a current investor or person other than 

a current investor, we continue to 

believe that this disclosure will provide 

investors with important context for 

weighing the relevance of the 

testimonial or endorsement. Two 

commenters specifically supported 

requiring advisers to disclose whether 

they paid for testimonials or 

endorsements under the proposed 

advertising rule.300 One of these 

commenters stated that without 

requiring clear and prominent 

disclosure that a particular testimonial 

or endorsement is effectively a ‘‘paid-for 

advertisement,’’ investors would not be 

able to determine whether they are 

consuming an authentic, unbiased 

review of the adviser.301 We agree, and 

we believe that this simple but clear 

disclosure is one that is both beneficial 

for investors and easy to implement for 

advisers, including on spaceconstrained platforms. For example, 

when providing a testimonial or 

endorsement on a social media 

platform, an adviser must clearly and 

prominently label the testimonial or 

endorsement as being a paid testimonial 

or endorsement. 

iii. Statement of Material Conflicts of 

Interest 

The final rule will require clear and 

prominent disclosure of a brief 

statement of any material conflicts of 

interest on the part of the promoter 

resulting from its relationship with the 

investment adviser.302 Similar to the 

other disclosures subject to the clear 

and prominent standard, we expect this 

disclosure to be succinct. For example, 

it would be sufficient for an adviser to 

simply state that the testimonial or 

endorsement was provided by an 

affiliate of the adviser, or that the 

promoter is related to the adviser, if this 

relationship is the source of the 

conflict.303

We believe the required disclosures 

result in information that informs and 

protects investors, yet can be provided 

succinctly within the testimonial or 

endorsement. We also believe this form 

of layered disclosure enhances the 

salience of this information and may 

help investors better focus on the 

presence of conflicts of interest than 

requiring potentially more lengthy 

disclosures. We require a fuller 

description of any material conflicts of 

interests resulting from the promoter’s 

relationship with the adviser and/or the 

promoter’s compensation arrangement 

with the adviser as part of the 

disclosures provided with respect to 

testimonials or endorsements, but this is 

not subject to the clear and prominent 

standard.304

b. Material Terms of Compensation 

Arrangement 

The final rule will require disclosure 

of the material terms of any 

compensation arrangement, including a 

description of the compensation 

provided or to be provided, directly or 

indirectly, to the person for the 

testimonial or endorsement.305 This 

provision is based on the disclosure 

requirement of the proposed solicitation 

rule. The proposed solicitation rule 

would have required the disclosure of 

the terms of any compensation 

arrangement, including a description of 

the compensation provided or to be 

provided to the solicitor.306 Some 

commenters stated that the disclosure 

requirement was overbroad and 

unclear.307 For instance, one commenter 

stated that it is unclear whether an 

adviser should disclose reimbursing a 

solicitor for third-party expenses in the 

solicitation process under this 

requirement.308 The final rule requires 

disclosure of compensation provided, 

directly or indirectly, for the testimonial 

or endorsement. If payment of thirdparty expenses is part of the 

compensation arrangement for the 

testimonial or endorsement, then such 

payment should be disclosed under the 

final rule. 

If a specific amount of cash 

compensation is paid, the advertisement 

should disclose that amount.309 If the 

compensation takes the form of a 

percentage of the total advisory fee over 

a period of time, then the advertisement 

should disclose such percentage and 

time period.310 With respect to non-cash 


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311This is also similar to the Commission’s 

position under the existing cash solicitation rule. 

See 1979 Adopting Release, supra footnote 3, at text 

accompanying nn.15 and 16. 

312See Proskauer Comment Letter. 

313See Investment Adviser Marketing Feedback 

Form. 

314As stated in our proposal, the materiality of 

the incentive to solicit investors to an investor’s 

evaluation of the referral depends on the type and 

magnitude of the compensation. We believe that the 

description of a compensation arrangement will be 

helpful for investors to consider the types and 

levels of incentives present. 2019 Proposing 

Release, supra footnote 7, at section II.B.4. 

315 If the amount of increased fees for the investor 

is known or could reasonably be obtained, then 

such amount should be disclosed as part of this 

requirement. 

316Proskauer Comment Letter (stating that this 

requirement would result in ‘‘very extensive’’ 

disclosures, particularly if an adviser has multiple 

arrangements with multiple solicitors). 

317Such activities will fall under the definition of 

endorsement. 

318See final rule 206(4)–1(e)(1)(ii). 

319See also Fiduciary Interpretation, supra 

footnote 88, at 23 (‘‘an adviser must eliminate or at 

least expose through full and fair disclosure all 

conflicts of interest which might incline an 

investment adviser—consciously or 

unconsciously—to render advice which was not 

disinterested.’’). 

compensation, if the value of the noncash compensation is readily 

ascertainable, the disclosures should 

include that amount. Moreover, if all or 

part of the compensation, cash or noncash, is payable upon dissemination of 

the testimonial or endorsement or is 

deferred or contingent on a certain 

future event, such as an investor’s 

continuation or renewal of its advisory 

relationship, agreement, or investment, 

then the advertisement should disclose 

those terms.311

In response to this requirement under 

our proposed solicitation rule, one 

commenter argued that requiring 

detailed disclosures about 

compensation arrangements would 

result in lengthy disclosures that would 

be confusing for, and irrelevant to, 

investors.312 The commenter suggested 

that the rule require solicitors to 

disclose only that they are receiving 

compensation for the solicitation. This 

commenter stated that this disclosure 

would adequately alert investors to the 

inherent conflict of interest associated 

with such compensation. At the same 

time, several commenters considered 

additional compensation information 

about a compensated solicitor’s referral, 

including the amount paid to the 

solicitor for referring the adviser, 

whether there would be any additional 

cost to the investor, and the solicitor’s 

relationship to the adviser, ‘‘very 

important.’’ 313

Although we believe that a simple 

disclosure that compensation was 

provided is sufficient for purposes of 

the clear and prominent disclosures, we 

continue to believe that the disclosure 

related to the terms of the compensation 

arrangement help convey to the investor 

the nature and magnitude of the 

person’s incentive to refer the investor 

to the adviser.314 The incentive might 

vary based on the structure of the 

compensation arrangement. A promoter 

that receives a flat or fixed fee from an 

adviser for a set number of referrals 

might have a different incentive in 

referring to the adviser than another that 

receives a fee, such as a percentage of 

the investor’s assets under management, 

for each investor that becomes a client 

of, or a private fund investor with, the 

adviser. Furthermore, trailing fees (i.e., 

fees that are continuing) that are 

contingent on the investor’s relationship 

with the adviser continuing for a 

specified period of time present 

additional considerations in evaluating 

the promoter’s incentives. It would be 

relevant to an investor to know that a 

promoter continues to receive 

compensation after the investor 

becomes a client of, or private fund 

investor with, the adviser, as well as the 

period of time over which the promoter 

continues to receive compensation for 

such solicitation. A longer trailing 

period can present a greater incentive to 

solicit the investor. In addition, if, as 

part of the compensation arrangement 

between the adviser and promoter, an 

investor would pay increased advisory 

fees for becoming a client as a result of 

the promoter’s testimonial or 

endorsement, then this information 

would be relevant so that the investor 

can make such considerations when 

choosing an adviser.315

After considering comments, we are 

requiring that the disclosures only 

include the material terms of any 

compensation arrangement. 

Accordingly, these disclosures need not 

include immaterial aspects of a 

compensation arrangement. These 

disclosures also need not include 

detailed information about the 

calculation of the compensation payable 

to each person giving a testimonial or 

endorsement; they need not be lengthy 

to convey the magnitude and nature of 

the conflict. In addition, these 

disclosures should not include all 

compensation arrangements that an 

adviser has with any and all promoters, 

as one commenter suggested, but rather 

should include only information about 

the relevant compensation arrangement 

between an adviser and a specific 

promoter in order for the disclosure to 

be effective.316 As modified, this 

provision will require disclosures about 

any compensation arrangement with a 

promoter for its testimonial or 

endorsement. 

An adviser may arrange to 

compensate a third-party marketing 

company to advertise and refer potential 

clients to the adviser. If the 

compensation arrangement calls for a 

percentage of fees collected from the 

referred clients, then the disclosures 

should state so and describe what that 

percentage is. An adviser may also have 

a directed brokerage arrangement with a 

third-party brokerage firm, in which the 

adviser will direct brokerage to the firm 

as compensation for the firm’s 

solicitation of clients for, or referral of 

clients to, the adviser.317 In these cases, 

the adviser or firm should disclose the 

material terms of this arrangement, 

including a brief description of the 

compensation provided or to be 

provided to the firm. As part of the 

disclosure of the material terms of the 

compensation, the disclosure should 

state the range of commissions that the 

firm charges for investors directed to it 

by the adviser. Furthermore, if the 

solicitation or referral is contingent 

upon the firm receiving a particular 

threshold of directed brokerage (and 

other services, if applicable) from the 

adviser, the disclosure should say so. 

Additional disclosure would be 

required, for example, if the firm and 

the adviser agree that as compensation 

for the firm’s endorsement of the 

adviser, the adviser’s directed brokerage 

activities would extend to other clients 

such as the solicited client’s friends and 

family. 

The final rule will require the 

advertisement to disclose compensation 

that the adviser provides directly or 

indirectly to a person for a testimonial 

or endorsement.318 For example, if an 

individual solicits an investor and the 

adviser compensates a related person of 

that individual for such solicitation 

(such as an employer or another entity 

that is associated with the individual), 

the adviser or individual will need to 

include this compensation in its 

disclosures. If a person, such as a 

broker-dealer, refers clients to advisers 

that recommend the broker-dealer’s or 

its affiliate’s proprietary investment 

products or recommend products that 

have revenue sharing or other pecuniary 

arrangements with the broker-dealer or 

its affiliate, the disclosures must say 

so.319 Regardless of whether the 

adviser’s arrangement is with an 

individual or the individual’s firm, 

compensation to the firm for any 

testimonial or endorsement will 

constitute compensation under the rule, 

as it would be likely to affect the 


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320Proposed rule 206(4)–3(a)(1)(iii)(E). 

321Final rule 206(4)–1(b)(1)(iii). The materiality 

standard applies to the investor(s) being solicited by 

the promoter. In other words, if an investor would 

consider a particular conflict of interest on the part 

of the promoter to be material to his or her decision 

to choose an investment adviser, then such conflict 

of interest should be disclosed. 

322See TINA Comment Letter. 

323See Proskauer Comment Letter; Mercer 

Comment Letter. 

324See, e.g., MFA/AIMA Comment Letter I. 

325See, e.g., Fidelity Comment Letter. 

326See, e.g., Fidelity Comment Letter, which also 

stated that Form CRS would be an additional place 

where investors may find similar information. 

327Such persons would also have disclosure 

obligations under the anti-fraud provisions of the 

Federal securities laws. If a person meets the 

definition of ‘‘investment adviser,’’ as defined 

under section 202(a)(11) of the Advisers Act, such 

person has a fiduciary duty to clients, regardless of 

whether the adviser is registered or required to be 

registered, and is thus liable under the anti-fraud 

provisions of the Advisers Act and other Federal 

securities laws for failure to disclose conflicts of 

interest. 

328See, e.g., Item 4.A. of Form ADV, Part 2 

(requires disclosure if a relationship between 

adviser and supervised person’s other financial 

industry activities creates a material conflict of 

interest with clients); Item 5.E of Form ADV, Part 

2 (requires disclosure of conflict of interest to the 

extent that the adviser or any of its supervised 

persons accepts compensation for the sale of 

securities or other investment products); Item 10.C. 

of Form ADV, Part 2 (requires description of 

material conflict of interests with related persons, 

as defined in Form ADV, and only if the 

relationship or arrangement with the related person 

creates a material conflict of interest with clients); 

Item 10.D. of Form ADV, Part 2 (requires disclosure 

of material conflict of interest if the adviser receives 

compensation from or has other business 

relationships with other advisers). 

329The Disclosure Obligation requires that a 

broker-dealer disclose in writing all material facts 

about the scope and terms of its relationship with 

a retail customer, including the material fees and 

costs the customer will incur as well as all material 

facts relating to its conflicts of interest associated 

with the recommendation, including third-party 

payments and compensation arrangements. See 

Regulation Best Interest Release, supra footnote 

146, at 14. See also infra section II.C.5. (discussing 

exemptions). 

330See infra section II.C.5. (discussing 

exemptions). To the extent that a broker-dealer’s 

testimonial or endorsement under rule 206(4)–1 is 

a recommendation to a retail customer of a 

securities transaction or investment strategy 

involving securities by a broker-dealer, the 

Disclosure Obligation under Regulation BI would 

apply to the broker-dealer’s testimonial or 

endorsement. 

331This will be a change from the current 

solicitation rule’s requirement that the solicitor 

state whether the client will pay a specific fee to 

the adviser in addition to the advisory fee, and 

whether the client will pay higher advisory fees 

than other clients (and the difference in such fees) 

because the client was referred by the solicitor. See 

current rule 206(4)–3(b)(6). 332See section II.C.2.b. (discussing material terms 

of compensation arrangement disclosure). 

individual’s salary, bonus, commission 

or continued association with the firm. 

c. Material Conflicts of Interest 

The proposed solicitation rule would 

have required a description of any 

potential material conflicts of interest 

on the part of the solicitor resulting 

from the investment adviser’s 

relationship with the solicitor and/or 

compensation arrangement.320 We have 

slightly modified this proposed 

requirement by removing the word 

‘‘potential’’ from ‘‘potential material 

conflicts of interest,’’ as discussed in 

detail below. Accordingly, the final rule 

will require a description of any 

material conflicts of interest on the part 

of the person giving the testimonial or 

endorsement resulting from the 

investment adviser’s relationship with 

such person and/or any compensation 

arrangement.321

One commenter to the proposed 

advertising rule requested that we 

broaden the disclosure provision and 

require disclosure of all ‘‘material 

connections,’’ stating that there are 

types of connections besides the fact of 

compensation that could ‘‘materially 

affect the weight or credibility’’ of a 

testimonial or endorsement.322 With 

respect to the proposed solicitation rule 

requirement, some commenters 

supported making clear to investors that 

a conflict of interest may result from an 

adviser’s relationship with the solicitor 

and/or their compensation 

arrangement.323 Others stated that the 

disclosure of potential material conflicts 

of interest would likely be redundant 

with the required disclosure of the 

terms of any compensation 

arrangement.324 Commenters also 

argued that such a requirement would 

result in disclosure that is too lengthy 

without much benefit.325 These 

commenters stated that registered 

investment advisers and broker-dealers 

who act as solicitors are already subject 

to similar disclosure obligations under 

Form ADV Part 2 and Regulation BI, 

respectively.326

We believe our modification of 

removing the word ‘‘potential’’ from the 

proposed requirement will help reduce 

the burden on advisers as well as the 

length of the disclosures without 

eliminating any material information 

provided to investors. We do not believe 

the compensation arrangement 

disclosure alone is sufficient as it 

merely implies the conflict. Rather, 

there should be explicit disclosure that 

the promoter, due to such 

compensation, has an incentive to 

recommend the adviser, resulting in a 

material conflict of interest. 

Additionally, we believe a promoter 

could have other material conflicts of 

interest based on a relationship with the 

investment adviser that could affect the 

credibility of the testimonial or 

endorsement. Accordingly, to the extent 

that there is any material conflict of 

interest, the rule will require a 

description of such material conflict of 

interest. 

We recognize that persons who are 

also registered as investment advisers or 

broker-dealers have other disclosure 

obligations relating to conflicts of 

interest, such as the requirements of 

Form ADV.327 We do not believe that 

disclosures provided in Form ADV 

would sufficiently satisfy this provision. 

For example, although Form ADV Part 

2 requires disclosure of material 

conflicts of interest, the disclosure 

required by the form is limited to 

conflicts related to relationships with 

specific personnel such as the adviser’s 

supervised persons and related 

persons.328 Moreover, we do not believe 

that an adviser that is acting as a 

promoter would be required to deliver 

its Form ADV Part 2 to a person the 

adviser was soliciting to become a client 

of another investment adviser. On the 

other hand, in circumstances where 

Regulation BI applies to a brokerdealer’s activity as a promoter, we 

believe the Disclosure Obligation under 

Regulation BI is sufficiently similar to 

satisfy the disclosure provisions under 

our final rule.329 Accordingly, as 

discussed below, we are adopting a 

partial exemption from the final rule’s 

required disclosures in certain 

circumstances.330

We had proposed under the 

solicitation rule to require disclosure of 

the amount of any additional cost to the 

investor as a result of the testimonial or 

endorsement. We did not receive any 

comments on this proposed 

requirement. After further 

contemplation, we believe that such a 

requirement under the final rule, which 

would apply to all testimonials and 

endorsements, would create burdens 

that are not commensurate with the 

benefits of the disclosure and are 

accordingly eliminating this 

requirement.331 Such costs could vary 

by client and over time, making it 

difficult for advisers to disclose 

concisely in an advertisement. 

Moreover, to the extent that an adviser 

knows or reasonably should know that 

an investor would pay increased 

advisory fees as a result of its 

compensation arrangement or 

relationship with a promoter, then such 

disclosures would be made under 

another provision of the rule as 

discussed above.332

d. Reasonable Belief 

Under the final rule, an adviser that 

does not provide the required 


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333See proposed rule 206(4)–1(b)(1) and (2) (each 

requiring a reasonable belief standard for 

investment advisers). See also proposed rule 

206(4)–3(a)(2) (requiring a reasonable basis for 

believing that solicitor has complied with the 

written agreement requirement). 

334See final rule 206(4)–1(b)(2)(ii). To the extent 

that the promoter’s testimonial or endorsement falls 

under the de minimis exemption, advisers would 

not be required to, but may choose to, enter into a 

written agreement and include such provisions. 

Final rule 206(4)–1(b)(2)(ii) and (b)(4)(i). 

335Final rule 206(4)–1(b)(1). This is similar to the 

existing cash solicitation rule, which requires that 

the solicitor disclosure be delivered at the time of 

any solicitation activities. See current rule 206(4)– 

3(a)(2)(iii)(A). 

336Proposed rule 206(4)–3(a)(1)(iii). 

337The timing for several aspects of the proposed 

solicitation rule was ‘‘at the time’’ of solicitation. 

See 2019 Proposing Release, supra footnote 7, at 

section II.B.4 (discussing solicitor disclosure), 

section II.B.5. (discussing written agreement), 

section II.B.6. (discussing adviser oversight and 

compliance) and section II.B.7 (discussing 

disqualification). 338The current solicitation rule requires that the 

solicitor deliver the solicitor disclosure ‘‘at the time 

of any solicitation activities.’’ Rule 206(4)– 

3(a)(2)(ii). 339See IAA Comment Letter; Flexible Plan 

Investments Comment Letter I (‘‘. . . delivery 

should simply be required before the recipient of 

the solicitation or referral becomes a client of the 

adviser.’’); Nesler Comment Letter. 340The exemption for broker-dealers subject to 

Regulation BI would allow for the related 

disclosures to be provided prior to or at the time 

of a recommendation, which may, in some cases, 

precede a particular testimonial or endorsement for 

private fund investors. However, unless the brokerdealer had made previous recommendations subject 

to Regulation BI to the investor, the testimonial or 

endorsement would likely be the first time the 

investor is receiving the disclosure. See Regulation 

Best Interest Release, supra footnote 146 (‘‘Brokerdealers could meet the Disclosure Obligation by 

making certain required disclosures of information 

regarding conflicts of interest to their customers at 

the beginning of a relationship, and this form of 

disclosure may be standardized. However, if 

standardized disclosure, provided at such time, 

does not sufficiently identify the material facts 

relating to conflicts of interest associated with any 

particular recommendation, the disclosure would 

need to be supplemented so that such disclosure is 

tailored to the particular recommendation.’’). 

341See proposed rule 206(4)–3(a)(1)(iii). The 

current solicitation rule also requires delivery of a 

separate disclosure. 342See final rule 206(4)–1(b)(1)(i). See also 

section II.C.2.a. (discussing clear and prominent 

standard). 

343See, e.g., MFA/AIMA Comment Letter I; 

SIFMA AMG Comment Letter I (responding to our 

request for comment in the Proposing Release as to 

whether the disclosure should be separate, as 

proposed). 

344See, e.g., SIFMA AMG Comment Letter I; IAA 

Comment Letter. 

345See final rule 206(4)–1(b)(1). This is also 

similar to the proposed advertising rule, which 

required that the investment adviser clearly and 

prominently disclose or reasonably believe that the 

testimonial or endorsement clearly and prominently 

disclosed certain information. See proposed rule 

206(4)–1(b)(1). 

disclosures must reasonably believe that 

the promoter discloses the required 

information. We proposed a reasonable 

belief standard under the advertising 

rule and continue to believe that the 

standard is appropriate in ensuring that 

the required disclosures are 

provided.333

To have a reasonable belief, an 

adviser may provide the required 

disclosures to a promoter and seek to 

confirm that the promoter provides 

those disclosures to investors. For 

example, if a blogger or social media 

influencer is endorsing and referring 

clients to the adviser through his or her 

website or platform, the adviser may 

provide such blogger or influencer with 

the required disclosures and confirm 

that they are provided appropriately on 

his or her respective pages. The adviser 

may choose to include provisions in its 

written agreement with the promoter, 

requiring the promoter to provide the 

required disclosures to investors.334 The 

aforementioned ways are only examples 

of how an adviser may demonstrate that 

it has a reasonable belief. 

e. Timing of Disclosures 

Under the final rule, the required 

disclosures with respect to testimonials 

and endorsements must be delivered at 

the time the testimonial or endorsement 

is disseminated.335 The proposed 

solicitation rule would have required 

delivery of a separate solicitor 

disclosure at the time of any solicitation 

activities (or in the case of a mass 

communication, as soon as reasonably 

practicable thereafter).336 Given that the 

final rule requires certain disclosures to 

be included within the testimonial or 

endorsement per the clear and 

prominent standard, rather than 

delivered separately, as discussed 

below, we are not adopting the 

proposed alternative to provide the 

disclosures as soon as reasonably 

practicable thereafter in the case of mass 

communications. 

We continue to believe the timing of 

disclosures is important.337 If the 

disclosures are not provided at the time 

the testimonial or endorsement is 

disseminated, many of the disclosures 

may not have the same impact on 

investors.338 Some commenters to the 

proposed solicitation rule suggested that 

the rule require delivery of solicitor 

disclosure after a prospective client 

expresses interest in the adviser’s 

services or becomes a client of the 

adviser, rather than at the time of 

solicitation.339 We decline to make this 

change as we continue to believe these 

disclosures should be provided at the 

time of dissemination of the testimonial 

or endorsement to protect against 

investor confusion.340

f. No Separate Disclosure Requirement 

We are not adopting the proposed 

requirement for a separate solicitor’s 

disclosure.341 In light of the merger of 

the advertising and solicitation rules, 

we believe that requiring certain 

disclosures be provided clearly and 

prominently within the testimonial or 

endorsement, and other disclosures be 

otherwise provided, is a more practical 

and effective approach to informing 

investors and clients.342 For example, if 

an adviser compensates a podcast host 

for endorsing the adviser in its podcast 

or as an advertisement during the 

podcast, including certain of the 

required disclosures in the podcast itself 

would give greater prominence to these 

disclosures and have a greater impact on 

the potential investor than a separate 

disclosure document with all of the 

required disclosures. 

Commenters raised concerns about 

separate solicitor disclosure, noting that 

the extra documentation would burden 

investment advisers and overwhelm 

clients.343 These commenters also 

suggested providing flexibility to 

include the disclosures within other 

solicitation materials or incorporating 

the solicitor disclosure into other 

required disclosures, such as the Form 

ADV Part 2A. We believe that it would 

reduce the effectiveness of the 

disclosures for testimonials and 

endorsements to allow them all to be 

included within other solicitation 

materials given our view that particular 

disclosures should be provided clearly 

and prominently. 

In a change from the proposal, the 

final rule will not permit the delivery of 

the solicitor disclosure as soon as 

reasonably practicable after the time of 

any solicitation activities in the case of 

a mass communication. We believe that 

the changes under the final rule, such as 

the elimination of a separate disclosure 

requirement, eliminate the need to 

provide a different delivery requirement 

for the required disclosures. In fact, as 

noted above, we believe that the 

required disclosures should be provided 

at the time that such testimonial or 

endorsement is disseminated in all 

cases in order to have a meaningful 

impact on investors. 

Under the proposed solicitation rule, 

either the adviser or the solicitor would 

have been able to give the disclosures. 

Commenters generally supported this 

flexibility.344 Accordingly, under the 

final rule, either the adviser or the 

promoter may provide the required 

disclosures, subject to the other 

conditions of the rule.345 We do not 

believe the impact of the disclosures 

will be undermined by permitting either 


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346 If the disclosures are made in writing, we have 

stated that an ‘‘in writing’’ requirement could be 

satisfied either through paper or electronic means 

consistent with existing Commission guidance on 

electronic delivery of documents. See Regulation 

Best Interest Release, supra footnote 146, at text 

accompanying nn.499–500. If delivery of the 

required disclosure is made electronically, it should 

be done in accordance with the Commission’s 

guidance regarding electronic delivery. See Use of 

Electronic Media by Broker-Dealers, Transfer 

Agents, and Investment Advisers for Delivery of 

Information; Additional Examples Under the 

Securities Act of 1933, Securities Exchange Act of 

1934, and Investment Company Act of 1940, 

Release No. 34–37182 (May 9, 1996) [61 FR 24644 

(May 15, 1996)]; see also 2000 Release, supra 

footnote 43; and see also 1995 Release, supra 

footnote 43. 

347See NASAA Comment Letter (‘‘Emails, text 

messages, instant messages, electronic 

presentations, videos, podcasts, and other modern 

methods of communications . . . do not adequately 

ensure that the investor will read, hear, or 

understand the importance of the disclosures. 

Furthermore, these and similar electronic 

communications are ill-suited to allowing the client 

to retain a copy of the disclosure in a form and 

location that can easily be recalled when 

necessary.’’). 

348To the extent that a testimonial or 

endorsement is disseminated by an adviser 

indirectly through a third party, an adviser should 

retain such records as well. See final rule 204– 

2(a)(11)(i)(A), which requires that advisers retain a 

copy of each advertisement. 

349 In addition to the disclosures that are required 

to be provided clearly and prominently within the 

testimonial or endorsement, an adviser may choose 

to provide the other disclosures that are not subject 

to the clear and prominent standard within the 

testimonial or endorsement. See supra section 

II.C.2.a. (discussing clear and prominent standard). 

In circumstances in which an adviser does not 

provide the other disclosures within the 

advertisement, an adviser would be required to 

maintain such disclosures under the recordkeeping 

rule. See final rule 204–2(a)(15)(i). 

350See final rule 204–2(a)(11)(i)(A)(2). If the 

required disclosures are provided in a written 

format, then only the written disclosures would 

need to be maintained. If the required disclosures 

are provided orally, however, this record need not 

necessarily be an actual recording of the oral 

disclosures provided, but must contain the fact that 

the oral disclosures were provided, the substance of 

what was provided, and when. 

351See Nesler Comment Letter (asking the 

Commission to clarify that if disclosures are 

provided orally, such disclosure in oral form needs 

to be recorded prior to being provided to a client, 

and not at the time it is provided to the client). 

352 In order to avoid duplicative records, advisers 

may maintain records of a script or reading of a 

script of disclosures provided orally. 

353Final rule 206(4)–1(b)(2) and (4). 

354Final rule 206(4)–1(b)(2). 

355See current rule 206(4)–3(a)(2)(iii)(C) 

(requiring that the investment adviser make a bona 

fide effort to ascertain whether the solicitor has 

complied with the agreement, and have a 

reasonable basis for believing that the solicitor has 

so complied.). 356See rule 206(4)–3(a)(2)(iii)(C). 357 1979 Adopting Release, supra footnote 3, 

accompanying nn.14 and 15. 358However, the oversight requirement contains 

two prongs with separate obligations. Although 

certain mechanisms in the written agreement, if 

implemented, could lead the adviser to have a 

reasonable basis for believing that any testimonial 

or endorsement complies with the requirements of 

the rule, having a written agreement by itself would 

not satisfy the first prong of the oversight 

requirement. 

the adviser or the promoter to provide 

the disclosures. 

Our final rule does not require an 

adviser or promoter to present the 

required disclosures in paper.346 One 

commenter stated that an investor 

would not grasp the importance of the 

disclosure if it is not in a paper 

document.347 We disagree that 

electronic or oral communication 

cannot be effective. We believe that 

providing flexibility regarding 

disclosure format is necessary to allow 

the disclosures to be provided at the 

time of dissemination of a testimonial or 

endorsement. We also believe that our 

adopted disclosure requirements will be 

adaptable to different types of 

testimonial and endorsement 

arrangements. Because disclosures must 

be clear and prominent, the final rule 

mitigates concerns that investors will 

not read or hear electronic disclosures. 

Regardless of the format, the adviser 

will be required, under the Act’s books 

and records rule, to make and keep true, 

accurate, and current copies of the 

advertisement.348 In some 

circumstances, a copy of the 

advertisement (i.e., the testimonial or 

endorsement) may include all of the 

required disclosures with respect to the 

testimonial or endorsement.349 In the 

case of a compensated oral testimonial 

or endorsement, the adviser may, 

instead of recording and retaining the 

entire oral testimonial or endorsement, 

make and keep a record of the 

disclosures provided to investors.350

Additionally, in response to one 

commenter,351 we are clarifying that if 

an adviser disseminates the required 

disclosures orally in connection with an 

oral testimonial or endorsement, the 

adviser may choose, consistent with 

applicable law, to record the oral 

disclosures either prior to or at the time 

of the dissemination of the testimonial 

or endorsement.352

3. Adviser Oversight and Compliance 

All testimonials and endorsements, 

including those that are compensated 

and those that are uncompensated and 

meet prong one of the definition of 

advertisement, will be subject to an 

adviser oversight and compliance 

provision under the final rule.353 The 

final rule will require the investment 

adviser to have: (i) A reasonable basis 

for believing that any testimonial or 

endorsement complies with the 

requirements of the rule, and (ii) a 

written agreement with any person 

giving a compensated testimonial or 

endorsement that describes the scope of 

the agreed upon activities and the terms 

of the compensation for those activities 

when the adviser is providing 

compensation for testimonials and 

endorsements that is above the de 

minimis threshold.354 The oversight 

requirement we are adopting is similar 

to the proposed oversight requirement 

and the current solicitation rule’s 

oversight requirement, but differs in 

several respects to address commenters’ 

concerns and to reflect the merger of the 

two rules.355

First, the adviser oversight condition 

will require that the adviser have a 

reasonable basis for believing that the 

testimonial or endorsement complies 

with the requirements of the final rule, 

rather than the terms of a written 

agreement as proposed. The proposal 

would have replaced the solicitation 

rule’s current requirement that the 

written agreement contain an 

undertaking by the solicitor to perform 

its duties under the agreement in a 

manner consistent with the provisions 

of the Act and the rules thereunder with 

the requirement that the solicitor agree 

to perform its solicitation activities in 

accordance with sections 206(1), (2), 

and (4) of the Act.356 We believe that 

explicitly requiring advisers to oversee 

third-party advertisements for 

compliance with the specific 

restrictions and requirements in the 

marketing rule, rather than the broader 

anti-fraud provisions, more 

appropriately and precisely addresses 

the risks posed by such advertisements. 

The question of what would 

constitute a reasonable basis for 

believing that the testimonial or 

endorsement complies with the 

requirements of the final rule would 

depend upon the facts and 

circumstances. For instance, in the 

context of solicitation or referral 

activity, we believe that, as under the 

solicitation rule, a reasonable basis 

could involve periodically making 

inquiries of a sample of investors 

solicited or referred by the promoter in 

order to assess whether that promoter’s 

statements comply with the rule.357 An 

adviser could implement policies and 

procedures to form a reasonable basis 

for believing the testimonial or 

endorsement complies with the rule. An 

adviser also could include terms in its 

written agreement with the promoter to 

help form such a reasonable belief. Such 

agreements could provide mechanisms, 

for example, to enable advisers to prereview testimonials or endorsements, or 

otherwise impose limitations on the 

content of those statements.358

Second, the final rule will require that 

an adviser pay any compensation over 


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359See rule 206(4)–3(a)(2)(iii); see proposed rule 

206(4)–3(a)(1). 

360See supra section II.C.2.f. 

361For example, the written agreement 

requirement could be met through a written private 

placement agreement that describes the scope of the 

agreed upon activities and the terms of the 

compensation for those activities. 

362See rule 206(4)–3(a)(2)(iii)(B). 

363Under the compliance rule, each adviser that 

is registered or required to be registered under the 

Act is required to adopt and implement written 

policies and procedures reasonably designed to 

prevent the adviser and its supervised persons from 

violating the Advisers Act and the rules thereunder. 

Rule 206(4)–7. See 2019 Proposing Release, supra 

footnote 7, at section II.B.6. Advisers should 

address their marketing practices in their policies 

and procedures under the compliance rule. 

364MFA/AIMA Comment Letter I. 

365Mercer Comment Letter; SIFMA AMG 

Comment Letter II; Nesler Comment Letter; IAA 

Comment Letter. 

366Mercer Comment Letter. 

367MFA/AIMA Commenter Letter I; SIFMA AMG 

Comment Letter II. 

368Mercer Comment Letter; SIFMA AMG 

Comment Letter II. 

369SIFMA AMG Comment Letter II. 

370Mercer Comment Letter. 

371Rule 206(4)–7. See Compliance Programs of 

Investment Companies and Investment Advisers, 

Release No. IA–2204 (Dec. 17, 2003) [68 FR 74714 

(Dec. 24, 2003)] (‘‘Compliance Program Adopting 

Release’’). 

372 In addition, any endorsements and 

testimonials by third parties that are 

advertisements, or are part of an advertisement, will 

be subject to the recordkeeping obligations of rule 

204–2, as discussed below. See infra section II.I. 

373Final rule 206(4)–1(b)(3). 

374Final rule 206(4)–1(e)(9). See final rule 206(4)– 

1(e)(3) and (4) for the defined terms ‘‘disqualifying 

Commission action’’ and ‘‘disqualifying event.’’ 

the de minimis threshold for a 

testimonial or endorsement pursuant to 

a written agreement with the person 

(aside from certain affiliates) giving the 

testimonial or endorsement. As 

proposed, the final rule will require that 

the written agreement describe the 

scope of the agreed upon activities and 

the terms of the compensation for those 

activities. Also as proposed, the final 

rule will not require that the written 

agreement require the promoter to 

deliver the adviser’s brochure. We 

continue to believe that this 

requirement is duplicative of an 

adviser’s delivery obligation under rule 

204–3, the Act’s brochure rule. 

The final rule, however, will not 

require that the written agreement 

require the promoter to deliver a 

separate written disclosure document as 

proposed (and as required under the 

current solicitation rule).359 Instead we 

are requiring advertisements that 

include testimonials or endorsements to 

provide certain disclosures at the time 

they are disseminated. Thus, we do not 

believe the rule should also prescribe in 

the written agreement that these 

disclosures are delivered in a separate 

document.360 In many cases, we believe 

the adviser itself will be providing the 

disclosures. Therefore, this approach 

will provide the adviser with flexibility 

in determining whether and how to 

address these disclosures in its written 

agreement with a promoter. 

Consistent with the final rule’s 

principles-based approach, this 

streamlined requirement provides more 

flexibility for an adviser to determine 

how to tailor its written agreement with 

its promoters.361 We believe that 

advisers are better situated to tailor their 

oversight approach based on the types 

of testimonials and endorsements used 

and the risks in their particular 

arrangements. For the same reasons, as 

proposed, the final rule will not 

incorporate the current solicitation 

rule’s requirement for the adviser to 

obtain a signed and dated 

acknowledgment from the client that the 

client has received the required 

disclosure.362 This principles-based 

approach is consistent with the Act’s 

compliance rule, which requires 

advisers to adopt and implement 

compliance policies and procedures, but 

does not mandate specific elements of 

such policies and procedures.363

One commenter supported a flexible 

and principles-based approach to 

adviser oversight.364 Several 

commenters supported our proposed 

approach to streamline the required 

provisions of the written agreement, 

such as by removing the provision 

requiring the solicitor to deliver the 

adviser’s brochure.365 Another 

commenter opposed the proposed 

requirement that the written agreement 

require the adviser to oversee the 

solicitor for compliance with the Act’s 

anti-fraud provisions, arguing that this 

is a regulatory function, not an advisory 

function.366 Some commenters also 

specifically supported removing the 

current rule’s requirement that an 

adviser obtain a signed and dated 

acknowledgment.367 Two commenters, 

however, opposed the proposed 

oversight requirement, arguing that it 

would be burdensome and overbroad to 

require the adviser to oversee 

compliance with a written agreement.368

One commenter argued that it would 

impose a new monitoring cost on 

advisers, which they will ultimately 

pass along to investors.369 Another 

commenter claimed that requiring 

advisers to contact a sample of clients 

to ascertain whether solicitors were 

complying with the written solicitation 

agreement would be awkward and 

burdensome.370

We believe the modifications to the 

adviser oversight condition discussed 

above address commenters’ concerns. 

These changes are consistent with our 

overall approach to shift to a principlesbased rule and leverage the Act’s 

existing compliance rule.371 We 

disagree with commenters’ assertion 

that this oversight requirement imposes 

a novel burden on advisers or is not an 

advisory function, considering the 

current solicitation rule’s oversight 

provision and the Advisers Act 

compliance rule. We continue to believe 

that the oversight provision will protect 

investors’ interests by requiring advisers 

to monitor third-party statements that 

constitute adviser advertisements 

(whether compensated or 

uncompensated) for compliance with 

the rule’s requirements, especially when 

the adviser does not disseminate the 

testimonials or endorsements 

directly.372

4. Disqualification for Persons Who 

Have Engaged in Misconduct 

The final marketing rule prohibits an 

adviser from compensating a person, 

directly or indirectly, for a testimonial 

or endorsement if the adviser knows, or 

in the exercise of reasonable care should 

know, that the person giving the 

testimonial or endorsement is an 

ineligible person at the time the 

testimonial or endorsement is 

disseminated.373 Under the final rule, 

an ‘‘ineligible person’’ is a person who 

is subject either to a ‘‘disqualifying 

Commission action’’ or to any 

‘‘disqualifying event,’’ 374 and, as 

discussed below, certain of that person’s 

employees and other persons associated 

with an ineligible person. 

The final marketing rule’s 

disqualification provisions follow a 

structure similar to the proposed 

solicitation rule’s disqualification 

provisions, with the following changes. 

First, to reflect the incorporation of 

solicitation and referral activities into 

the final marketing rule’s definitions of 

endorsements and testimonials, the final 

rule applies the disqualification 

provisions to persons providing 

compensated testimonials and 

endorsements (i.e., compensated 

promoters). Second, under the final 

rule, certain Commission cease and 

desist orders will be disqualifying 

events (rather than disqualifying 

Commission actions, as proposed), and 

compensated promoters subject thereto 

may be eligible for the final rule’s 

conditional carve-out applicable to 

disqualifying events. Third, the final 

rule conforms the proposed ten-year 

lookback period across all disqualifying 

events, aligning to advisers’ disciplinary 


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375Commenters’ requests for not applying the 

proposed rule to certain existing solicitation 

arrangements are addressed in a separate section, 

below. 

376See rule 506(d) of Regulation D under the 

Securities Act (‘‘rule 506(d) of Regulation D’’). 

Consistent with the approach discussed below, the 

final rule’s disqualification provision, paragraph 

(b)(3), will not disqualify any broker-dealer or any 

covered person for purposes of the final rule for any 

matter(s) that occurred prior to the effective date of 

the rule, if such matter(s) would not have 

disqualified such person under rule 206(4)– 

3(a)(1)(ii), as in effect prior to the effective date of 

the rule. See infra section II.C.4.f. 

377See NAPFA Comment Letter; NRS Comment 

Letter; MFA/AIMA Comment Letter I; IAA 

Comment Letter; SIFMA AMG Comment Letter I; 

MMI Comment Letter; Consumer Federation 

Comment Letter. Some commenters, however, 

disagreed with particular aspects of the proposed 

disqualification provisions, discussed below. 

378See 2019 Proposing Release, supra footnote 7, 

at text accompanying nn.26–27. 

379See e.g., MFA/AIMA Comment Letter I; Sidley 

Austin Comment Letter; SIFMA AMG Comment 

Letter I. See also infra section II.C.5, which 

discusses commenters’ concerns about overlapping 

requirements for broker-dealers, particularly with 

respect to disclosures. One commenter stated that 

most solicitors who place private fund interests are 

broker-dealers already subject to the statutory 

disqualifications in section 3(a)(39) of the Exchange 

Act, but did not comment on the comparability of 

the statutory disqualification provisions. See IAA 

Comment Letter. 

380See rule 506(d) of Regulation D. 

381See MMI Comment Letter; SIFMA AMG 

Comment Letter I & III; FSI Comment Letter; Credit 

Suisse Comment Letter. Another alternative that 

commenters suggested was codification of existing 

no-action letters for broker-dealers and other 

solicitors. See infra section II.C.4.e (discussing the 

final rule’s conditional exception from the 

definition of disqualifying event). 

382See infra section II.C.5.c. (discussing that 

broker-dealers are subject to disqualification for a 

variety of misconduct under the Exchange Act 

section 3(a)(39), that the Exchange Act is 

particularized to broker-dealer activity, and that we 

believe such disqualification provisions will serve 

the same policy goal as the disqualification 

provisions under this rule). 

383See id. (discussing that these covered persons 

are subject to disqualification for a variety of 

misconduct under rule 506(d) of Regulation D, that 

rule 506(d) of Regulation D is particularized to 

activities in connection with certain securities 

offerings, and that we believe such disqualification 

provisions will serve the same policy goal as the 

disqualification provisions under this rule). 

384Final rule 206(4)–1(b)(4)(iv). See rule 506(d)(1) 

of Regulation D. See also infra section II.C.5. 

385For example, the final rule’s disqualification 

provisions and rule 506 of Regulation D apply to 

certain Commission orders that restrict a person’s 

activities (e.g., supervisory or compliance bars or 

suspensions), whereas the Exchange Act’s 

disqualification provisions do not. See, e.g., final 

rule 206(4)–1(e)(3); rule 506(d)(1)(ii); section 

3(a)(39) of the Exchange Act. In addition, the 

Exchange Act disqualification provisions are 

triggered by activities of employees and other 

associated persons, similar to the final rule’s 

application to ‘‘ineligible persons,’’ but rule 506 of 

Regulation D is triggered by events involving 

partners, directors, and certain officers, but not 

other employees or associated persons. See final 

rule 206(4)–1(e)(9)(i)(A); rule 506(d)(1); section 

3(a)(39)(E) of the Exchange Act. As another 

example, while the look-back periods under the 

final rule and the Exchange Act’s statutory 

disqualification extend for ten years, some of the 

look-back periods under rule 506 of Regulation D 

extend for ten years, and others extend only for five 

Continued 

disclosure reporting on Form ADV Part 

1A.375 Fourth, the final rule’s definition 

of ineligible person will not apply to 

certain control affiliates of the ineligible 

person. Fifth, the final rule will exempt 

from the disqualification provisions 

compensated promoters that are brokerdealers registered with the Commission 

in accordance with section 15(b) of the 

Exchange Act, provided that they are 

not subject to statutory disqualification 

as defined in the Exchange Act. It will 

also exempt any person covered by rule 

506(d) of Regulation D with respect to 

a rule 506 securities offering, provided 

the person’s involvement would not 

disqualify the offering under that 

rule.376

Commenters generally supported the 

disqualification of compensated 

promoters that are ‘‘bad actors,’’ noting 

the importance of protecting investors 

from their influence in soliciting clients 

or investors for investment advisers.377

We believe compensated testimonials 

and endorsements raise the same 

concerns about misleading investors as 

compensated solicitations, and the final 

rule treats solicitations within the scope 

of the terms testimonial and 

endorsement. We are therefore adopting 

a final rule that prohibits advisers from 

compensating bad actors for 

testimonials and endorsements, 

including solicitations. 

We did not propose, and we are not 

adopting, disqualification provisions for 

providers of uncompensated 

testimonials and endorsements. It has 

been, and continues to be, our view that 

the disqualification provisions are 

needed most where there are financial 

incentives for a promoter to engage in 

fraudulent conduct to persuade an 

investor to hire an investment adviser or 

invest in an investment adviser’s private 

fund.378 For testimonials and 

endorsements that lack financial 

incentives, we believe the burden of 

assessing whether a promoter is 

disqualified would likely not be 

justified by the risk that the promoter 

would engage in fraudulent conduct. 

We believe that the final rule’s other 

provisions applicable to testimonials 

and endorsements (i.e., required 

disclosures and adviser oversight and 

compliance), in combination with the 

final marketing rule’s general 

prohibitions, are sufficient to address 

the risks that uncompensated 

testimonials and endorsements may 

present in misleading investors. 

Some commenters recommended that 

the proposed solicitation rule exempt 

registered broker-dealers altogether, 

stating that applying the rule to brokerdealers would result in duplicative 

regulation.379 Some also recommended 

that the Commission conform the final 

rule to the disqualifying events set forth 

in rule 506(d) of Regulation D under the 

Securities Act 380 for solicitors of 

investors in private funds who would be 

newly subject to the solicitation rule, or 

that we provide an exemption from the 

final rule’s disqualification provisions 

for persons that are subject to rule 506 

of Regulation D.381 They stated that 

having one set of disqualifying events 

for solicitors that are subject to both the 

final solicitation rule and rule 506 of 

Regulation D would streamline 

compliance processes for such 

solicitors. 

As discussed below, we agree that 

registered broker-dealers acting as 

compensated promoters need not be 

subject to the disqualification 

provisions of both the Advisers Act 

marketing rule and the Exchange Act.382

Accordingly, the final rule contains an 

exemption from the disqualification 

provisions for registered broker-dealers, 

provided they are not subject to a 

statutory disqualification under the 

Exchange Act’s disqualification 

provisions. We similarly agree that 

persons covered by rule 506(d) of 

Regulation D with respect to a rule 506 

securities offering need not be subject to 

both the disqualification provisions of 

the Advisers Act marketing rule and the 

bad actor disqualification provisions of 

rule 506 of Regulation D with respect to 

their participation in the offering.383

Accordingly, the final rule also contains 

an exemption from the disqualification 

provisions for any person that is 

covered by rule 506(d) of Regulation D 

with respect to a rule 506 securities 

offering, provided the person’s 

involvement would not disqualify the 

offering under that rule.384 This 

exemption applies to persons covered 

by rule 506(d) of Regulation D only to 

the extent they are acting thereunder in 

a rule 506 securities offering. For 

example, a broker-dealer acting as a 

placement agent for a private fund in a 

rule 506 securities offering that is 

covered by this exemption will only be 

covered with respect to the brokerdealer’s testimonials and endorsements 

made in its capacity under rule 506(d) 

of Regulation D as part of the offering. 

While we believe these exemptions 

will avoid regulatory overlap that would 

yield little benefit, we recognize that 

each disqualification regime is unique 

and will apply differently to 

compensated promoters regulated 

thereunder.385 Because each 


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years. See, e.g., final rule 206(4)–1(e)(4); rule 

506(d)(1)(i) and (ii); section 3(a)(39)(F) of the 

Exchange Act. 

386See 2019 Proposing Release, supra footnote 7, 

at text accompanying n.456. Under the proposed 

solicitation rule, an adviser could not compensate 

a solicitor, directly or indirectly, for any solicitation 

activity if the adviser knows, or, in the exercise of 

reasonable care, should have known, that the 

solicitor is an ineligible solicitor. See proposed rule 

206(4)–3(a)(3). 

387See NRS Comment Letter. 

388See NAPFA Comment Letter; FSI Comment 

Letter; MFA/AIMA Comment Letter I. Under the 

proposed solicitation rule, the definition of 

‘‘ineligible solicitor’’ meant, in part, ‘‘[a] person 

who at the time of the solicitation is subject to a 

disqualifying Commission action or is subject to 

any disqualifying event.’’ Proposed rule 206(4)– 

3(a)(3)(ii)(A). 

389See NAPFA Comment Letter. 

390See MFA/AIMA Comment Letter I (stating that 

a requirement to make an assessment at the time of 

solicitation would exceed the ‘‘reasonable care’’ 

standard). 

391See FSI Comment Letter. 

392The proposed solicitation rule defined 

‘‘ineligible solicitor’’, in part, as a person who ‘‘at 

the time of the solicitation’’ is subject to a 

disqualifying Commission action or is subject to 

any disqualifying event. See proposed rule 206(4)– 

3(a)(3)(ii)(A). 

393See final rule 206(4)–1(b)(3). The final 

marketing rule also moves the timing of the 

reasonable care requirement to the operative 

disqualification provision, instead of including it 

within the definition of ‘‘ineligible person.’’ See id. 

394Final rule 206(4)–1(b)(1). See supra section 

II.C.2. 

395Under the final marketing rule, an adviser may 

pay trailing compensation for solicitations that were 

made prior to the marketing rule’s effective date, 

provided the adviser complied with rule 206(4)–3 

as in effect at the time. For example, if a solicitor 

was not disqualified under rule 206(4)–3 at the time 

of a solicitation, but the solicitor would have been 

an ineligible person at the time of solicitation under 

the final marketing rule solely because of a change 

in the scope of events that trigger disqualification, 

the adviser may provide trailing compensation. 

Commenters advocated for this approach. See IAA 

Comment Letter; MMI Comment Letter. 

396Registered investment advisers ascertain their 

supervised persons’ disciplinary history in order to 

report disciplinary events on Form ADV, which 

advisers must update by filing additional 

amendments promptly if the disciplinary 

information becomes inaccurate in any way. See 

Form ADV: General Instructions. Instruction 4. 

Certain registered investment advisers are also 

required to deliver to retail investors a relationship 

summary disclosing information about the firm. See 

rule 204–5. Form ADV, Part 3 requires that an 

adviser state ‘‘Yes’’ if it or any of its financial 

professionals currently disclose, or are required to 

disclose, disciplinary information in its Form ADV, 

and that the adviser take certain steps to update its 

relationship summary and inform the Commission 

and its retail investors whenever any information in 

the relationship summary becomes materially 

inaccurate. See Form ADV, Part 3: Instructions to 

Form CRS, General Instruction 8 and Item 4. In 

addition, if a person is subject to certain 

disciplinary events and the Commission has issued 

an order that, for example, censures or places 

limitations on the activities of that person, it is 

unlawful for any investment adviser to permit such 

a person to become, or remain, a person associated 

with the investment adviser without the consent of 

the Commission, if such investment adviser knew, 

or in the exercise of reasonable care, should have 

known, of such order. See section 203(f) of the Act. 

397Advisers should address such methods in 

their policies and procedures under the Act’s 

compliance rule. See rule 206(4)–7. 

398However, this adviser would have to conduct 

its inquiry more often than annually if there is 

information or other indicators suggesting changes 

in circumstance that would be disqualifying under 

the rule. 

disqualification regime is particularized 

to the activity thereunder, our final 

rule’s exemptions defer to these other 

disqualification provisions where 

applicable. 

a. Knowledge or Reasonable Care 

Standard 

No commenters objected to the 

proposed solicitation rule’s introduction 

of a knowledge or reasonable care 

standard for the disqualification 

provisions, which we proposed to 

replace the current solicitation rule’s 

strict liability standard.386 One 

commenter specifically supported the 

proposed standard.387 Others 

commented on the proposal’s 

requirement that an adviser make the 

assessment about a solicitor’s eligibility 

status ‘‘at the time of solicitation.’’ 388

One commenter supported this 

timing,389 while another commenter 

stated that this timing would present an 

undue burden on advisers that may 

interpret the provision as requiring 

continuous monitoring of their 

solicitors.390 Another commenter agreed 

with the Commission’s approach in the 

proposal to not prescribe the level, 

method, or frequency of required due 

diligence.391

We continue to believe that including 

a reasonable care standard preserves the 

benefits of a disqualification provision, 

while reducing the likelihood that 

advisers will inadvertently violate the 

provision (i.e., due to disqualifying 

events that they would not, even in the 

exercise of reasonable care, have known 

existed). Our final marketing rule 

generally maintains the proposed 

solicitation rule’s knowledge or 

reasonable care standard with one 

modification to reflect its application to 

compensated testimonials and 

endorsements.392 Instead of tying the 

standard to the ‘‘time of solicitation,’’ 

the final marketing rule ties it to the 

time the compensated endorsement or 

testimonial is disseminated.393 We 

believe this timing is appropriate 

because it mirrors the timing of the final 

marketing rule’s required disclosures for 

testimonials and endorsements.394

Furthermore, we believe that the time of 

dissemination is often when a 

compensated testimonial or 

endorsement by a bad actor could 

mislead a client or investor. For 

example, if a person provides a 

compensated testimonial or 

endorsement of an adviser in a face-toface meeting with a potential advisory 

client, the time of dissemination (i.e., 

the meeting) is the point at which the 

client could be misled. 

In some instances, an adviser may be 

obligated to compensate the promoter 

for a period after the dissemination of a 

testimonial or endorsement. For 

example, a promoter may continue to 

receive trailing compensation as a 

percentage of a client’s assets under 

management with the adviser for the 

duration of time that client continues to 

use the adviser. If a compensated 

promoter was subject to a disqualifying 

event or disqualifying Commission 

action at the time of dissemination, but 

the adviser did not know, or have 

reason to know, of such event, then the 

adviser may make trailing payments 

resulting from such dissemination.395

The final marketing rule will not 

require an adviser to monitor the 

eligibility of compensated promoters on 

a continuous basis, as one commenter 

suggested. The frequency with which an 

adviser must monitor eligibility and the 

steps an adviser must take in making 

this assessment will vary depending on 

what constitutes the exercise of 

reasonable care in a particular set of 

facts and circumstances. Advisers could 

likely take a similar approach to 

monitoring promoters as they take in 

monitoring their own supervised 

persons, though advisers may assess the 

eligibility of their supervised persons 

more frequently in light of their 

obligations to report promptly certain 

disciplinary events on Form ADV.396

The frequency of inquiry could vary 

depending upon, for example, the risk 

that a person could become an ineligible 

person and the impact of other 

screening and compliance mechanisms 

already in place.397 In some cases where 

an endorsement or testimonial is posted 

on a public website and disseminated 

over a long period, it may not be 

practical for an adviser to update its 

inquiry continuously. In this case, we 

would expect an adviser to update its 

inquiry into the compensated 

promoter’s eligibility at least annually 

while the endorsement or testimonial is 

available to clients and investors in 

order to demonstrate that it did not 

know, or have reason to know, that the 

promoter was ineligible at the time of 

dissemination.398 If the adviser has 

reason to believe that the compensated 

promoter is an ineligible person, then 

the exercise of reasonable care would 

require the adviser to inquire promptly 


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399 If a promoter notifies an adviser that it is 

subject to a disqualifying event or disqualifying 

Commission action, the adviser would have 

knowledge of the promoter’s status as an ineligible 

person and the final rule would prohibit the adviser 

from compensating the promoter. 

400See final rule 206(4)–1(e)(9). See also 

proposed rule 206(4)–3(a)(3)(ii). 

401See NAPFA Comment Letter. 

402See Credit Suisse Comment Letter; MFA/ 

AIMA Comment Letter I; IAA Comment Letter. 

403Section 208(d) of the Act. 

404See final rule 206(4)–1(b)(3). This principle 

also applies if the entity is a partnership, to all 

general partners; and if the entity is a limited 

liability company managed by elected managers, to 

all elected managers. 

405Final rule 206(4)–1(e)(9) (defining ineligible 

person, in part, as ‘‘[a] person who is subject to a 

disqualifying Commission action or is subject to 

any disqualifying event,’’ and ‘‘[a]ny employee, 

officer, or director of the ineligible person and any 

other individuals with similar status or functions 

within the scope of association with the ineligible 

person.’’) 

406Final rule 206(4)–1(e)(9). See also proposed 

rule 206(4)–3(a)(3)(ii). 

407Final rule 206(4)–1(e)(3). The imposition of a 

bar, suspension, or prohibition may appear in an 

opinion of the Commission or in an administrative 

law judge initial decision that has become final 

pursuant to a Commission order. In both cases, such 

a bar, suspension, or prohibition is a disqualifying 

Commission action under the final rule. In addition 

to associational bars or suspensions, these include, 

for example, officer and director bars imposed in 

Commission cease and desist orders, limitations on 

activities imposed under section 203(e) or 203(f) of 

the Advisers Act that prevent persons from acting 

in certain capacities, penny stock bars imposed 

under section 15(b) of the Exchange Act, and 

investment company prohibitions imposed under 

section 9(b) of the Investment Company Act. In 

addition, under the final rule, if the Commission 

prohibits or suspends an individual from acting in 

a specific capacity under the Federal securities laws 

(e.g., as a supervisor or compliance officer), such 

prohibition will be a disqualifying Commission 

action, even if the Commission has not barred or 

suspended the individual from association with an 

investment adviser, broker-dealer or other 

registrant. 

408See Mercer Comment Letter; Credit Suisse 

Comment Letter. See infra section II.C.4.e 

(discussing the final marketing rule’s conditional 

carve-out). 

into the promoter’s eligibility under the 

rule.399

Like the proposed solicitation rule, 

the final marketing rule will require that 

an adviser inquire into the relevant 

facts; however, it does not specify what 

method or level of due diligence or 

other inquiry is sufficient to exercise 

reasonable care. For example, advisers 

generally have an in-depth knowledge 

of their own personnel gained through 

the hiring process and in the course of 

the employment relationship. In such 

circumstances, further steps generally 

would not be required in connection 

with a compensated endorsement or 

testimonial by such personnel. Factual 

inquiry by means of questionnaires or 

certifications, perhaps accompanied by 

contractual representations, covenants 

and undertakings, may be sufficient in 

other circumstances, particularly if 

there is no information or other 

indicators suggesting bad actor 

involvement. 

b. Ineligible Person 

Like the proposed solicitation rule, 

the final marketing rule applies the 

definition of ineligible person not only 

to the person subject to the 

disqualifying event or disqualifying 

Commission action, as both terms are 

discussed below, but also to certain 

persons associated with an ineligible 

person.400 An ineligible person includes 

a person who is subject to a 

disqualifying Commission action or is 

subject to any disqualifying event. It 

also includes any employee, officer, or 

director of an ineligible person and any 

other individuals with similar status or 

functions within the scope of 

association with an ineligible person. If 

the ineligible person is a partnership, 

the definition includes all general 

partners. If the ineligible person is a 

limited liability company managed by 

elected managers, the definition 

includes all elected managers. Unlike 

the proposed rule, the definition does 

not include persons that directly or 

indirectly control, or are controlled by, 

an ineligible person. 

One commenter supported the 

proposed definition of ineligible 

solicitor.401 Some commenters, 

however, expressed concern that the 

proposed solicitation rule would 

disqualify solicitors solely because their 

affiliates are ineligible solicitors, when 

their affiliates are not involved with or 

connected to the solicitation.402 These 

commenters stated that such potential 

disqualification would disadvantage 

larger, more established solicitors that 

have multiple affiliated entities, and 

that smaller standalone solicitors would 

therefore have a competitive advantage. 

They also stated that disqualification by 

affiliation, as proposed, would 

disadvantage investors through lack of 

choice. 

After considering comments, we agree 

that the final rule should not apply to 

a disqualified person’s control affiliates. 

These affiliates may operate 

independently from the person 

providing the compensated testimonial 

or endorsement, and may be uninvolved 

with an adviser’s arrangement to 

compensate that person for the 

testimonial or endorsement. However, 

any compensation arrangement 

structured to avoid the final rule’s 

restrictions, depending on the facts and 

circumstances, would violate section 

208(d) of the Act’s general prohibitions 

against doing anything indirectly which 

would be prohibited if done directly.403

Under the final rule’s definition of 

ineligible person, an entity that is not an 

ineligible person will not become an 

ineligible person solely because its 

employee, officer, or director (or an 

individual with a similar status or 

functions) is an ineligible person. 

However, any employee, officer, 

director, or person with similar status or 

functions that is an ineligible person 

may not directly or indirectly receive 

compensation for a testimonial or 

endorsement (e.g., by receipt of a share 

of profits the entity receives from the 

testimonial or endorsement, or as a 

bonus tied to the entity’s overall profits 

without setting aside revenue from 

testimonials and endorsements).404

In addition, we are clarifying that, in 

the case of an entity that is an ineligible 

person, the final rule’s definition of 

ineligible person will apply to that 

entity’s employees, officers, and 

directors (and persons with similar 

status or functions) associated with the 

ineligible person, but only within the 

scope of that association.405 In some 

cases, for example, an employee may be 

associated with two different firms, one 

of which is an ineligible person and the 

other is not. Under the final rule, if the 

employee is not herself an ineligible 

person, she may conduct compensated 

testimonial and endorsement activity on 

behalf of the firm that is not an 

ineligible person, because she would 

not be conducting that activity within 

the scope of her association with the 

ineligible person. 

The final marketing rule adopts, 

without change from the proposal, the 

provisions of the definition applying to 

general partners and elected managers 

of a partnership and limited liability 

company, respectively.406 Commenters 

did not respond to these aspects of the 

definition. 

c. Disqualifying Commission Action 

Under the final rule, like the proposed 

rule, a disqualifying Commission action 

is any Commission opinion or order 

barring, suspending, or prohibiting a 

person from acting in any capacity 

under the Federal securities laws.407

Commenters stated that advisers have 

historically engaged solicitors that are 

subject to Commission actions or orders 

that address disqualifying events under 

the cash solicitation rule, but that do not 

bar, suspend, or prohibit the solicitor 

from acting in any capacity under the 

Federal securities laws.408 These 

commenters requested that we continue 

to permit advisers to engage solicitors 

subject to these types of Commission 

actions to avoid disturbing the existing 


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409See final rule 206(4)–1(e)(4)(v). See also 

proposed rule 206(4)–3(a)(3)(iii)(A)(1). 

410See 2019 Proposing Release, supra footnote 7, 

at text accompanying n.467. 

411But see supra footnote 381 (discussing that 

some commenters advocated for conforming the 

rule’s disciplinary provision with rule 506 of 

Regulation D under the Securities Act, which 

includes similar cease and desist orders, in 

connection with the proposed rule’s new 

application to broker-dealers soliciting investors in 

private funds). 

412Final rule 206(4)–1(e)(4). 

413Final rule 206(4)–1(e)(4)(i). 

414Final rule 206(4)–1(e)(4)(ii). 

415Final rule 206(4)–1(e)(4)(iii). We made a nonsubstantive change from the proposal to cross 

reference the Advisers Act statutory provision 

rather than repeat the wording of the statutory 

provision in the final rule. 

416Final rule 206(4)–1(e)(4)(iv). 

417Rule 206(4)–1(e)(4)(v). 

418Rule 206(4)–1(e)(4)(vi). 

419See section 203(e) and (f) of the Act. 

420See Form ADV Part 1A, Item 11 (requiring 

disclosure of certain actions related to the 

Commodity Futures Trading Commission (CFTC) 

and self-regulatory organizations). 

421The term advisory affiliates is defined in the 

Form ADV Glossary of Terms, in part, as (1) all of 

your officers, partners, or directors (or any person 

performing similar functions); (2) all persons 

directly or indirectly controlling or controlled by 

you; and (3) all of your current employees (other 

than employees performing only clerical, 

administrative, support or similar functions). Form 

ADV Part 2 also requires information about the 

disciplinary history of the adviser and its 

personnel. See e.g., Form ADV Part 2A, Item 9. 

422See Consumer Federation Comment Letter. 

423See proposed rule 206(4)–3(a)(3)(iii)(B)(3). 

424See the Form ADV Glossary of Terms (defining 

Self-Regulatory Organization as ‘‘[a]ny national 

securities or commodities exchange, registered 

securities association, or registered clearing 

agency.’’). 

425See Exchange Act section 3(26). The Form 

ADV definition also aligns with the definition of 

self-regulatory organization used in Form BD for 

broker-dealers. See Form BD, Explanation of Terms. 

balance between protecting investors 

and aiding market efficiency. 

We agree with commenters that the 

final rule should permit advisers to 

engage compensated solicitors and other 

compensated promoters that are subject 

to certain Commission orders, provided 

that the Commission has not barred, 

suspended, or prohibited the 

compensated promoter from acting in 

any capacity under the Federal 

securities laws, and subject to 

conditions under the final rule. We are 

therefore relocating within the rule— 

from the definition of disqualifying 

Commission action, as proposed, to the 

definition of disqualifying event— 

Commission cease and desist orders 

from committing or causing a violation 

or future violation of any scienter-based 

anti-fraud provision of the Federal 

securities laws, and Section 5 of the 

Securities Act.409 This change will 

subject these orders to the final rule’s 

conditional carve-out, if available, 

which aligns the rule’s treatment of 

these orders with the final rule’s other 

disqualifying events. We believe that 

these cease and desist orders could call 

into question a person’s trustworthiness 

or ability to act as a compensated 

promoter,410 and that the final rule’s 

conditional carve-out, discussed below, 

will address the risks of compensating 

a promoter subject to such an order. No 

one commented specifically on the 

proposed inclusion of this provision.411

d. Disqualifying Event 

The final rule’s disqualifying events 

are substantially similar to what we 

proposed, except for conforming the 

look-back period across all disqualifying 

events to ten years prior to the time the 

person disseminates the testimonial or 

endorsement. In addition, as noted 

above, we are including Commission 

cease and desist orders from committing 

or causing a violation or future violation 

of any scienter-based anti-fraud 

provision of the Federal securities laws, 

and Section 5 of the Securities Act as 

disqualifying events (rather than 

disqualifying Commission actions). 

Under the final marketing rule, 

therefore, a disqualifying event 

generally includes a finding, order, or 

conviction by a United States court or 

certain regulatory agencies that a person 

has engaged in any act or omission 

referenced in one or more of the 

provision’s five prongs. 

A disqualifying event is any of five 

categories of events that occurred within 

ten years prior to the person 

disseminating an endorsement or 

testimonial.412 The first is a conviction 

by court of competent jurisdiction 

within the United States of any felony 

or misdemeanor involving conduct 

described in paragraph (2)(A) through 

(D) of section 203(e) of the Act.413 The 

second is a conviction by a court of 

competent jurisdiction within the 

United States of engaging in, any of the 

conduct specified in paragraphs (1), (5), 

or (6) of section 203(e) of the Act.414 The 

third is the entry of any final order by 

any entity described in paragraph (9) 

section 203(e) of the Act,415 or by the 

U.S. Commodity Futures Trading 

Commission or a self-regulatory 

organization (as defined in the Form 

ADV Glossary of Terms), of the type 

described in paragraph (9) of section 

203(e) of the Act. The fourth is the entry 

of an order, judgment or decree that is 

described in paragraph (4) of section 

203(e) of the Act, and that is in effect 

at the time of such dissemination by any 

court of competent jurisdiction within 

the United States.416 The fifth is a 

Commission order that a person cease 

and desist from committing or causing 

a violation or future violation of (i) any 

scienter-based anti-fraud provision of 

the Federal securities laws, including 

without limitation section 17(a)(1) of the 

Securities Act, section 10(b) of the 

Exchange Act, section 15(c)(1) of the 

Exchange Act, and section 206(1) of the 

Act, or any other rule or regulation 

thereunder, or (ii) Section 5 of the 

Securities Act.417 A disqualifying event 

does not include any of these events 

with respect to a person that is also 

subject to: An order pursuant to section 

9(c) of the Investment Company Act 

with respect to such event; or a 

Commission opinion or order with 

respect to such event that is not a 

disqualifying Commission action, 

provided in each case that certain 

conditions are met.418

The disqualifying events in the final 

rule incorporate a familiar framework 

for advisers evaluating promoters. As 

proposed, the rule’s disqualifying events 

are drawn from section 203(e) of the 

Act, which is a basis for Commission 

action to censure, place limitations on 

the activities, or revoke the registration 

of any investment adviser or its 

associated persons.419 The final rule 

also includes actions of two types of 

regulatory entities not referenced in 

section 203(e) of the Act—specifically, 

the Commodity Futures Trading 

Commission (CFTC) and self-regulatory 

organizations—as we had proposed. 

Certain disciplinary actions by these 

organizations are included in Form ADV 

Part 1A’s disciplinary history 

disclosures,420 which all registered 

investment advisers must complete for 

themselves and for their advisory 

affiliates.421 Only one commenter 

commented specifically on the addition 

of disciplinary actions by the CFTC, and 

supported it.422 No one commented 

specifically on the inclusion of 

disciplinary events by self-regulatory 

organizations. However, the final rule 

refers to self-regulatory organization as 

defined in the Form ADV Glossary of 

Terms, rather than the term defined in 

the Exchange Act, as proposed.423 We 

believe that compensated promoters that 

are advisers must be familiar with the 

Form ADV definition,424 which is the 

same as the Exchange Act definition 

except that the Form ADV definition 

includes commodities exchanges and 

excludes the Municipal Securities 

Rulemaking Board.425 The inclusion of 

commodities exchanges also aligns with 

the final rule’s inclusion of the CFTC in 

the disciplinary events provisions. 

As discussed above, we are including 

in this definition a Commission cease 

and desist order from committing or 


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426See NRS Comment Letter. A person subject to 

a regulatory action by a foreign court or regulatory 

or self-regulatory organization may become be an 

ineligible person under the final rule, to the extent 

that the Commission uses its authority to bar, 

suspend, or prohibit that person from acting in any 

capacity under the Federal securities laws. See the 

final rule’s definition of disqualifying Commission 

action. 

427Sections 203(e)(2) and (3) of the Act 

(containing a ten-year look-back period for 

convictions for certain felonies and misdemeanors). 

428Form ADV Part 1A, Item 11. 

429See section 203(e)(4) of the Act. 

430See supra sections II.C.2 (discussing the 

disclosure requirements for testimonials and 

endorsements) and II.C.4.a (discussing the 

reasonable care knowledge standard). 

431Final rule 206(4)–1(e)(4)(vi). The conditions 

apply to each applicable type of order, and opinion 

or order, described in paragraphs (A) and (B) 

therein. See final rule 206(4)–1(e)(4)(vi). 432 Id. 

causing a violation or future violation of 

scienter-based anti-fraud provision of 

the Federal securities laws or of Section 

5 of the Securities Act, which we had 

proposed to be disqualifying 

Commission actions. We continue to 

believe that including violations or 

future violations of these provisions 

protects investors from compensated 

promoters’ bad acts that are likely to 

have the most effect on investors’ 

review of a promoter’s compensated 

testimonial or endorsement. 

Like those in the proposed rule, the 

final marketing rule’s ‘‘disqualifying 

events’’ are limited to actions of courts 

of competent jurisdiction within the 

United States, and of certain regulatory 

and self-regulatory organizations within 

the United States. Only one commenter 

commented on this aspect of the 

proposed rule, and supported it.426

In a change from the proposed rule, 

the final rule’s look-back period will 

apply to all of the rule’s ‘‘disqualifying 

events,’’ rather than only to some. We 

received no comments on the proposed 

look-back period, but we are conforming 

the period across the definition to ease 

advisers’ compliance with the rule by 

providing a consistent framework for 

compliance. A ten-year look-back period 

is included in section 203(e) of the 

Advisers Act.427 Advisers also apply 

this look-back period when reporting to 

the Commission their disciplinary 

history and the disciplinary history of 

all of their advisory affiliates.428 In 

addition, we are making a change to the 

fourth prong of the definition of 

disqualifying event to specify that this 

prong applies only to any order, 

judgment, or decree described therein 

that is in effect at the time the 

testimonial or endorsement is 

disseminated. This change aligns this 

prong of the definition of disciplinary 

event with the provision of the Advisers 

Act that it references.429

In addition, we are making a change 

from the proposed solicitation rule’s 

look-back period to tie it to the time the 

testimonial or endorsement is 

disseminated, rather than to the time of 

solicitation. As discussed above, this 

change in timing will not result in a 

substantive change in timing for 

solicitations delivered orally, for which 

the time of solicitation and the time of 

dissemination are generally the same. 

This change conforms the look-back 

period to other aspects of the final 

marketing rule.430 Specifically, we 

believe that the same rationale for tying 

the final rule’s reasonable care 

knowledge requirement to the 

dissemination of a compensated 

testimonial or endorsement applies 

here. Therefore, a disqualifying event is 

any of the final rule’s enumerated 

disciplinary events that occurred within 

ten years prior to dissemination of an 

endorsement or testimonial. 

e. Conditional Exception From 

Definition of ‘‘Disqualifying Event’’ 

The final rule provides a conditional 

carve-out from the definition of 

disqualifying event, adapted from the 

proposed solicitation rule. The carveout permits an adviser to compensate a 

promoter that is subject to certain 

disqualifying actions, when the 

Commission has issued an opinion or 

order with respect to the promoter’s 

disqualifying action, but not barred or 

suspended the promoter or prohibited 

the promoter from acting in any 

capacity under the Federal securities 

laws, subject to conditions. Specifically, 

the carve-out applies to a person that is 

subject to (A) an order pursuant to 

section 9(c) of the Investment Company 

Act with respect to a disciplinary action 

that would otherwise be a disciplinary 

event; or (B) a Commission opinion or 

order with respect to such action that is 

not a disqualifying Commission action, 

provided that, for each type of order or 

opinion described therein, certain 

conditions are met.431 The conditions 

are that: (1) The person is in compliance 

with the terms of the order or opinion 

including, but not limited to, the 

payment of disgorgement, prejudgment 

interest, civil or administrative 

penalties, and fines; and (2) for a period 

of ten years following the date of each 

order or opinion, the advertisement 

containing the testimonial or 

endorsement must include a statement 

that the person providing the 

testimonial or endorsement is subject to 

a Commission order or opinion 

regarding one or more disciplinary 

action(s), and include the order or 

opinion or a link to the order or opinion 

on the Commission’s website.432

This conditional carve-out is 

substantively similar to the proposed 

solicitation rule’s carve-out from the 

definition of ineligible solicitor, with 

two changes The first change is that the 

final rule requires that the promoter be 

‘‘in compliance with,’’ rather than, as 

proposed, that a solicitor ‘‘has complied 

with,’’ the terms of the order or opinion. 

The final rule will therefore permit a 

compensated promoter to apply the 

conditional carve-out if the promoter 

has complied with all of the terms of the 

applicable opinion or order that are 

required to be completed at the time the 

testimonial or endorsement is 

disseminated, even if there are 

additional terms of the applicable order 

or opinion that are, at that time, not yet 

required to be completed. We believe 

that the carve-out should not benefit 

promoters that are not in good standing 

under the terms of their Commission 

opinion or order. 

Second, we revised the disclosure 

requirement of the conditional carveout. The final rule’s disclosure 

condition is designed to provide 

investors with notice that the promoter 

has disciplinary action(s) and direct the 

investor to additional information. We 

revised the disclosure condition to 

reflect that the final rule does not 

require a separate solicitor disclosure, as 

proposed for compensated solicitations. 

It also reflects that the final rule’s 

disqualification provisions apply to a 

broader population of promoters than 

solicitors and that advisers may 

advertise compensated testimonials and 

endorsements through spaceconstrained media. Accordingly, 

because there is no longer a separate 

solicitor disclosure requirement, the 

final rule requires the disclosure about 

disciplinary action(s) as part of the 

advertisement, rather than included in a 

separate solicitor disclosure. Further, 

because a testimonial or endorsement 

may appear in space-constrained media, 

the required disclosure is more concise 

than proposed. Instead of requiring a 

separate description of the acts or 

omissions that are the subject of, and 

the terms of, the opinion or order, the 

advertisement containing the 

testimonial or endorsement under the 

final rule must include a statement that 

the promoter is subject to a Commission 

opinion or order regarding one or more 

disciplinary action(s), and include the 

order or opinion or a link to the order 

or opinion on the Commission’s 


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433 Id. See also proposed rule 206(4)– 

3(a)(3)(iii)(C)(2)(ii). 

434See Credit Suisse Comment Letter; Mercer 

Comment Letter. See also Dougherty & Co., LLC, 

SEC Staff No-Action Letter (Mar. 21, 2003), revised 

by Dougherty & Co., LLC, SEC Staff No-Action 

Letter (July 3, 2003) (collectively, the ‘‘Dougherty 

Letter’’). In the Dougherty Letter, Commission staff 

stated that it would not recommend enforcement 

action under section 206(4) and rule 206(4)–3 if an 

investment adviser pays cash solicitation fees to a 

solicitor who is subject to an order issued by the 

Commission under section 203(f) of the Advisers 

Act, or who is subject to a ‘‘Rule 206(4)–3 

Disqualifying Order,’’ based on certain 

representations. The staff described a Rule 206(4)– 

3 Disqualifying Order as an order issued by the 

Commission in which the Commission has found 

that the solicitor: (a) Has been convicted of any 

felony or misdemeanor involving conduct described 

in section 203(e)(2)(A) through (D) of the Advisers 

Act; (b) has engaged, or has been convicted of 

engaging, in any of the conduct specified in 

paragraphs (1), (5), or (6) of section 203(e) of the 

Advisers Act; or (c) was subject to an order, 

judgment, or decree described in section 203(e)(4) 

of the Advisers Act. Representations included that 

no Rule 206(4)–3 Disqualifying Order bars or 

suspends the solicitor from acting in any capacity 

under the Federal securities laws, and that, for a 

period of ten years following the date of each Rule 

206(4)–3 Disqualifying Order, the solicitor or the 

investment adviser with which it has a solicitation 

arrangement subject to the cash solicitation rule 

discloses the order to each person whom the 

solicitor solicits. 

435See Consumer Federation Comment Letter. 

436See Credit Suisse Comment Letter; SIFMA 

AMG Comment Letter; Mercer Comment Letter. 

437See SIFMA AMG Comment Letter I (‘‘The ten 

year time period is significant, and may have the 

effect of forcing such persons out of business rather 

than making them come into compliance.’’). 

438See supra footnotes 427 and 428 (discussing 

the ten-year lookback). 

439As discussed below, the staff is also stating its 

view that it will not object if certain third parties 

that have been operating in a manner consistent 

with certain staff no-action letters under the 

existing cash solicitation rule, which will be 

nullified due to the rescission of the solicitation 

rule, provide compensated testimonials and 

endorsements under the new rule notwithstanding 

otherwise disqualifying events. See infra section 

II.J. 

440Final rule 206(4)–1(b)(3). Such a person will 

not be an ‘‘ineligible person’’ due to that conduct. 

441Compare current rule 206(4)–3(a)(1)(ii), with 

final rule 206(4)–1(e)(5)(iii). 

442See IAA Comment Letter; Credit Suisse 

Comment Letter. 

443See, e.g., FSI Comment Letter; IAA Comment 

Letter. 

444However, see supra footnote 395 and 

accompanying text for a discussion of trailing 

compensation. 

445The proposed rule would have provided four 

exemptions under the solicitation rule for: (1) 

Impersonal investment advice; (2) advisers’ inhouse solicitors and other affiliated solicitors; (3) de 

minimis compensation; and (4) nonprofit programs. 

Proposed rule 206(4)–3(b). 

website.433 We believe the final rule’s 

disclosure will make salient the fact that 

the promoter is subject to disciplinary 

action(s), while directing the investor to 

the facts and circumstance in the 

Commission opinion or order. An 

advertisement containing testimonial or 

endorsement disseminated 

electronically should include the 

opinion or order or an electronic link 

directly to the opinion or order on the 

Commission’s website. 

Some commenters requested we adopt 

a carve-out that aligns with advisers’ 

long-established practice of engaging 

solicitors subject to Commission actions 

where the Commission order or opinion 

does not bar, suspend, or prohibit a 

person from acting in any capacity 

under the Federal securities laws.434

One commenter did not oppose the 

proposed carve-out, but urged the 

Commission to use its authority to issue 

non-disqualifying Commission actions 

only in the most exceptional of 

circumstances.435

We believe that when the Commission 

has issued an opinion or order with 

respect to a person’s disqualifying 

conduct but not barred or suspended the 

person or prohibited the person from 

acting in any capacity under the Federal 

securities laws, it is appropriate to 

likewise permit such person to engage 

in activities related to compensated 

testimonials and endorsements. This 

approach obviates the need for the 

Commission to consider how to treat 

under the final rule a person with these 

disciplinary events. However, in the 

event that the Commission has not 

previously evaluated the disqualifying 

event and neither the promoter nor any 

person on its behalf has previously 

sought a waiver under the Investment 

Company Act with respect to the 

disqualifying event, such person may 

contact the Commission to seek relief. 

Commenters that addressed this 

provision generally supported it, noting 

the appropriateness of disclosure as a 

remedy for solicitors subject to nondisqualifying Commission actions.436

One commenter, however, stated that 

the ten-year disclosure period is overly 

punitive, and requested that we reduce 

the disclosure period to five years.437

We are adopting a ten-year look-back, 

however, because that period is 

consistent with the look-back period for 

the rule’s disqualifying events, which is 

based on the look-back in the certain of 

the Act’s statutory disqualification 

provisions and the rules for reporting to 

the Commission disciplinary history of 

advisers and their advisory affiliates.438

We believe that this period provides for 

a sufficient period after the 

disqualifying event that the past actions 

of the ineligible person may no longer 

pose as significant a risk. 

f. Application to Existing Events 

The final rule will not apply to preeffective date conduct that would 

otherwise trigger the disqualification 

provisions, as we proposed.439 The final 

rule’s disqualification provision, 

paragraph (b)(3), will not disqualify any 

person for purposes of the final rule for 

any matter(s), that occurred prior to the 

effective date of the rule, if such 

matter(s) would not have disqualified 

such person under rule 206(4)– 

3(a)(1)(ii), as in effect prior to the 

effective date of the rule.440 As 

discussed above, the final rule’s 

disqualifying events are slightly broader 

than those under the current solicitation 

rule. For example, the solicitation rule’s 

disqualification provisions do not 

include the entry of a final order of the 

CFTC or a self-regulatory organization, 

whereas the final rule includes such 

conduct.441 We agree with commenters 

that it would be inappropriate to apply 

the final rule’s broader disqualification 

provisions retroactively to prior 

conduct—such as a pre-effective date 

CFTC order—when such conduct had 

not disqualified that solicitor under the 

solicitation rule.442 In this case, the rule 

will not disqualify a person for prior 

conduct that did not cause 

disqualification at that time under the 

solicitation rule. 

However, we disagree with some 

commenters who requested that we 

grandfather all ongoing solicitation 

arrangements entered into prior to the 

final rule’s effective date. Commenters 

argued that without a broad 

grandfathering provision, the final rule 

would require firms to renegotiate 

agreements with solicitors that had not 

been subject to the current rule when 

executed.443 Commenters’ approach 

would effectively provide a blanket 

exemption that permits solicitation 

activities to continue indefinitely 

without complying with the final rule, 

if a solicitor performs such activity 

pursuant to a pre-effective date 

solicitation arrangement.444 Unlike the 

scenario discussed above, we believe 

this would exempt post-effective date 

solicitation activity that we explicitly 

intend to capture in the final rule. 

5. Exemptions 

Under the final rule, we are adopting 

exemptions from certain conditions for 

compensated testimonials and 

endorsements by an adviser’s affiliated 

personnel and for de minimis 

compensation.445 We are also adopting 

a partial exemption from certain 

conditions for testimonials and 

endorsements by a registered brokerdealer. The final rule will not exempt 

testimonials and endorsements related 

to the provision of impersonal 

investment advice or nonprofit 


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446See final rule 206(4)–1(b). 447See IAA Comment Letter. 448See IAA Comment Letter. 449MMI Comment Letter. 450For ease of reference, we refer to these persons 

in the release as ‘‘affiliated persons’’ or ‘‘affiliated 

personnel.’’ 451Final rule 206(4)–1(b). The proposed 

solicitation rule would have provided a partial 

exemption for an adviser’s in-house solicitors and 

other affiliated solicitors. See proposed rule 206(4)– 

3(b)(2). 

452However, an adviser’s affiliated persons will 

not be required to comply with the written 

agreement requirement under the adviser oversight 

and compliance provision. See final rule 206(4)– 

1(b)(4)(ii). See also proposed rule 206(4)–3(b)(2). 

The proposed rule would have created an 

exemption from the disclosure requirements by 

virtue of the exemption from the written agreement 

requirement. 

453See, e.g., SIFMA AMG Comment Letter I; 

Proskauer Comment Letter. 

454Final rule 206(4)–1(b)(4)(ii). 

455See, e.g., SIFMA AMG Comment Letter I; 

Proskauer Comment Letter; Mercer Comment Letter. 

456SIFMA AMG Comment Letter I; Fidelity 

Comment Letter. 

457Fidelity Comment Letter. 

458Such persons could be employees or 

independent contractors. 

459Final rule 206(4)–1(b)(4)(ii). 

460See Fidelity Comment Letter. 

461SIFMA AMG Comment Letter I. We requested 

comment on whether we should define ‘‘employee’’ 

to include an adviser’s independent contractors or 

provide that this partial exemption for in-house 

personnel applies to an adviser’s independent 

contractors. 2019 Proposing Release, supra footnote 

7, at section II.B.7. 

462See Mercer Comment Letter. 

463See SIFMA AMG Comment Letter I; Proskauer 

Comment Letter; Mercer Comment Letter. 

464See final rule 206(4)–1(b)(3). See also 

proposed rule 206(4)–3(b)(2). 

programs.446 Although some 

commenters suggested that we adopt 

additional exemptions for participants 

in refer-a-friend programs,447 publishers 

(e.g., bloggers),448 and those who refer 

clients from networking 

relationships,449 we do not believe 

general exemptions for these categories 

are appropriate. We believe that the 

final exemptions appropriately balance 

the risks of the use of compensated 

testimonials and endorsements with the 

benefits and protections of the final 

rule. 

a. Affiliated Personnel 

Similar to the proposed solicitation 

rule, the final rule will partially exempt 

a testimonial or endorsement by an 

adviser’s partners, officers, directors, or 

employees, or a person that controls, is 

controlled by, or is under common 

control with the investment adviser, or 

is a partner, officer, director or 

employee of such a person.450 For this 

exemption to apply, the affiliation 

between the investment adviser and 

such person must be readily apparent to 

or disclosed to the client or investor at 

the time the testimonial or endorsement 

is disseminated and the investment 

adviser must document such person’s 

status at the time the testimonial or 

endorsement is disseminated.451 This is 

a partial exemption because the 

testimonial or endorsement will be 

exempt from the final rule’s disclosure 

requirements, but it still will be 

necessary to comply with the adviser 

oversight and disqualification 

provisions.452 Commenters were 

generally supportive of retaining this 

current partial exemption under the 

solicitation rule.453

As proposed under the solicitation 

rule, we are modifying the current rule 

to permit an adviser to rely on the 

exemption not only when the affiliated 

status is disclosed to the investor, but 

also when such relationship is readily 

apparent to the investor.454 We continue 

to believe that, in such cases, a 

requirement to disclose a person’s status 

as an affiliated person would not result 

in a benefit to the investor, and would 

create compliance burdens for the 

adviser and person giving the 

testimonial or endorsement. 

Commenters generally agreed with our 

approach, noting that disclosures 

regarding status are unnecessary 

because of the obvious and close 

relationship of some affiliates.455

However, commenters also suggested 

more guidance on the meaning of 

‘‘readily apparent.’’ 456

What constitutes ‘‘readily apparent’’ 

will depend on the facts and 

circumstances. The relationship 

between an affiliated person and the 

adviser may be readily apparent to an 

investor, such as when an in-house 

solicitor shares the same name as the 

advisory firm or a person operates under 

the same name brand as the adviser. An 

affiliated relationship also may be 

readily apparent when a person is 

clearly identified as related to the 

adviser in its communications with the 

investor at the time the testimonial or 

endorsement is disseminated. For 

example, the person’s affiliation would 

be readily apparent if a business card 

distributed to investors at the time the 

testimonial or endorsement is 

disseminated clearly and prominently 

states that the person is a representative 

of the adviser. There may be other 

situations where the relationship 

between the adviser and its affiliated 

personnel is well known. 

One commenter suggested that there 

be a presumption that an adviser and its 

affiliated person’s relationship is readily 

apparent to an investor if the adviser 

has disclosed the affiliation in its Form 

ADV brochure.457 However, we are not 

adopting such a presumption because 

the client may not have read the Form 

ADV brochure at the time the 

testimonial or endorsement is 

disseminated. 

In certain situations, the adviser’s 

relationship with an affiliated person is 

not readily apparent, such as when the 

person is a representative of the adviser 

but operates its marketing activities 

through its own DBA name or brand, 

and the name of the adviser is omitted 

or less prominent.458 If an adviser’s and 

its affiliated person’s relationship is not 

readily apparent, the adviser or 

affiliated person must disclose the 

affiliation in order to avail itself of the 

rule’s partial exemption. 

As proposed under the solicitation 

rule, we are expanding the current 

partial exemption for affiliated persons 

to cover any person that controls, is 

controlled by, or is under common 

control with, the investment adviser 

that is compensating the person 

pursuant to the final rule.459 One 

commenter explicitly supported this 

expansion.460 We continue to believe 

that the rule should treat a person that 

controls, is controlled by, or is under 

common control with, the investment 

adviser, similarly to any partners, 

officers, directors or employees of such 

affiliated person. 

One commenter suggested that we 

include an adviser’s independent 

contractors under this partial 

exemption.461 However, another 

suggested that we limit the exemption to 

an adviser’s supervised persons.462 We 

believe that the supervision and control 

an adviser exercises over an endorsing 

independent contractor may vary among 

different advisers and independent 

contractors. If the adviser exercises 

substantially the same level of 

supervision and control over an 

independent contractor as the adviser 

exercises over its own employees with 

respect to its marketing activities, the 

partial exemption would be available. 

We continue to believe, and 

commenters generally agreed, that when 

an investor is aware that a person 

endorsing the adviser is affiliated with 

the adviser, disclosures are not 

necessary to inform the investor of the 

person’s bias in recommending such 

adviser. 463 An investor is on notice that 

an in-house solicitor has a stake in 

soliciting the investor for its own firm. 

In these instances, the policy goals 

underlying the disclosure element of the 

final rule would already be satisfied. 

As proposed under the solicitation 

rule, the final rule’s disqualification 

provisions will apply to affiliated 

personnel.464 One commenter expressed 


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465SIFMA AMG Comment Letter I. 

466See Investment Adviser Marketing Feedback 

Form. Question 15 asks ‘‘How important is it to 

know the following information about a paid 

salesperson’s referral?’’ and lists among other 

things, ‘‘Whether the solicitor has been disciplined 

for financial-related misconduct.’’ Commenters 

were given the option to answer on a scale of 1– 

5, with 1 meaning ‘‘Very Important’’ and 5 meaning 

‘‘Not Important.’’ There was also an option to 

answer ‘‘Don’t Know.’’ More than two-thirds of the 

respondents indicated that this disciplinary 

information was ‘‘Very Important.’’ 

467See final rule 206(4)–1(b)(2)(i)). 

468See final rule 206(4)–1(b)(4)(ii). 

469Final rule 206(4)–1(e)(2). The proposed 

solicitation rule would have required that ‘‘the 

adviser documents such solicitor’s status at the time 

the adviser enters into the solicitation 

arrangement.’’ Proposed rule 206(4)–3(b)(2)(ii) 

(emphasis added). 

470MMI Comment Letter. 

471Final rule 206(4)–1(b)(4)(i). 

472See supra footnote 123 (stating that a 

testimonial or endorsement for which an adviser 

provides de minimis compensation will be an 

advertisement under the second prong of the 

definition of advertisement). 

473Proposed rule 206(4)–3(b)(3). Under the 

proposed de minimis compensation exemption, the 

solicitation rule would not have applied if the 

solicitor complied with certain conditions. 

474See, e.g., Comment Letter of Wealthfront Corp. 

(Mar. 3, 2020); SIFMA AMG Comment Letter I; MMI 

Comment Letter; and Flexible Plan Investments 

Comment Letter I. 

475See, e.g., Comment Letter of MarketCounsel 

(Feb. 10, 2020) (‘‘MarketCounsel Comment Letter’’); 

SIFMA AMG Comment Letter I; IAA Comment 

Letter. 

476NAPFA Comment Letter. 

concern that this approach would be 

overly restrictive and suggested that the 

rule also should exempt certain 

affiliated personnel from the 

disqualification provisions.465 This 

commenter stated that there is greater 

control and opportunity to train and 

rehabilitate affiliated personnel. We do 

not believe that the availability of 

training justifies exempting affiliated 

personnel from the disqualification 

provisions, and in other circumstances 

under the Federal securities laws the 

availability of such training does not 

affect affiliated personnel’s 

disqualification. 

Some affiliated persons with 

disciplinary events under the final rule 

will be disqualified from association 

with an investment adviser independent 

of the final rule, if the Commission has 

barred or suspended those persons from 

association with an investment adviser 

under section 203(f) of the Act. 

However, other affiliated persons with 

such disciplinary events may not be 

subject to such Commission action and, 

absent the application of the rule’s 

disqualification provisions, would be 

permitted to endorse an adviser as an 

affiliated person, notwithstanding their 

disqualifying event. After considering 

comments, including those from our 

Investor Feedback Flyers, we believe 

that the disqualification provisions 

should apply to compensated 

testimonials and endorsements, 

regardless of whether the marketing 

activity is conducted by a person 

affiliated or unaffiliated with the 

adviser.466

Unlike the proposed solicitation rule, 

however, the final rule will subject 

affiliated persons to a part of the adviser 

oversight and compliance provision, 

which will require that the investment 

adviser have a reasonable basis for 

believing that the testimonial or 

endorsement complies with the 

requirements of the rule.467 We believe 

that this part of the oversight and 

compliance provision will help reduce 

the risk that any testimonials or 

endorsements do not comply with the 

final rule, particularly with respect to 

certain affiliates that may not be subject 

to the adviser’s compliance policies and 

procedures. However, similar to the 

proposed solicitation rule, the final rule 

will not subject affiliated personnel to 

the written agreement requirement 

under the adviser oversight and 

compliance provision.468 Although we 

did not receive any comments on this 

particular modification under the 

proposed in-house and other affiliated 

personnel exemption, we continue to 

believe that advisers should not be 

required to enter into written 

agreements with their own affiliated 

persons in order to avail themselves of 

this partial exemption. We also continue 

to believe that such a requirement under 

the current rule creates additional 

compliance obligations for the adviser 

and its affiliated persons that are not 

justified by any corresponding benefit. 

Finally, we are adopting a new 

requirement, largely as proposed under 

the solicitation rule, that in order to 

avail itself of this partial exemption, an 

adviser must document an affiliated 

person’s status contemporaneously with 

disseminating the testimonial or 

endorsement.469 One commenter 

criticized this requirement as 

unnecessary and unduly burdensome, 

stating that the Commission should 

either remove it or clarify the form and 

type of documentation expected.470 We 

are not requiring a specific form of 

documentation to record an affiliated 

person’s status. We continue to believe 

that this approach affords advisers the 

flexibility to develop their own policies 

and procedures or use existing records 

to document such status. 

Advisers may wish to document this 

status through various means. For 

example, an adviser’s policies and 

procedures regarding affiliated 

personnel may require that the adviser 

document a person’s status on an 

internal form at the time that the adviser 

or affiliated person disseminates the 

testimonial or endorsement. However, 

an adviser does not need to create a new 

form of separate documentation to 

satisfy this requirement. For example, to 

the extent that an affiliated person’s 

status is notated through corporate 

records, employee payroll records, 

Central Registration Depository 

(‘‘CRD’’), or any other similar records 

and licensing for investment adviser 

representatives, then such records 

would suffice so long as such records 

are kept current. 

Similar to our approach under the 

disqualification provisions applicable to 

testimonials and endorsements, we 

believe that the time of dissemination is 

the most appropriate time for an adviser 

to know about, or exercise reasonable 

care to determine, whether personnel is 

affiliated. The rule does not require an 

adviser to monitor the affiliated status of 

a person on a continuous basis. Instead, 

an adviser could conduct periodic 

inquiries to confirm that any 

testimonials or endorsements provided 

in reliance on this exemption are by 

affiliated personnel. 

b. De Minimis Compensation 

The final rule will have a partial 

exemption for the use of testimonials or 

endorsements that are for zero or de 

minimis compensation.471 Specifically, 

a testimonial or endorsement that is 

disseminated for no compensation or de 

minimis compensation will not be 

subject to the disqualification 

provisions or the written agreement 

requirement, but must comply with the 

disclosure and oversight provisions.472

The proposed solicitation rule would 

have provided a full exemption for 

solicitation activities performed for de 

minimis compensation, which we 

proposed as $100 or less.473

Commenters generally supported the 

proposed de minimis exemption. 

However, commenters also suggested 

modifications to increase the utility of 

the exemption.474 For example, some 

commenters suggested raising the 

proposed de minimis threshold amount, 

arguing that $100 would be too low.475

One commenter, while generally 

supporting the idea of a de minimis 

exemption, stated that tracking the 

exemption would be difficult in certain 

situations where advisers may make 

donations on behalf of clients who refer 

new prospective clients.476 Another 

commenter stated that the exemption 

would only offer a superficial benefit 


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477SBIA Comment Letter. 

478NASAA Comment Letter. 

479We stated in our proposal that we recognize 

that the solicitor disqualification may pose major 

challenges, especially for smaller advisers. See 2019 

Proposing Release, supra footnote 7, at section 

II.B.7. 

480See, e.g., IAA Comment Letter (‘‘This will help 

alleviate the compliance burden on investment 

advisers where incentives are inherently limited, 

and thus risks to prospective clients are low.’’); 

Mercer Comment Letter. 

481See, e.g., MarketCounsel Comment Letter; 

SIFMA AMG Comment Letter I. 

482See NASAA Comment Letter (arguing against 

the proposed de minimis exemption under the 

solicitation rule); Prof. Jacobson Comment Letter 

(supporting no de minimis exemption for 

testimonials and endorsements from the proposed 

advertising rule’s disclosure requirements). 

483See final rule 206(4)–1(b)(4)(i). However, 

testimonials and endorsements for zero or de 

minimis compensation will not be required to have 

a written agreement under the adviser oversight 

provision. See id. See also section II.C.3. 

(discussing the written agreement requirement 

under the adviser oversight and compliance 

provision). 

484 IAA Comment Letter. 

485Final rule 206(4)–1(e)(2). 

486We would measure the initial date of the 12- 

month period to begin at the time that a promoter’s 

testimonial or endorsement is initially 

disseminated. 487MarketCounsel Comment Letter. 488Final rule 206(4)–1(b)(4)(iii)(C). 489Final rule 206(4)–1(b)(4)(iii)(A). 490Final rule 206(4)–1(b)(4)(iii)(B). 491 2019 Proposing Release, supra footnote 7, at 

38 and 211. We also considered the recently 

proposed exemption for certain ‘‘finders’’ involved 

in exempt offerings. See Notice of Proposed 

Exemptive Order Granting Conditional Exemption 

from the Broker Registration Requirements of 

Section 15(a) of the Securities Exchange Act of 1934 

for Certain Activities of Finders, Release No. 34– 

90112 (Oct. 7, 2020) [85 FR 64542 (Oct. 13, 2020)]. 

because compensation paid to a solicitor 

would trigger required disclosure under 

the advertising rule since solicitor 

referrals often involve testimonials or 

endorsements.477 One commenter 

suggested eliminating the exemption 

altogether, arguing that small dollar 

values still create conflicts between a 

solicitor and the solicited investor.478

After considering comments, we 

believe a partial exemption is necessary 

because it could be overly burdensome 

for advisers and persons providing 

testimonials or endorsements for de 

minimis compensation to comply with 

the rule’s disqualification provisions. 

We do not believe the same level of 

incentive or risk to defraud investors 

exists when a de minimis fee is 

involved.479 In supporting our proposed 

de minimis exemption, commenters 

agreed that a solicitor’s incentives are 

reduced significantly when receiving de 

minimis compensation and that the 

need for heightened safeguards is 

likewise reduced.480 We also believe 

that many solicitation and referral 

programs would benefit from this 

exemption. Commenters confirmed our 

observation that there is a recent trend 

towards the use of programs that 

involve de minimis compensation, such 

as refer-a-friend programs.481

However, we agree with commenters 

to both the proposed advertising rule 

and solicitation rule who expressed 

concern that minimal compensation 

may still create conflicts.482 We believe 

disclosure of any conflicts is paramount 

to mitigate the risks that an investor 

would mistakenly view the promoter as 

unbiased and rely on a testimonial or 

endorsement more than the investor 

otherwise would have if the investor 

knew of any incentive or conflict. Even 

when there is no compensation 

involved, we believe these conflicts of 

interest create an incentive or bias on 

the part of the promoter. For instance, 

if the adviser and the promoter are 

participants in a referral network, it is 

important that these investors fully 

understand that the provider expects to 

benefit from its endorsement of or 

testimonial about the adviser. Although 

this will create some burden for 

promoters who are not already subject 

to the existing cash solicitation rule, we 

believe that the benefits of fully 

informing and protecting investors 

justify any such burden. Moreover, with 

respect to advisers, providing such 

disclosures is consistent with an 

adviser’s duty to disclose all conflicts of 

interest and thus will not be unduly 

burdensome for advisers. In addition, 

we believe that subjecting testimonials 

and endorsements that are for no or de 

minimis compensation to the adviser 

oversight requirement is a reasonable 

benefit that justifies any burdens. 

Accordingly, unlike the proposed de 

minimis exemption under the 

solicitation rule, the final marketing rule 

will subject testimonials and 

endorsements for zero or de minimis 

compensation to the required disclosure 

and adviser oversight provisions and 

exempt such testimonials and 

endorsements only from the 

disqualification provisions.483

We also believe the exemption from 

the disqualification provisions will help 

ease the burden of compliance in many 

situations where the testimonials or 

endorsements are limited in scope, such 

as in refer-a-friend programs. To 

illustrate, if the disqualification 

provisions were to apply, one 

commenter stated that firms with 

‘‘thousands of retail clients,’’ not 

knowing who will participate in the 

refer-a-friend programs, would have to 

inquire into each client’s disciplinary 

history.484 We agree that such an 

undertaking would be a major 

compliance challenge that is 

disproportionate to the limited scope 

and magnitude of such non-professional 

refer-a-friend programs. We accordingly 

believe that our approach appropriately 

balances the need for protections of the 

final rule with the burdens placed on 

the advisers complying with the rule. 

After considering comments and 

various thresholds, however, we are 

increasing the proposed de minimis 

threshold amount to $1,000.485

Accordingly, the disqualification 

provisions will not apply if an 

investment adviser provides 

compensation to a promoter of a total of 

$1,000 or less (or the equivalent value 

in non-cash compensation) during the 

preceding twelve months. We consider 

$1,000 to more appropriately capture 

referrals from both professional and 

non-professional types of testimonials 

and endorsements than the $100 

amount we proposed. We also continue 

to believe that adopting an aggregate 

limit over a trailing 12-month period is 

consistent with our goal of providing an 

exception for small or nominal 

payments.486 One commenter supported 

our approach in requiring a trailing 

period, agreeing that it would not overly 

burden advisers because adviser should 

be keeping records of such payments.487

c. Registered Broker-Dealers 

Under the final rule, we are providing 

an exemption from the rule’s 

disqualification provisions for 

promoters that are brokers or dealers 

registered with the Commission in 

accordance with section 15(b) of the 

Exchange Act, provided they are not 

subject to statutory disqualification 

under the Exchange Act.488 In addition, 

we are providing an exemption from the 

rule’s disclosure provisions when a 

broker-dealer is providing a testimonial 

or endorsement to a retail customer that 

is a recommendation subject to 

Regulation BI.489 Finally, we are 

providing an exemption from certain 

disclosure requirements when a brokerdealer provides a testimonial or 

endorsement to an investor who is not 

a retail customer as defined in 

Regulation BI.490

While the proposed amendments to 

the solicitation rule would have applied 

the rule to all broker-dealer 

solicitations, we had contemplated 

whether to exempt certain 

advertisements or solicitation activities 

in some fashion from each of the 

proposed rules because we recognized 

some overlap in requirements 

applicable to broker-dealers.491 We 

received several comments suggesting 

that we eliminate the application of the 


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492See, e.g., Wellington Comment Letter; Fidelity 

Comment Letter; MFA/AIMA Comment Letter I; 

IAA Comment Letter; Credit Suisse Comment 

Letter: SIFMA AMG Comment Letter I. 

493 Id. 

494 IAA Comment Letter. 

495As stated in the proposal, we recognize that 

there may be some overlap between the prohibition 

in rule 206(4)–8 and the final rule. However, the 

final rule provides more specificity regarding what 

we believe to be false or misleading statements that 

advisers to private funds must avoid in their 

advertisements. We also continue to believe that 

any additional costs to advisers to private funds as 

a result of potential overlap between the final rule 

and rule 206(4)–8 with respect to advertisements 

will be minimal, as an advertisement that would 

raise issues under rule 206(4)–8 might also raise 

issues under a specific provision of the final rule 

as well as other anti-fraud provisions of the Federal 

securities laws. See 2019 Proposing Release, supra 

footnote 7, at 35–36. 

496See, e.g., MFA/AIMA Comment Letter I; 

Sidley Austin Comment Letter; SIFMA Comment 

Letter I. 

497See section 3(a)(39) of the Exchange Act. 

Among other things, a person is subject to 

‘‘statutory disqualification’’ under the Exchange Act 

if such person (i) is subject to an order of the 

Commission denying, suspending for a period not 

exceeding 12 months, or revoking the person’s 

registration as a broker or dealer or barring or 

suspending for a period not exceeding 12 months 

the person’s being associated with a broker or 

dealer; (ii) is subject to an order of the CFTC 

denying, suspending, or revoking his registration 

under the Commodity Exchange Act; and (iii) has 

been convicted of any specified offense or other 

felony within 10 years of the date of filing of an 

application for membership of a self-regulatory 

organization. See also final rule 206(4)–1(e)(4). 

498 In this case, we agree with commenters that 

certain statutory or regulatory requirements 

applicable to registered broker-dealers will satisfy 

the policy goals of some of the conditions. See, e.g., 

MFA/AIMA Comment Letter I; Sidley Austin 

Comment Letter; SIFMA AMG Comment Letter I. 

499Final rule 206(4)–1(b)(4)(iii)(C). See also supra 

section II.C.4.f. (discussing grandfathering for 

broker-dealers and covered persons with respect to 

the disqualification provisions). Advisers must have 

a reasonable basis for believing that the brokerdealer is not subject to such statutory 

disqualification, consistent with the adviser 

oversight and compliance provision applicable to 

testimonials and endorsements. Final rule 206(4)– 

1(b)(2)(i). 

500Although Regulation BI does not explicitly 

require disclosure related to whether or not the 

broker-dealer is a current client or investor of the 

adviser, the Disclosure Obligation under Regulation 

BI requires the broker-dealer firm or representative 

to disclose that it is acting in a broker-dealer 

capacity, which we believe investors will generally 

understand to imply that the broker-dealer is not a 

client or investor of the adviser. Given this, we do 

not believe we need to separately require such a 

broker-dealer to disclose its status as a client or 

non-client. 

501See Regulation Best Interest Release, supra 

footnote 146, at 14. Regulation BI applies when a 

broker-dealer makes a recommendation to a ‘‘retail 

customer.’’ See id. 

502Final rule 206(4)–1(b)(4)(iii)(A). 

503Final rule 206(4)–1(b)(4)(iii)(B). 

504 Id. However, the broker-dealer must clearly 

and prominently disclose: (A) That the testimonial 

was given by a current client or investor, or the 

endorsement was given by a person other than a 

current client or investor; (B) that cash or non-cash 

compensation was provided for the testimonial or 

endorsement, if applicable; and (C) a brief statement 

of any material conflicts of interest on the part of 

the person giving the testimonial or endorsement 

resulting from the investment adviser’s relationship 

with such person. See final rule 206(4)–1(b)(1)(i). 

505See final rule 206(4)–1(b)(1)(i). 

506See, e.g., Exchange Act section 10(b) and rules 

10b–5, 10b–10(a)(2), 12b–20, 15c1–5, and 15c1–6 as 

well as FINRA rules 2010, 2020, 2262, 2269, and 

5123. 

507See, e.g., FINRA rule 2210(d)(6). 

508See FINRA rule 2210(a)(1). Although FINRA 

rule 2210(f) separately covers public appearances, 

proposed advertising rule to 

advertisements related to potential 

investors in pooled investment vehicles, 

and that we exempt registered brokerdealers that solicit private fund 

investors from the proposed solicitation 

rule.492 These commenters expressed 

concern that the proposed amendments 

would result in unnecessary and 

overlapping layers of regulation, 

including with respect to disclosures 

provided to investors, when a registered 

broker-dealer is involved in the sale of 

interests in a pooled investment 

vehicle.493 One commenter also stated 

that broker-dealers already are subject to 

the statutory disqualifications in section 

3(a)(39) of the Exchange Act.494

We continue to believe that certain 

provisions of the final rule, such as the 

general prohibitions and performance 

provisions, should apply to all 

advertisements, regardless of whether 

the advertisement is provided to 

potential clients of an investment 

adviser or potential investors in a 

private fund.495 However, we recognize 

that regulatory overlap would yield 

little benefit. Specifically, we agree with 

commenters that certain statutory or 

regulatory requirements applicable to 

registered broker-dealers will satisfy the 

policy goals of some of the 

conditions.496 Broker-dealers are subject 

to disqualification for a variety of 

misconduct under the Exchange Act, 

many of which we believe are 

sufficiently similar to the misconduct 

that would trigger a disqualification 

under the marketing rule, but the 

Exchange Act is particularized to 

broker-dealer activity.497 We are 

confident these disqualification 

provisions will serve the same policy 

goal as the disqualification provisions 

under this rule.498 As a result, the final 

rule will exempt from the 

disqualification provisions any 

testimonial or endorsement by a brokerdealer registered with the Commission 

under section 15(b) of the Exchange Act, 

if the broker-dealer is not subject to 

statutory disqualification under section 

3(a)(39) of the Exchange Act.499

Likewise, we recognize that the 

requirements under Regulation BI 

include conflicts of interest and 

compensation disclosures.500 For 

instance, under the Regulation BI 

Disclosure Obligation, when making a 

recommendation to a retail customer, a 

broker-dealer must disclose all material 

facts about the scope and terms of its 

relationship with the retail customer, 

such as the material fees and costs the 

customer will incur, as well as all 

material facts relating to its conflicts of 

interest associated with the 

recommendation, including third-party 

payments and compensation 

arrangements.501 In addition, all of the 

other Regulation BI obligations would 

apply when the broker-dealer is making 

a recommendation to a retail customer. 

Accordingly, we believe that the robust, 

protective framework of Regulation BI 

renders the disclosure requirements of 

the final marketing rule unnecessary 

when a broker-dealer provides a 

testimonial or endorsement to a retail 

customer that is a recommendation 

subject to Regulation BI.502

In addition, we are providing a partial 

exemption in cases where a registered 

broker-dealer provides a testimonial or 

endorsement to an investor who is not 

a retail customer as defined in 

Regulation BI.503 Specifically, under the 

final rule, a broker-dealer that provides 

a testimonial or endorsement to such an 

investor will not be required to disclose 

the material terms of any compensation 

arrangement or a description of any 

material conflicts of interest.504 We 

believe that the clear and prominent 

disclosures such a broker-dealer will be 

required to provide under our final rule 

are sufficient to alert an investor that is 

not a retail customer that a testimonial 

or endorsement is a paid solicitation.505

We also believe that these investors will 

be able to request from the broker-dealer 

other information about the solicitation. 

Aside from this partial exemption 

from the disclosure provisions, the 

disclosure obligations of the final 

marketing rule will apply when a 

broker-dealer provides a testimonial or 

endorsement that is not a 

recommendation subject to Regulation 

BI. While registered broker-dealers may 

be subject to other disclosure 

obligations in these circumstances, 

these obligations generally do not align 

with the disclosure obligations for 

testimonials and endorsements under 

our final rule.506 In addition, although 

broker-dealers must comply with FINRA 

rule 2210, we do not believe that FINRA 

rule 2210 requires the same substantive 

disclosures that we require under the 

final rule.507 Moreover, communications 

for purposes of FINRA rule 2210 are 

‘‘written’’ communications, whereas our 

final rule would apply to written and 

oral advertisements.508 Accordingly, 


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‘‘communications’’ consist of ‘‘correspondence, 

retail communications, and institutional 

communications,’’ all of which are defined as 

written communications. See FINRA rule 

2210(a)(2), (3), and (5). 

509See final rule 206(4)–1(b)(1). 

510See supra footnote 361 and accompanying 

text. 

511See final rule 206(4)–1(b)(4)(iv). 

512See rule 506(d)(1) under the Securities Act. 

513See, e.g., Credit Suisse Comment Letter; 

SIFMA AMG Comment Letter I; MMI Comment 

Letter. 

514 Id. 

515We believe that the two sets of provisions are 

sufficiently similar to help realize our policy goal 

of reducing the risk that certain ineligible persons 

should not be acting as promoters. For example, an 

offering is disqualified under rule 506(d) if a 

covered person is subject to any order of the 

Commission entered within five years before such 

sale that, at the time of such sale, orders the person 

to cease and desist from committing or causing a 

violation or future violation of: (i) Any scienterbased anti-fraud provision of the Federal securities 

laws; or (ii) section 5 of the Securities Act. See 

section 506(d)(1)(v) of the Securities Act. See also 

final rule 206(4)–1(e)(4)(v). 

516Final rule 206(4)–1(b)(4)(iv). 

517Proposed rule 206(4)–3(b)(1). Specifically, 

such solicitors would not have had to enter into a 

written agreement and provide the solicitor 

disclosure and would not have been subject to the 

adviser oversight and compliance provision. 

However, such solicitors would have been subject 

to the disqualification provisions under the 

proposed rule. 

518Final rule 206(4)–1(b). 

519SIFMA AMG Comment Letter I. 

absent any exemption under the final 

rule, the rule will require the 

disclosures of compensation 

arrangements and material conflicts of 

interest associated with a testimonial or 

endorsement.509

The final rule does not provide an 

exemption for registered broker-dealers 

from the adviser oversight and 

compliance condition applicable to 

testimonials and endorsements, 

including the written agreement 

requirement. We continue to believe 

that advisers should reasonably ensure 

that a registered broker-dealer providing 

a testimonial or endorsement for the 

adviser is complying with the rule’s 

applicable conditions. We believe that 

many advisers would already have an 

incentive to oversee any broker-dealers 

operating as their promoters and 

accordingly believe that this provision 

will provide an additional benefit to 

investors without being unduly 

burdensome. As noted above, in the 

context of private placements of private 

fund shares, we believe that a written 

private placement agreement would 

meet the final rule’s written agreement 

requirement, further reducing the 

compliance burdens associated with 

this aspect of the rule.510

d. ‘‘Covered Persons’’ 

Under the final rule, similar to the 

partial exemption for registered brokerdealers, we are providing an exemption 

from the rule’s disqualification 

provisions for ‘‘covered persons’’ under 

rule 506(d) of Regulation D with respect 

to a rule 506 securities offering, 

provided the person’s involvement 

would not disqualify the offering under 

that rule.511 With respect to rule 506 of 

Regulation D, ‘‘covered persons’’ 

include the issuer, its predecessors and 

affiliated issuers; directors, general 

partners, and managing members of the 

issuer; executive officers of the issuer, 

and other officers of the issuer that 

participate in the offering; beneficial 

owners of 20 percent or more of the 

issuer’s outstanding voting equity 

securities, calculated on the basis of 

voting power; promoters connected to 

the issuer in any capacity at the time of 

sale; for pooled investment fund issuers, 

the fund’s investment manager and any 

general partner, managing member, 

director, executive officer or other 

officer participating in the offering of 

any such investment manager; and 

persons compensated for soliciting 

investors, including any general partner, 

managing member, director, executive 

officer or other officer participating in 

the offering of any such solicitor.512

Commenters expressed concern that 

issuers and solicitors conducting private 

fund offerings in reliance on Regulation 

D would face increased compliance 

burdens in observing two sets of 

overlapping disqualification 

regulations.513 Stating that a majority of 

private placements are carried out under 

rule 506, these commenters suggested 

we conform the rule’s disqualification 

provisions to the provisions under rule 

506 of Regulation D for solicitors of 

investors in private funds who would be 

newly subject to the solicitation rule, or 

that we provide an exemption from the 

final rule’s disqualification provisions 

for persons that are subject to rule 506 

of Regulation D.514

We agree with commenters that 

having one set of disqualifying events 

for promoters with respect to offerings 

conducted in reliance on rule 506 of 

Regulation D would streamline 

compliance processes and reduce the 

burden for such promoters. 

Additionally, similar to the statutory 

disqualification provisions under the 

Exchange Act, we believe that the 

disqualification provisions, or ‘‘bad 

actor’’ provisions, under Regulation D 

will serve the same policy goal as our 

final rule’s disqualification 

provisions.515 While we recognize that 

the two sets of disqualification 

provisions are not identical and that 

there are certain categories of 

disqualifying events that do not overlap, 

we do not believe that the differences 

justify having more than one set of 

disqualification provisions for 

compliance. Moreover, this exemption 

is narrowly limited to testimonials and 

endorsements that are in connection 

with a sale of securities under rule 506 

of the Securities Act. Accordingly, in 

cases where a covered person’s activity 

with respect to a rule 506 securities 

offering would be considered a 

testimonial or endorsement under our 

final rule, such covered person will not 

be subject to the disqualification 

provisions under our final rule so long 

as his or her involvement would not 

disqualify the offering under rule 506(d) 

under the Securities Act.516

Given that Regulation D does not have 

any similar provisions that are sufficient 

to replace our final rule’s disclosure or 

adviser oversight and compliance 

provisions, covered persons under rule 

506(d) of Regulation D will not be 

exempt from our rule’s disclosure and 

adviser oversight and compliance 

obligations for testimonials and 

endorsements. Accordingly, similar to 

the exemption for registered brokerdealers, persons covered by rule 506(d) 

of Regulation D with respect to a rule 

506 offering will still be subject to all 

other provisions of the final rule, to the 

extent that their activity falls within the 

scope of the rule, including the general 

prohibitions, performance provisions, 

and conditions applicable to 

testimonials and endorsements except 

the disqualification provisions. 

e. No Exemptions for Impersonal 

Investment Advice and Nonprofit 

Programs 

i. Impersonal Investment Advice 

The proposed solicitation rule would 

have provided a partial exemption for 

solicitation activities for investment 

advisory services that do not purport to 

meet the objectives or needs of specific 

individuals or accounts.517 The 

proposed advertising rule did not 

provide any similar exemption. As a 

result of the merger of the two rules, the 

final rule will not have an exemption for 

promoters that refer investors for the 

provision of impersonal investment 

advice.518

One commenter supported our 

proposal to retain and modify the 

current exemption under the solicitation 

rule for solicitation activities related to 

the provision of impersonal investment 

advice.519 This commenter stated that 

the exemption is a ‘‘long-standing 

feature of the regime covering 

solicitation,’’ and that our proposed 


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520See current rule 206(4)–1. The current 

advertising rule does not have any exemptions for 

advertisements related to impersonal investment 

advice. 

521See TINA Comment Letter. 

522See Mercer Comment Letter; NAPFA 

Comment Letter. 

523Some solicitors have, from time to time, 

requested that the staff not recommend enforcement 

action under the cash solicitation rule for referral 

programs with some, or all, of these features. See 

National Football League Players Association, SEC 

Staff No-Action Letter (Jan. 25, 2002) (‘‘NFLPA 

Letter’’); Excellence in Advertising, Limited, SEC 

Staff No-Action Letter (Nov. 13, 1986) (‘‘EIA 

Letter’’); International Association for Financial 

Planning, SEC Staff No-Action Letter (June 1, 1998) 

(‘‘IAFP Letter’’). These staff no-action letters will be 

nullified following the rescission of the solicitation 

rule. 

524See final rule 206(4)–1(b). The proposed 

solicitation rule would not have applied to an 

adviser’s participation in a program when the 

adviser had a reasonable basis for believing that the 

solicitor is a nonprofit program, participating 

advisers compensated the solicitor only for the 

costs reasonably incurred in operating the program, 

and the solicitor provided clients a list, based on 

non-qualitative criteria, of at least two advisers. See 

proposed rule 206(4)–3(b)(4). There is no special 

exception made for nonprofit programs under the 

current advertising rule. 

525 2019 Proposing Release, supra footnote 7, at 

section II.B.7. 

526SIFMA AMG Comment Letter I. 

527See proposed rule 206(4)–3(a)(1). 

528See proposed rule 206(4)–3(b)(4), which 

would have required that: (i) The adviser have a 

‘‘reasonable basis for believing’’ that among other 

things, the solicitor is a nonprofit program and that 

the solicitor (or adviser) ‘‘prominently discloses to 

the client, at the time of any solicitation activities,’’ 

certain information; and (ii) solicitor or adviser 

disclose: (1) The criteria for inclusion on the list of 

investment advisers; and (2) that investment 

advisers reimburse the solicitor for the costs 

reasonably incurred in operating the program. 

529See final rule 206(4)–1(b)(4)(i). The proposed 

nonprofit program exemption would have required 

that the client receive certain disclosures. See 

proposed rule 206(4)–3(b)(4)(ii). The exemption 

would have also had a ‘‘reasonable basis’’ standard 

for the adviser’s reliance on the exemption. See 

proposed rule 206(4)–3(b)(4)(i). As with the de 

minimis exemption, nonprofit programs would not 

have been subject to the disqualification provisions 

under the proposed rule. See proposed rule 206(4)– 

3(b)(4). Since a person or program would be 

unlikely to demonstrate bias in referring one 

adviser over another when neither adviser provides 

compensation based on the number of referrals 

made or any other indicator of the potential to earn 

the adviser profit, we believed, and continue to 

believe, that an exemption from the disqualification 

provisions in such cases is appropriate. 

530The proposed exemption would have required 

that the solicitor or adviser disclose to the client 

that investment advisers reimburse the solicitor for 

the costs reasonably incurred in operating the 

client. Proposed rule 206(4)–3(b)(4)(ii)(B). 

531Such a program within the de minimis 

exemption will not be subject to the written 

agreement requirement under the adviser oversight 

and compliance provision. Final rule 206(4)– 

1(b)(2)(ii) and (b)(4)(i). 

532See proposed rule 206(4)–3(b)(4)(i). 

modifications such as removing the 

requirement to enter into a written 

agreement would improve aspects of the 

exemption. However, in the context of 

advertising, and testimonials and 

endorsements in particular, we do not 

believe that there should be any 

distinction made between personal and 

impersonal investment advice.520 Many 

testimonials and endorsements, by their 

nature, will be used to promote and 

advertise an adviser’s services, without 

taking into account a particular 

investor’s objectives or needs. 

Accordingly, in such cases, we believe 

that investors should be afforded all 

protections of the final rule. A 

testimonial or endorsement serving as 

an advertisement for an adviser should 

not be exempt from providing 

disclosures when there is a material 

conflict of interest simply because the 

advertisement is related to the provision 

of impersonal investment advice instead 

of personal investment advice. 

We stated in the proposal that the 

current and proposed solicitation rule 

provided a partial exemption for 

impersonal advisory services because 

we understood that ‘‘prospective clients 

normally would be aware that a person 

selling such services was a salesman 

who was paid to do so.’’ However, with 

respect to the proposed advertising rule, 

one commenter argued against 

regulations built on any underlying 

assumption that consumers are skilled 

at evaluating testimonials.521 Other 

commenters argued against permitting 

testimonials and endorsements, raising 

concerns about investor confusion and 

inadvertent investor harm.522 Although 

we continue to recognize that a 

potential investor may be aware of a 

promoter’s incentive to sell, after 

considering comments, we believe that 

any use of testimonials or 

endorsements, subject to the final 

exemptions, needs certain protections. 

Accordingly, notwithstanding the fact 

that an adviser may offer 

impersonalized services, if an adviser’s 

advertisement includes a testimonial or 

endorsement, then such advertisement 

will be subject to the final rule’s 

provisions. 

ii. Nonprofit Programs Exemption 

The proposed solicitation rule would 

have exempted certain types of 

nonprofit programs from the substantive 

requirements of the rule, codifying the 

positions taken in previous staff noaction letters.523 The proposed 

advertising rule provided no such 

exemption for testimonials or 

endorsements. The final marketing rule 

will not have an exemption for 

nonprofit programs.524

We proposed this exemption because 

we believed that the potential for the 

solicitor to demonstrate bias towards 

one adviser or another when there is no 

profit motive made the protections of 

the solicitation rule unnecessary.525 One 

commenter supported the proposed 

exemption and suggested that the same 

type of approach could be helpful for 

for-profit entities that provide matching 

of investors and advisers based on 

objective criteria.526 However, given the 

merger of the advertising and 

solicitation rules and our final rule’s 

requirements, we no longer believe that 

an exemption for nonprofit programs 

would be appropriate or necessary. 

Instead, we believe the requirements of 

the final rule are important for investors 

even when the advertisement take the 

form of a testimonial or endorsement by 

a nonprofit program. 

Among other things, our proposed 

solicitation rule would have required a 

separate solicitor disclosure that 

provided investors with certain 

information including the terms of 

compensation, and a written agreement 

between the adviser and solicitor 

describing the solicitation activities and 

requiring solicitor compliance with 

section 206 of the Act.527 The proposed 

nonprofit programs exemption would 

have exempted advisers and solicitors 

from the requirements of the proposed 

solicitation rule including the written 

agreement and disclosure requirements, 

provided that the adviser and solicitor 

still met a number of conditions 

including some advisory oversight and 

different disclosures.528

Under the final rule, though we are 

not providing an exemption for 

nonprofit programs per se, we took into 

account that, if there is no or minimal 

compensation involved, the nonprofit 

program would fall under the de 

minimis exemption. As a result, many 

nonprofit programs may effectively be 

subject to the required disclosures and 

a part of the adviser oversight provision 

under the final rule, similar to the 

proposed exemption under the 

solicitation rule.529 Under the final rule, 

the nonprofit program would need to 

disclose that it is not a current client of 

the adviser, the material terms of 

compensation, which, if any, would be 

similar to the disclosure under the 

proposed exemption,530 and any 

material conflicts of interest. With 

respect to the adviser oversight 

provision, if the nonprofit program falls 

under the de minimis exemption,531

advisers would only need to have a 

reasonable basis for believing that the 

nonprofit program complies with the 

final rule, rather than a number of 

specific items as proposed under the 

solicitation rule.532

We believe that the disclosure and 

advisory oversight requirements under 


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533See, e.g., Blackrock Comment Letter; IAA 

Comment Letter. 

534See NASAA Comment Letter. 

535Rule 206(4)–1(e)(17). An adviser’s ‘‘related 

person’’ is defined in Form ADV’s Glossary of 

Terms as ‘‘[a]ny advisory affiliate and any person 

that is under common control with your firm.’’ 

Italicized terms are defined in the Form ADV 

Glossary. We believe that a rating by a person under 

common control with the adviser could present the 

same bias towards the adviser as a rating by an 

adviser’s other advisory affiliates. 

536See final rule 206(4)–1(c). 

537See id. 

538Commenters claimed that a ‘‘clearly and 

prominently’’ disclosure standard would pose 

challenges for certain advertisements, including 

advertisements on certain social media or internet 

platforms, if hyperlinking is not permitted. See, e.g., 

Fidelity Comment Letter; LinkedIn Comment Letter; 

MMI Comment Letter. As discussed above, we 

continue to believe that it would not be consistent 

with the clear and prominent standard to use a 

hyperlink to include the disclosures required under 

the final rule. See supra section II.C.2.a. Instead, 

such required disclosures should be included 

within the advertisement. 

539See, e.g., Blackrock Comment Letter 

(suggesting that firms might not be willing to 

provide proprietary survey methodology 

information to advisers); MFA/AIMA Comment 

Letter I; IAA Comment Letter; AIC Comment Letter. 

540See, e.g., Blackrock Comment Letter; AIC 

Comment Letter. 

541See IAA Comment Letter. 

the final rule are more appropriate than, 

and preferable to, the more tailored 

disclosures and conditions that were 

proposed under the nonprofit program 

exemption. Accordingly, we believe 

eliminating the proposed nonprofit 

program exemption is appropriate, and 

the final rule will subject advisers 

participating in any referral program, 

whether nonprofit or for profit, to the 

rule in order to provide investors with 

sufficient and necessary information 

when presented with a testimonial or 

endorsement of an adviser by such a 

program. Absent the de minimis or other 

exemption, the rule will subject all 

referral programs that provide 

testimonials or endorsements to the 

required disclosures, adviser oversight 

and disqualification provisions. 

D. Third-Party Ratings 

As proposed, the final rule will 

prohibit including third-party ratings in 

an advertisement, unless they comply 

with the rule’s general prohibitions and 

additional conditions. An investment 

adviser may not include a third-party 

rating in its advertisement unless the 

adviser has a reasonable basis for 

believing that any questionnaire or 

survey used in the preparation of the 

third-party rating meets certain criteria 

and provides certain disclosures. 

Several commenters supported the 

proposed rule’s approach of expressly 

permitting the inclusion of third-party 

ratings in advertisements.533 However, 

one commenter requested that we 

prohibit third-party ratings in retail 

advertisements, arguing that advisers 

will be incentivized to purchase only 

positive third-party ratings and 

aggressively market them to mislead 

investors.534 We believe that the final 

rule’s conditions for including thirdparty ratings in an advertisement, 

discussed in more detail below, in 

conjunction with the rule’s general 

prohibitions, mitigate any such 

incentives and safeguard investors from 

misleading third-party ratings. 

The final rule will, as proposed, 

define ‘‘third-party rating’’ as a ‘‘rating 

or ranking of an investment adviser 

provided by a person who is not a 

related person (as defined in the Form 

ADV Glossary of Terms), and such 

person provides such ratings or rankings 

in the ordinary course of its 

business.’’ 535 This definition is 

intended to permit advisers to use thirdparty ratings, subject to conditions, 

when the ratings are conducted in the 

ordinary course of business. We 

continue to believe that the ordinary 

course of business requirement would 

largely correspond to persons with the 

experience to develop and promote 

ratings based on relevant criteria. It 

would also distinguish third-party 

ratings from testimonials and 

endorsements that resemble third-party 

ratings, but that are not made by persons 

who are in the business of providing 

ratings or rankings. The requirement 

that the provider not be an adviser’s 

related person will avoid the risk that 

certain affiliations could result in a 

biased rating. 

The final rule also will subject 

advertisements that include third-party 

ratings to additional tailored conditions, 

as proposed. For such advertisements, 

the final rule will require that the 

investment adviser have a reasonable 

basis to believe that any questionnaire 

or survey used in the preparation of the 

third-party rating is structured to make 

it equally easy for a participant to 

provide favorable and unfavorable 

responses, and is not designed or 

prepared to produce any predetermined 

result (the ‘‘due diligence 

requirement’’).536 The final rule also 

will require that an investment adviser 

clearly and prominently disclose, or the 

investment adviser reasonably believes 

that the third-party rating clearly and 

prominently discloses: (i) The date on 

which the rating was given and the 

period of time upon which the rating 

was based; (ii) the identity of the thirdparty that created and tabulated the 

rating; and (iii) if applicable, that 

compensation has been provided 

directly or indirectly by the adviser in 

connection with obtaining or using the 

third-party rating (the ‘‘disclosure 

requirement’’).537 In order to be clear 

and prominent, the disclosure must be 

at least as prominent as the third-party 

rating.538 While we are adopting the 

conditions required for including any 

third-party rating in an advertisement 

largely as proposed, we are providing 

additional clarification on how advisers 

can comply with such conditions. 

Several commenters requested 

guidance on how an adviser can satisfy 

the due diligence requirement.539 We 

continue to believe that an adviser 

could satisfy the requirement by 

accessing the questionnaire or survey 

that was used in the preparation of the 

rating. We are persuaded by 

commenters’ concerns, however, that 

third-party rating agencies may be 

reluctant to share proprietary survey or 

questionnaire information to advisers, 

such as their calculation 

methodology.540 Accordingly, we are 

clarifying that obtaining the 

questionnaire or survey used in the 

preparation of the rating is not the only 

means to satisfy this requirement. We 

also do not believe that this condition 

requires an adviser to obtain complete 

information about how the third-party 

rating agency collects underlying data or 

calculates a rating, as one commenter 

suggested.541 Nevertheless, we continue 

to believe that an adviser relying solely 

on the results of a survey or 

questionnaire—i.e., the rating itself— 

without conducting some due diligence 

into the underlying methodology and 

structure, could give rise to 

advertisements that include misleading 

ratings. To satisfy the due diligence 

requirement, an adviser could seek 

representations from the third-party 

rating agency regarding general aspects 

of how the survey or questionnaire is 

designed, structured, and administered. 

Alternatively, a third-party rating 

provider may publicly disclose similar 

information about its survey or 

questionnaire methodology. In either 

case, the adviser could obtain sufficient 

information to formulate a reasonable 

belief as required by the due diligence 

requirement without obtaining 

proprietary data of third-party rating 

agencies. 

The first provision of the disclosure 

requirement—the date on which the 

rating was given and the period of time 

upon which the rating was based—will 

assist investors in evaluating the 

relevance of the rating. Ratings from an 

earlier date, or that are based on 

information from an earlier period, may 

not reflect the current state of an 


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542 In addition, an adviser would be required to 

provide contextual disclosures of subsequent, lessfavorable performance in the rating, if applicable. 

See final rule 206(4)–1(a). 

543 In many cases, third-party ratings are 

developed by relying significantly on 

questionnaires or client surveys and involve 

different compensation models. For example, some 

investment advisers compensate the third-party 

ratings firm for the right to include the ratings or 

rankings that are calculated as a result of the survey 

in their advertisements. Other investment advisers 

compensate the third-party ratings firm to be 

included in the initial pool of advisers from which 

the rating or ranking is determined. 

544See supra section II.A. 

545See 2019 Proposing Release, supra footnote 7, 

at text accompanying n. 181. 

546For example, investors may rely particularly 

heavily on advertised performance results in 

choosing whether to hire or retain an investment 

adviser or invest in a private fund managed by the 

adviser. This reliance may be misplaced to the 

extent that an investor considers past performance 

achieved by an investment adviser to be predictive 

of the results that the investment adviser will 

achieve for the investor. 

547See, e.g., MFA/AIMA Comment Letter I; AIC 

Comment Letter I. 

548Proposed rule 206(4)–1(c)(1). 

549We proposed to define clients and investors 

that are ‘‘qualified purchasers’’ or ‘‘knowledgeable 

employees’’ as ‘‘Non-Retail Persons’’ and to define 

all other clients and investors as ‘‘Retail Persons.’’ 

See proposed rule 206(4)–1(e)(8) and (14). 

Similarly, the proposed rule distinguished between 

advertisements for which an adviser has adopted 

and implemented policies and procedures 

reasonably designed to ensure that the 

advertisements are disseminated solely to NonRetail Persons as ‘‘Non-Retail Advertisements’’ and 

all other advertisements as ‘‘Retail 

Advertisements.’’ See proposed rule 206(4)–1(e)(7) 

and (13). 

550Proposed rule 206(4)–1(c)(2). 

551Final rule 206(4)–1(d)(1). 

552 Id. 

553See Consumer Federation Comment Letter; 

CFA Institute Comment Letter; Proskauer Comment 

Letter. The majority of commenters who responded 

via the Investor Feedback Flyer marked net 

performance results as ‘‘Very Important.’’ 

investment adviser’s business. An 

advertisement that includes an older 

rating would be misleading without 

clear and prominent disclosure of the 

rating’s date.542

The second provision of the 

disclosure requirement—the identity of 

the third party that created the rating— 

is important because it will provide 

investors with the opportunity to assess 

the qualifications and credibility of the 

rating provider. Investors can look up a 

third party by name and find relevant 

information, if available, about the third 

party’s qualifications and can form their 

own opinions about credibility. 

The final provision of the disclosure 

requirement—that compensation has 

been provided directly or indirectly by 

the adviser in connection with obtaining 

or using the third-party rating—provides 

consumers with important context for 

weighing the relevance of the statement 

in light of the compensation 

incentive.543 Although the final rule 

uses the term ‘‘compensation,’’ this term 

continues to refer to cash and non-cash 

compensation, as proposed. Similarly, 

the final rule replaces the phrase ‘‘by or 

on behalf’’ with ‘‘directly or indirectly.’’ 

As discussed above, this reflects a nonsubstantive change to use a phrase that 

we believe is commonly understood in 

the industry.544

While the final rule explicitly requires 

these three disclosures, they would not 

cure a rating that could otherwise be 

false or misleading under the final rule’s 

general prohibitions or under the 

general anti-fraud provisions of the 

Federal securities laws. For example, 

where an adviser’s advertisement 

references a recent rating and discloses 

the date, but the rating is based upon on 

an aspect of the adviser’s business that 

has since materially changed, the 

advertisement would be misleading. 

Likewise, an adviser’s advertisement 

would be misleading if it indicates that 

the adviser is rated highly without 

disclosing that the rating is based solely 

on a criterion, such as assets under 

management, that may not relate to the 

quality of the investment advice. 

E. Performance Advertising 

The final rule’s general prohibitions 

apply to advertisements that include 

performance results (‘‘performance 

advertising’’), as proposed. We are 

adopting specific requirements and 

restrictions for performance advertising, 

with some changes from the proposal as 

described below. We continue to believe 

that performance advertising raises 

special concerns that warrant additional 

requirements and restrictions under the 

final marketing rule.545 In particular, the 

presentation of performance could lead 

reasonable investors to unwarranted 

assumptions and thus would result in a 

misleading advertisement.546 Some 

commenters objected to the proposed 

rule’s specific performance advertising 

provisions, favoring relying only on the 

rule’s general prohibitions for non-retail 

investors.547 However, commenters 

generally did not advocate for the 

removal of the performance advertising 

provisions as a whole. After considering 

comments, we remain convinced that 

additional protections should apply to 

advertisements that include 

performance results. 

We proposed several requirements for 

all advertisements that include 

performance advertising. Specifically, 

under our proposal, an advertisement 

could not: (i) Include gross performance, 

unless the advertisement provided or 

offered to provide a schedule of fees and 

expenses deducted to calculate net 

performance (the ‘‘proposed schedule of 

fees requirement’’); (ii) contain any 

statement that the performance results 

have been approved or reviewed by the 

Commission (the ‘‘Commission approval 

requirement’’); and (iii) provide related, 

extracted, or hypothetical performance 

without meeting specific conditions.548

For Retail Advertisements,549 our 

proposal also would have required that: 

(i) Any presentation of gross 

performance also include net 

performance, subject to conditions (the 

‘‘net performance requirement’’); and 

(ii) any performance results of a 

portfolio or composite aggregation of 

related portfolios include performance 

results for one-, five-, and ten-year 

periods, subject to conditions (the ‘‘time 

period requirement’’).550 As discussed 

in more detail below, the final rule 

substantially adopts the proposed rule’s 

requirements, and applies them to all 

advertisements that include 

performance advertising. Unlike the 

proposed rule, the final rule does not 

provide separate requirements for 

performance advertising in Retail 

Advertisements and Non-Retail 

Advertisements and will not include the 

proposed schedule of fees requirement. 

1. Net Performance Requirement; 

Elimination of Proposed Schedule of 

Fees Requirement 

The final rule will prohibit any 

presentation of gross performance in an 

advertisement unless the advertisement 

also presents net performance (i) with at 

least equal prominence to, and in a 

format designed to facilitate comparison 

with, the gross performance; and (ii) 

calculated over the same time period, 

and using the same type of return and 

methodology as, the gross 

performance.551 The final rule applies 

the net performance requirement to all 

advertisements, not only to Retail 

Advertisements and, in turn, eliminates 

the proposed schedule of fees 

requirement.552 We discuss below the 

benefits of expanding the net 

performance requirement to all 

performance advertisements in light of 

the removal of the proposed schedule of 

fees requirement, and the anticipated 

effects on advisers. 

Some commenters supported our 

proposal to require advisers that present 

gross performance in Retail 

Advertisements to present net 

performance.553 They agreed that 

presentations of net performance help 

demonstrate the effect that fees and 

expenses will have on future 

performance. One commenter also 

stated that providing net performance 

information to Non-Retail Persons alerts 


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554See NYC Bar Comment Letter (expressing this 

idea in the context of its overall argument that the 

rule should not require an adviser to provide (or 

offer to provide) a schedule of fees and expenses to 

Non-Retail Persons when also presenting net 

performance). 

555See, e.g., IAA Comment Letter; Proskauer 

Comment Letter (stating that for Non-Retail Persons, 

disclosure that gross performance is gross and not 

net is sufficient); CFA Institute Comment Letter; 

MFA/AIMA Comment Letter I; Blackrock Comment 

Letter. 

556See ILPA Comment Letter. 

557See, e.g., CFA Institute Comment Letter; 

Consumer Federation Comment Letter. 

558See, e.g., NYC Bar Comment Letter; NSCP 

Comment Letter; AIC Comment Letter I; NAPFA 

Comment Letter; ACG Comment Letter. 

559See, e.g., NSCP Comment Letter; IAA 

Comment Letter (stating that prospective investors 

typically do not provide information about their 

retail or non-retail status at the marketing stage, and 

stating that in the case of non-U.S. investors, this 

information is generally not gathered at any stage). 

560See Ropes & Gray Comment Letter; 

Association for Corporate Growth Comment Letter. 

For example, a private fund that relies on section 

3(c)(1) of the Investment Company Act may have 

investors that qualify as Retail and Non-Retail 

Persons under the proposed amendments to the 

advertising rule. Retail Persons would receive 

different disclosures under the proposal, raising the 

possibility of unequal treatment and potential 

questions about fair disclosure. See proposed rule 

206(4)–1(c)(1) and (2). 

561See CFA Institute Comment Letter. 

562See, e.g., MFA/AIMA Comment Letter I; IAA 

Comment Letter; CFA Institute Comment Letter 

(stating that they do not believe it is feasible for an 

adviser that presents gross returns to provide the 

proposed fee schedule, but that advisers should 

disclose certain information about fees a client will 

pay). 

563See MFA/AIMA Comment Letter I; NYC Bar 

Comment Letter. 

564See ILPA Comment Letter. 

565See, e.g., NAPFA Comment Letter (opposing 

additional disclosure requirements); NRS Comment 

Letter (supporting additional disclosure 

requirements). See also ILPA Comment Letter 

(requesting that the Commission incorporate 

specific disclosures for non-retail investors 

reviewing private equity fund performance 

advertising). 

566See 2019 Proposing Release, supra footnote 7, 

at nn.191–195. 

567Final rule 206(4)–1(e)(11). See also proposed 

rule 206(4)–1(e)(10). 

them to the fact that fees and expenses 

may significantly reduce 

performance.554

Some commenters also supported our 

proposal to allow advisers to exclude 

net performance in Non-Retail 

Advertisements, stating that Non-Retail 

Persons are often not at risk of being 

misled by gross performance.555

However, another commenter stated that 

many Non-Retail Persons investing in 

private funds prefer to receive both net 

and gross performance results in 

advertisements because it provides an 

opportunity to cross check the investors’ 

net performance calculations against 

advisers’ calculations.556

In addition, while some commenters 

supported permitting different 

performance presentations in Retail and 

Non-Retail Advertisements,557 other 

commenters stated that it could create 

operational, administrative, and 

compliance burdens for advisers, and 

significant potential for errors.558 Some 

commenters stated that advisers would 

face difficulties in controlling the 

distribution of Non-Retail 

Advertisements pursuant to policies and 

procedures that would be required 

under the proposal.559 A few 

commenters also raised concerns that in 

some cases Retail and Non-Retail 

Persons may invest in the same fund, 

but may receive different types or levels 

of information because of the proposed 

rule’s bifurcated approach.560

After considering comments, we 

believe that the net performance 

requirement is reasonably designed to 

prevent all types of prospective clients 

and private fund investors from being 

misled by the presentation of gross 

performance in an advertisement. 

Presenting gross performance alone in 

this context may imply that investors 

received the full amount of the 

presented returns, when the fees and 

expenses paid in connection with the 

investment adviser’s investment 

advisory services would reduce the 

returns to investors. Presenting gross 

performance alone also may be 

misleading to the extent that amounts 

paid in fees and expenses are not 

deducted and thus not compounded in 

calculating the returns. In addition, we 

believe that presenting net performance 

in all advertisements will help illustrate 

for investors the effect of fees and 

expenses on the advertised performance 

results and allow all investors to 

compare the adviser’s performance 

presentation with their own 

calculations, if applicable. We do not 

believe the burden will be considerable 

given that many advisers already 

present net performance.561

Given the operational complexity and 

challenges that commenters noted, as 

well as changes we are making to the 

final rule to streamline the performance 

presentation requirements for all 

advisers, we are persuaded that the rule 

should no longer provide different 

flexibility for advertisements to NonRetail Persons. Accordingly, the final 

rule implements changes from the 

proposed rule that we believe, when 

viewed as a whole, simplify the rule’s 

compliance for all advisers, while 

preserving and promoting protection for 

all investors. In particular, we are 

eliminating the proposed schedule of 

fees requirement. Commenters stated 

that this requirement could be overly 

burdensome for advisers and may not 

provide relevant information to 

investors.562 Some commenters also 

stated that Non-Retail Persons are in a 

position to negotiate for appropriately 

tailored disclosures based on their 

particular needs.563 While one 

commenter disagreed, arguing that 

investors in private funds (including 

Non-Retail Persons) sometimes have 

difficulty obtaining information 

regarding fees and expenses for complex 

products,564 we believe requiring net 

performance for all advertisements with 

appropriate disclosures will alert 

investors to the effect of fees on an 

adviser’s performance results. 

As proposed, the final rule will not 

prescribe disclosure requirements for 

net and gross performance 

presentations. Instead, an adviser would 

need to comply with the final rule’s 

general prohibitions. Comments were 

mixed on this aspect of the proposal.565

We continue to believe, however, that 

advisers should evaluate the particular 

facts and circumstances that may be 

relevant to investors, including the 

assumptions, factors, and conditions 

that contributed to the performance, and 

include appropriate disclosures or other 

information such that the advertisement 

does not violate the prohibitions in 

paragraph (a) of the final rule or other 

applicable law. Depending on the facts 

and circumstances, disclosures may 

include: (1) The material conditions, 

objectives, and investment strategies 

used to obtain the results portrayed; (2) 

whether and to what extent the results 

portrayed reflect the reinvestment of 

dividends and other earnings; (3) the 

effect of material market or economic 

conditions on the results portrayed; (4) 

the possibility of loss; and (5) the 

material facts relevant to any 

comparison made to the results of an 

index or other benchmark.566

a. Definition of Gross Performance 

Similar to the proposal, both ‘‘gross 

performance’’ and ‘‘net performance’’ 

will be defined by reference to a 

‘‘portfolio,’’ which is defined as ‘‘a 

group of investments managed by the 

investment adviser’’ and can include 

‘‘an account or private fund.’’ 567 Under 

the final rule, ‘‘gross performance’’ is 

defined to mean the performance results 

of a portfolio (or portions of a portfolio 

that are included in extracted 

performance, if applicable) before the 

deduction of all fees and expenses that 

a client or investor has paid or would 

have paid in connection with the 

investment adviser’s investment 

advisory services to the relevant 


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568Final rule 206(4)–1(e)(7). 

569See CFA Institute Comment Letter. See infra 

section II.E.5 (discussing extracted performance). 

570See 2019 Proposing Release, supra footnote 7, 

at text accompanying nn.235–236. 

571See, e.g., IAA Comment Letter; CFA Institute 

Comment Letter. 

572See IAA Comment Letter (recommending for 

all cases where an investment adviser has 

discretion and is responsible for the execution of 

client transactions); CFA Institute Comment Letter 

(recommending for all presentations of gross returns 

other than those the adviser describes as ‘‘pure 

gross returns’’). 

573CFA Institute Comment Letter (‘‘Pure gross 

returns are commonly used when transaction costs 

are bundled with investment management fees, 

such as in a wrap fee arrangement.’’). This 

commenter also requested that we clarify whether 

returns of accounts that pay zero commissions are 

gross returns or pure gross returns. 

574See, e.g., CFA Institute Comment Letter. 

575See, e.g., supra section II.B; infra section II.E. 

576Even though we are not adopting a definition 

of ‘‘pure gross performance,’’ as one commenter 

suggested, we believe that any adviser that presents 

such performance results in addition to gross 

performance and net performance should identify 

pure gross returns and disclose that pure gross 

returns do not reflect the deduction of transaction 

costs, to avoid misleading recipients of the 

advertisement. 

577Final rule 206(4)–1(e)(10). 

578See proposed rule 206(4)–1(e)(6). 

579See IAA Comment Letter; MFA/AIMA 

Comment Letter I; NRS Comment Letter. 

580See Consumer Federation Comment Letter 

(stating that the Commission should require 

advisers to comply with a uniform set of principles 

when calculating performance). See also CFA 

portfolio.568 We are adopting the 

definition of gross performance as 

proposed, with one change to require, as 

a commenter requested, that advisers 

that show extracted performance in 

accordance with the final marketing rule 

must show net and gross performance 

for the applicable subset of investments 

extracted from a portfolio.569 This 

change clarifies that gross performance 

applies not only to an entire portfolio 

but also to a portion of a portfolio that 

is included in extracted performance. 

Gross performance does not show the 

impact of all fees and expenses that the 

adviser’s existing investors have borne 

or that prospective investors would 

bear, which can be relevant to an 

evaluation of the investment experience 

of the adviser’s advisory clients and/or 

investors in private funds advised by 

the investment adviser.570 While 

commenters generally supported the 

proposed definition of gross 

performance, some requested that we 

clarify the types of fees and expenses 

advisers must deduct in calculating 

gross performance.571 For example, 

some commenters requested we specify 

that gross returns should reflect the 

deduction of transaction costs, if any 

exist.572 One of these commenters also 

requested that we add a definition for 

‘‘pure gross returns’’ (i.e., returns that do 

not reflect the deduction of any 

transaction costs), and require advisers 

to make additional disclosures when 

presenting pure gross returns in 

advertisements.573 The same commenter 

requested that we clarify that advisory 

fees paid to underlying investment 

vehicles must be deducted from gross 

performance. 

Like the proposed rule, the final rule 

does not prescribe any particular 

calculation of gross performance. For 

example, many private funds use 

money-weighted returns instead of timeweighted returns.574 Under the final 

rule, advisers may use the type of 

returns appropriate for their strategies 

provided that the usage does not violate 

the rule’s general prohibitions, and, if 

applicable, subject to the requirements 

discussed below.575 We continue to 

believe that, because of the variation 

among types of advisers and 

investments, prescribing the calculation 

could unduly limit the ability of 

advisers to present performance 

information that they believe would be 

most relevant and useful to an 

advertisement’s audience. However, if 

an investment adviser calculates the 

performance of a portfolio in part by 

deducting transaction fees and 

expenses, but deducts no other fees or 

expenses, then such performance would 

be ‘‘gross performance.’’ If an 

investment adviser’s calculation of 

performance reflects the deduction of 

advisory fees paid to an underlying 

investment vehicle before the deduction 

of all fees and expenses that a client or 

investor has paid or would have paid in 

connection with the investment 

adviser’s investment advisory services 

to the relevant portfolio, then such 

performance would be ‘‘gross 

performance.’’ 

It would be misleading to present 

gross performance information without 

providing appropriate disclosure about 

gross performance, taking into account 

the particular facts and circumstances of 

the advertised performance. Advisers 

generally should describe the type of 

performance return presented in the 

advertisement. For example, an 

advertisement may or may not present 

the performance of a portfolio using a 

return that accounts for the cash flows 

into and out of the portfolio. In either 

case, under the final rule, an adviser 

generally should disclose what elements 

are included in the return presented so 

that the audience can understand, for 

example, how it reflects cash flow and 

other relevant factors. Similarly, if an 

adviser’s presentation of gross 

performance does not reflect the 

deduction of transaction fees and 

expenses, an adviser should disclose 

that fact to avoid being misleading, if it 

would not be clear to the investor from 

the context of the advertisement.576

b. Definition of Net Performance 

We are adopting the definition of net 

performance as proposed, with some 

modifications. First, as with gross 

performance and for the same reasons, 

the final rule provides that net 

performance applies not only to an 

entire portfolio but also to a portion of 

a portfolio that is included in extracted 

performance. Second, we are specifying 

when advisers may exclude certain 

custodian fees paid to third parties. 

Third, we are prescribing some aspects 

of the calculation of net performance 

using model fees. 

The final rule defines ‘‘net 

performance’’ to mean, in part, the 

performance results of a portfolio (or 

portions of a portfolio that are included 

in extracted performance, if applicable) 

after the deduction of all fees and 

expenses that a client or investor has 

paid or would have paid in connection 

with the investment adviser’s 

investment advisory services to the 

relevant portfolio.577 Once an adviser 

establishes the ‘‘portfolio’’ for which 

performance results are presented, the 

adviser must determine the fees and 

expenses borne by the owner of the 

portfolio and then deduct those to 

establish the ‘‘net performance.’’ 

The final rule includes a nonexhaustive list of the types of fees and 

expenses to be considered in preparing 

net performance that is identical to the 

proposal.578 This list includes, if 

applicable, advisory fees, advisory fees 

paid to underlying investment vehicles, 

and payments by the investment adviser 

for which the client or investor 

reimburses the investment adviser. It 

illustrates fees and expenses that clients 

or investors bear in connection with the 

services they receive. In addition, ‘‘net 

performance’’ may exclude custodian 

fees paid to a bank or other third-party 

organization for safekeeping funds and 

securities. Finally, the final rule permits 

the use of a model fee in calculating net 

performance in an advertisement, 

subject to conditions. 

A few commenters supported the 

proposed definition of net 

performance.579 Some commenters, 

however, requested we prescribe 

additional requirements for net 

performance calculations, including 

specific requirements for certain private 

funds.580 For example, one commenter 


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Institute Comment Letter; ILPA Comment Letter 

(both letters discussing particular concerns 

regarding private equity funds). 

581See CFA Institute Comment Letter. 

582See, e.g., IAA Comment Letter; NRS Comment 

Letter. 

583See Resolute Comment Letter. 

584See ILPA Comment Letter. 

585See Resolute Comment Letter. 

586Final rule 206(4)–1(e)(10). 

587Final rule 206(4)–1(e)(10)(i). See proposed rule 

206(4)–1(e)(6)(iii). 

588See CFA Institute Comment Letter. See also 

IAA Comment Letter (supporting permitting the 

exclusion of custodian fees, generally). 

589Final rule 206(4)–1(e)(10)(ii)(A). 

590 If the fee to be charged to the intended 

audience is anticipated to be higher than the actual 

fees charged, the adviser must use a model fee that 

reflects the anticipated fee to be charged in order 

not to violate the rule’s general prohibitions. See id. 

See also final rule 206(4)–1(a). 

recommended that, when clients cannot 

‘‘opt out’’ of custody or other 

administrative costs, the rule should 

expressly require the adviser to deduct 

these fees and costs when presenting net 

returns of a specific pooled investment 

vehicle.581 This commenter requested 

that we clarify that when presenting net 

performance of a specific pooled fund, 

advisers must deduct administrative 

fees, as required when complying with 

the CFA Institute’s Global Investment 

Performance Standards (‘‘GIPS 

standards’’). Some commenters 

supported our proposal not to prescribe 

specific calculations, stating that there 

is no single correct way to calculate 

returns.582 Some of these commenters 

also requested we clarify that net 

performance calculations in 

advertisements must reflect the 

deduction of any transaction costs and 

investment advisory fees (including any 

performance-based fees or carried 

interest). One commenter requested 

clarification that net performance fees 

exclude taxes on gains generated in a 

portfolio.583

As proposed, the final rule does not 

prescribe any particular calculation of 

net performance. We believe that 

prescribing the calculation of net 

performance could unduly limit the 

ability of advisers to present 

performance information that they 

believe would be most relevant and 

useful to an advertisement’s audience. 

Therefore, the final rule’s definition 

continues to include a non-exhaustive 

list of the types of fees and expenses to 

be considered in preparing net 

performance. We decline, however, to 

enumerate all potential private fund fees 

and expenses, as one commenter 

suggested.584 Instead, the final rule’s 

definition of net performance requires 

the deduction of private fund fees and 

expenses that the investor has paid or 

would have paid in connection with the 

investment adviser’s investment 

advisory services to the relevant fund. 

However, we are clarifying in 

response to some commenters that any 

adviser that deducts applicable 

transaction fees and expenses, or 

advisory fees paid to an underlying 

investment vehicle, when calculating 

gross performance should also do so for 

net performance. We are also clarifying 

that, under the final rule’s definition of 

net performance, advisory fees include 

performance-based fees and 

performance allocations that a client or 

investor has paid or would have paid in 

connection with the investment 

adviser’s investment advisory services 

to the relevant portfolio. With respect to 

administrative fees and expenses that a 

commenter raised, whether a client or 

investor pays them in connection with 

the investment adviser’s advisory 

services (and therefore they must be 

deducted) depends on the facts and 

circumstances. For example, if an 

adviser agrees to bear certain 

administrative fees as a result of 

negotiations with investors in the 

private fund, or if an investor agrees to 

directly bear them, we do not believe 

that those fees should be included in the 

calculation of net performance. In 

response to a commenter discussed 

above, we believe that capital gains 

taxes paid outside of the portfolio are 

not fees and expenses that a client or 

investor has paid or would have paid in 

connection with the investment 

adviser’s investment advisory services 

(and are therefore not required to be 

deducted in the calculation of net 

performance).585

In addition, as proposed, the 

definition of net performance refers to 

the deduction of all fees that an investor 

‘‘has paid or would have paid’’ in 

connection with the services provided. 

That is, where hypothetical performance 

is permissibly advertised under the final 

rule, net performance should reflect the 

fees and expenses that ‘‘would have’’ 

been paid if the hypothetical 

performance had been achieved by an 

actual portfolio.586

c. Deduction of Custodian Fees Paid to 

a Bank or Other Third-Party 

Organization 

Under the final rule, presentation of 

‘‘net performance’’ in an advertisement 

may exclude custodian fees paid to a 

bank or other third-party organization 

for safekeeping funds and securities, as 

proposed.587 We understand that 

advisory clients commonly select and 

directly pay custodians, and in such 

cases, advisers may not have knowledge 

of the amount of such custodian fees to 

deduct for purposes of establishing net 

performance. 

One commenter supported this 

treatment for non-pooled investment 

vehicles, stating that the rule should not 

require an adviser to reflect the 

deduction of custodian fees when 

clients select their custodians.588

However, this commenter also 

recommended that the rule expressly 

require custody fee deduction if a client 

cannot ‘‘opt-out’’ of paying those fees. 

After considering comments, we 

continue to believe that the final rule 

should allow an adviser to exclude 

custodian fees paid to third parties 

given a client may control custodian 

selection (and accompanying fees). We 

believe that this approach is appropriate 

even where advisers know the amount 

of custodian fees—e.g., where the 

adviser recommended the custodian. 

However, to the extent a client or 

investor pays an adviser, rather than a 

third party, for custodial services, then 

the adviser must deduct the custodial 

fee in calculating net performance for 

purposes of the advertisement. This will 

be the case, for example, when an 

adviser provides custodial services with 

respect to funds or securities for which 

the performance is presented and 

charges a separate fee for those services, 

or when custodial fees are included in 

a single fee paid to the adviser, such as 

if they are included in wrap fee 

programs. This would also be the case 

when a client or investor reimburses the 

investment adviser for third-party 

custodian fees. 

d. Deduction of Model Fees 

Under the final rule, presentation of 

‘‘net performance’’ in advertisements 

may reflect the deduction of a model fee 

when doing so would result in 

performance figures that are no higher 

than if the actual fee had been deducted, 

as proposed.589 This will result in 

performance that is no higher than if the 

adviser deducted actual fees. For 

example, in a private fund with 

multiple series or classes where each 

series or class has different fees, an 

adviser may display the performance of 

the highest fee class. We did not receive 

any comments on this aspect of the 

proposal. Advisers may choose this 

modification to ease calculating net 

performance. When an adviser 

advertises net performance that is no 

higher than if deducting actual fees, 

there appears to be little chance of 

misleading the audience into believing 

that investors received better returns 

than they actually did.590


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591Final rule 206(4)–1(e)(10)(ii)(B). The final rule 

reflects one change from the proposal, in response 

to a commenter that requested that we conform the 

phrase ‘‘relevant audience’’ in the proposed rule’s 

model fee provision, to other parts of the rule. See 

CFA Institute Comment Letter. We agree, and have 

revised the provision to refer to the ‘‘intended 

audience to whom the advertisement is 

disseminated.’’ 

592See MMI Comment Letter. 

593See supra footnote 590 (discussing the final 

rule’s first model fee provision and the general 

prohibitions). As discussed above, net performance 

that reflects a model fee that is not available to the 

intended audience is not permitted under the final 

rule’s second model fee provision. 

594See CFA Institute Comment Letter. 

595See final rule 206(4)–1(e)(10) (referring, in the 

definition of net performance, to the deduction of 

all fees and expenses that a client or investor 

‘‘would have paid’’). An adviser could use such a 

model fee pursuant to the second model fee 

provision. Final rule 206(4)–1(e)(10)(ii)(B). 

596See Wellington Comment Letter. 

597See CFA Institute Comment Letter. 

598See 2019 Proposing Release, supra footnote 7, 

at text following footnote 288. 

599See IAA Comment Letter. 

600Final rule 206(4)–1(d)(1)(i) and (ii). 601See CFA Institute Comment Letter. 602Final rule 206(4)–1(d)(2). See proposed rule 

206(4)–1(c)(2)(ii). 603See id. 604See id. 

The rule also will allow net 

performance to reflect the deduction of 

a model fee that is equal to the highest 

fee charged to the intended audience to 

whom the advertisement is 

disseminated, similar to as proposed.591

We continue to believe that allowing 

advisers to present net performance that 

reflects the deduction of this type of 

model fee may be useful for advisers 

who manage a particular strategy for 

different types of investors. For 

example, under the final rule, an adviser 

managing several accounts, each using 

the same investment strategy, could 

present in an advertisement the gross 

and net performance of all such 

accounts. For net performance, the 

adviser may deduct a model fee equal to 

the highest fee charged to retail 

investors (assuming an intended retail 

audience). This provision of the 

definition of net performance does not 

permit net performance that reflects a 

model fee that is not available to the 

intended audience. One commenter 

requested that we permit advisers to 

deduct model fees that reflect either the 

highest fee that was charged historically 

or the highest potential fee that it will 

charge the investors or clients receiving 

the particular advertisement, provided 

the performance is accompanied by 

appropriate disclosure.592 Under the 

final rule, an adviser does not have 

discretion to choose the model fee to 

use in calculating net performance—it 

must use the higher of these two model 

fees.593

Another commenter supported this 

provision, but stated that where an 

adviser has not yet managed an actual 

account for clients or investors similar 

to the relevant audience, the rule should 

permit the adviser to deduct a model fee 

that is equal to the highest fee to be 

charged to relevant audience.594 We 

agree, and the final rule requires the use 

of such a model fee.595

Another commenter expressed 

concern that the proposed rule would 

require an adviser to overstate its 

normal fee, when deducting a model 

fee, because the adviser had previously 

charged a client a higher fee for unique 

relationship servicing requirements.596

If an adviser charged a higher fee for 

unique services that it does not intend 

to provide in the future to the intended 

audience for the advertisement, the 

portfolio may be outside of the scope of 

the adviser’s performance calculation. 

For example, it may not meet the 

criteria for a related portfolio and, in 

that case, should not be included in the 

calculation of related performance. 

Similarly, one commenter stated that 

the rule should not require an adviser to 

deduct a model fee when presenting 

performance of a portfolio of a non-fee 

paying client.597 This commenter 

requested that we instead permit such 

adviser to calculate net performance 

returns using actual investment 

management fees (i.e., zero fees) and 

disclose the percentage of assets under 

management represented by non-fee 

paying portfolios. Further, this 

commenter stated that the GIPS 

standards do not require the application 

of a model fee to non-fee-paying 

portfolios to calculate net returns, and 

that requiring it in the final rule may 

result in many advisers being required 

to restate historical performance. We 

believe this presentation could mislead 

investors to believe that they could 

receive returns as high as non-fee 

paying clients, even with the 

commenter’s proposed disclosure. In the 

2019 Proposing Release, we expressed 

similar concerns with presenting related 

performance of accounts with fee 

waivers or reduced rates unavailable to 

unaffiliated clients of the adviser.598

Accordingly, to satisfy the final rule’s 

general prohibitions, an adviser 

generally should apply a model fee that 

reflects either the highest fee that was 

charged historically or the highest 

potential fee that it will charge the 

investors or clients receiving the 

particular advertisement. 

One commenter requested 

clarification that model fees also may 

exclude custodian fees that would be 

paid to a bank or other third-party 

organization.599 We agree that an 

adviser that uses a model fee in 

accordance with the final rule may also 

exclude custodian fees if otherwise 

permitted under the final rule. 

e. Conditions for Presentation 

As proposed, the final rule will 

require that net performance be 

presented in the advertisement with at 

least equal prominence to, and in a 

format designed to facilitate comparison 

with, the gross performance, and 

calculated over the same time period, 

and using the same type of return and 

methodology as, the gross 

performance.600 These conditions are 

designed to help ensure that net 

performance effectively conveys to the 

audience information about the effect of 

fees and expenses on the relevant 

performance. A calculation of net 

performance over a different time period 

or using a different type of return or 

methodology would not necessarily 

provide information about the effect of 

fees and expenses. Only one commenter 

discussed this condition and 

recommended that the Commission 

encourage advisers to be certain that the 

layout of the information presented is 

not misleading.601 As described above, 

advertisements containing any 

performance presentation will be 

subject to the rule’s general 

prohibitions. 

2. Prescribed Time Periods 

Our final rule also adopts the 

proposed one-, five-, and ten-year time 

period requirement for the presentation 

of performance results in an 

advertisement, with some modifications 

from the proposed rule. First, the final 

rule applies the time period requirement 

to all advertisements (with a new 

exception for private funds), rather than 

only to Retail Advertisements, as 

proposed.602 Second, prescribed time 

periods must end on a date that is no 

less recent than the most recent 

calendar year-end, rather than the most 

recent practicable date, as proposed.603

As proposed, this time period 

requirement will apply to all 

performance results, including gross 

and net performance, and including any 

composite aggregation of related 

portfolios. Also, as proposed, if the 

relevant portfolio did not exist for a 

particular prescribed period, then an 

adviser must present performance 

information for the life of the 

portfolio.604 For example, if a portfolio 

has been in existence for seven years, 

then the adviser must show 


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605For example, an adviser may present 

performance results for three-year periods, which is 

a requirement for advisers that claim compliance 

with the GIPS standards. See, e.g., CFA Institute 

Comment Letter. We are not requiring a three-year 

period, however, because we believe the time 

periods required under the final rule already 

provide investors with sufficient information 

regarding performance over varying time periods. 

606Final rule 206(4)–1(d)(2). 

607See Consumer Federation Comment Letter; 

CFA Institute Comment Letter; Fried Frank 

Comment Letter. 

608See AIC Comment Letter I; Fried Frank 

Comment Letter; MFA/AIMA Comment Letter I; 

IAA Comment Letter; Ropes & Gray Comment 

Letter; NYC Bar Comment Letter. 

609See, e.g., AIC Comment Letter; Fried Frank 

Comment Letter; Ropes & Gray Comment Letter; 

IAA Comment Letter. 

610See Fried Frank Comment Letter; MFA/AIMA 

Comment Letter I. 

611Final rule 206(4)–1(d)(2). See also final rule 

206(4)–1(e)(13) (defining private fund). 

612See Fried Frank Comment Letter; Ropes & 

Gray Comment Letter (discussing that when not 

using time-based performance, there is a potential 

for investment advisers to cherry-pick only recent 

performance results or strong performance years, or 

otherwise mislead investors by using ‘‘not 

meaningful’’ to show performance information). 

613See CFA Institute Comment Letter; IAA 

Comment Letter. 

614CFA Institute Comment Letter. Cf. MMI 

Comment Letter (requesting that our final rule 

permit advisers to present quarterly performance 

results). 

615See, e.g., final rule 206(4)–1(a)(6) (an 

advertisement may not include or exclude 

performance results, or present performance time 

periods, in a manner that is not fair and balanced). 

performance results for one- and fiveyear periods, as well as for the sevenyear period. An investment adviser is 

free to include performance results for 

other periods as long as the 

advertisement also presents results for 

the prescribed time periods, and 

otherwise complies with the 

requirements of the final rule.605

The final rule also adopts the 

proposed requirement that the 

prescribed time periods be presented 

with equal prominence in the 

advertisement, so that an investor can 

observe the history of the adviser’s 

performance on a short-term and longterm basis.606 An adviser may not 

highlight the single one-, five-, or tenyear period that shows the best 

performance, instead of showing them 

in relation to each other. 

We believe this standardized 

presentation provides the audience with 

insight into the experience of the 

investment adviser over set periods that 

are likely to reflect how the advertised 

portfolio(s) performed during different 

market or economic conditions. For 

portfolios in existence for at least ten 

years, performance for that period could 

provide investors with more complete 

information than only performance over 

the most recent year. That performance 

may prompt investors to seek additional 

information from advisers regarding the 

causes of significant changes in 

performance over longer periods. Some 

commenters supported this aspect of the 

proposal for this reason.607 These 

commenters also stated that this 

information would aid investors in 

comparing different performance 

advertisements and reduce the risk that 

advisers would present performance 

based on cherry-picked periods. 

Several commenters stated that the 

proposed time period requirement for 

closed-end private funds, however, 

would be inappropriate and confusing 

for investors, in part, because such 

performance (especially five- and tenyear periods) may not exist for the fund 

advertised, since private funds are often 

advertised to investors at early stages.608

In addition, commenters stated that the 

performance of private equity funds can 

vary substantially over the term of the 

fund (with early years often negatively 

affected by organizational expenses of 

the ‘‘J-curve’’), and that the presentation 

of performance over prescribed time 

periods is therefore not useful to 

investors.609 Similarly, commenters 

noted that the presentation of 

performance using an internal rate of 

return, as is typical with private equity 

funds, is often not meaningful in the 

early years of the fund because the fund 

is not fully invested, no investments 

have been harvested, and the new 

investments likely have not changed in 

value.610

In light of our decision not to 

distinguish the treatment of Retail and 

Non-Retail Advertisements, and after 

considering comments, we agree that 

requiring advisers to provide 

performance results of private funds 

over one-, five-, and ten-year periods in 

advertisements will not provide 

investors with useful insight into how 

the advertised portfolio(s) performed 

during different market or economic 

conditions. Our final rule therefore 

applies the time period requirement to 

all performance advertisements, except 

for performance of a private fund.611 An 

adviser may rely on this exception when 

displaying performance advertising of 

any type of private fund, rather than 

only when displaying performance 

advertising of private equity funds or 

other closed-end private funds. We 

believe that it is appropriate to except 

any private fund because there may be 

additional types of private funds than 

those identified by commenters for 

which displaying this information could 

be misleading. We decline to allow only 

certain defined types of private funds to 

rely on this exception, given the varied 

limitations that private funds may place 

on redemptions now and in the future. 

We also do not believe the benefit of 

having advisers parse the rule’s 

requirements based on specific fund 

types would justify the complexity. 

Further, although we are not mandating 

presentation of performance for any 

specific time periods for these funds, 

presentations of private fund 

performance are subject to the general 

anti-fraud provisions of the Federal 

securities laws and the general 

prohibitions in the final rule, including 

the prohibition of including or 

excluding performance results, or 

presenting performance time periods, in 

a manner that is not fair and 

balanced.612

Other commenters stated that our 

proposal would create operational 

difficulties for advisers that present 

annual returns as of the most recent 

calendar year-end.613 A commenter 

stated that, for these advisers, the 

proposal’s requirement to present one-, 

five-, and ten-year returns as of the 

‘‘most recent practicable date’’ would 

require that they continuously update 

their performance presentations 

throughout the year.614 This commenter 

requested we permit annual returns 

presented through the most recent 

calendar year-end. This commenter also 

requested that the final rule align with 

the GIPS standards by allowing advisers 

to present annual returns for the past 

ten years (or since inception if the track 

record exists for less than ten years) as 

of the most recent calendar year end, 

instead of one-, five-, and ten-year 

annualized returns. 

We understand that, for some 

advisers, the most recent calendar yearend may be the most recent practicable 

date. Our final rule therefore requires 

that the prescribed time period end on 

a date that is no less recent than the 

most recent calendar year-end. In 

selecting time periods for purposes of an 

advertisement, an adviser may not select 

the periods that show only the most 

favorable performance—e.g., presenting 

a five-year period ending on a particular 

date because that five-year period 

showed growth while presenting a tenyear period ending on a different date 

because that ten-year period showed 

growth. Depending on the facts and 

circumstances, an adviser may be 

required to present performance results 

as of a more recent date than the most 

recent calendar year-end to comply with 

the rule’s general prohibitions.615 For 

example, it could be misleading for an 

adviser to present performance returns 

as of the most recent calendar year-end 

if more timely quarter-end performance 

is available and events have occurred 


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616Final rule 206(4)–1(d)(3). 

617Final rule 206(4)–1(a)(3). 

618See, e.g., Mercer Comment Letter (supporting 

this aspect of the proposed rule). 

619Similarly, section 208(a) of the Act, states that 

it is unlawful for a registered investment adviser to 

represent or imply in any manner whatsoever that 

it has been sponsored, recommended, or approved, 

or that his abilities or qualifications have in any 

respect been passed upon by the United States or 

any agency or any officer thereof. 

620See also section 208(a) of the Act. 

621Final rule 206(4)–1(d)(4). The presentation 

must also comply with the rule’s general 

prohibitions. See final rule 206(4)–1(a). 

622Final rule 206(4)–1(e)(14). 

623Final rule 206(4)–1(e)(11). A portfolio also 

includes, but is not limited to, a portfolio for the 

account of the investment adviser or its advisory 

affiliate (as defined in the Form ADV Glossary of 

Terms). See id. 

624Final rule 206(4)–1(e)(15). 

625See, e.g., MFA/AIMA Comment Letter I; 

Proskauer Comment Letter; Comment Letter of Loan 

Syndications and Trading Association (Feb. 10, 

2020) (‘‘LSTA Comment Letter’’); MMI Comment 

Letter. 

626See MFA/AIMA Comment Letter I (supporting 

the conditions generally, but requesting that we also 

permit advisers to present representative accounts 

that would not meet the proposed rule’s 

conditions); LSTA Comment Letter. 

627See IAA Comment Letter; SIFMA AMG 

Comment Letter II; Ropes & Gray Comment Letter. 

628See SIFMA AMG Comment Letter II. 

629See CFA Institute Comment Letter. 

since that time that would have a 

significant negative effect on the 

adviser’s performance. If more recent 

quarter-end performance data is not 

available, the adviser should include 

appropriate disclosure about the 

performance presented in the 

advertisement. 

We are also clarifying that, for an 

adviser that provides performance 

results in advertisements for periods 

other than one, five, and ten years, the 

adviser is free to include such results as 

long as the advertisement presents 

results for the final rule’s required time 

periods. Thus, an adviser that complies 

with the GIPS standards may present 

annual returns for the past ten years (or 

since inception if the track record exists 

for less than ten years) as of the most 

recent calendar year end, in addition to 

performance results for the final rule’s 

required periods. 

3. Statements About Commission 

Approval 

As proposed, the final rule prohibits 

any statement, express or implied, that 

the calculation or presentation of 

performance results in the 

advertisement has been approved or 

reviewed by the Commission in any 

advertisement containing performance 

results.616 This approval prohibition is 

intended to prevent advisers from 

representing that the Commission has 

approved or reviewed the performance 

results, even when the adviser is 

presenting performance results in 

accordance with the rule. Furthermore, 

the final rule’s general prohibitions have 

the effect of prohibiting an adviser from 

stating or implying that any part of an 

advertisement, and the advertisement as 

a whole, has been approved or reviewed 

by the Commission.617 Our final rule 

prescribes this condition specifically for 

advertisements containing performance 

results because of the particular weight 

an investor would likely give to 

performance results that it believes the 

Commission has reviewed or vetted. 

We received few comments on this 

aspect of the proposed rule, with one 

commenter supporting it and the other 

requesting clarification as to whether 

this provision would prohibit 

advertisements that combine 

performance results with summary 

information about an adviser’s recent 

SEC examination.618 We continue to 

believe that performance results may 

lead to a heightened risk of creating 

unrealistic expectations in an 

advertisement’s audience. An express or 

implied statement that the Commission 

has reviewed or approved the 

performance results could advance such 

unrealistic expectations. For example, 

while potentially true, a statement that 

‘‘performance results are prepared in 

compliance with the Commission’s 

requirements on performance 

presentations in advertisements’’ may 

mislead an investor into thinking that 

the Commission has approved the 

results portrayed.619 Such a statement 

could also be misleading to the extent 

it suggests that the Commission has 

reviewed or approved more generally 

the investment adviser, its services, its 

personnel, its competence or 

experience, or its investment strategies 

and methods. Therefore, under the final 

rule, advisers may not represent that the 

Commission has approved or reviewed 

the performance results.620

4. Related Performance 

The final rule will condition the use 

of ‘‘related performance’’ in adviser 

advertisements, on the inclusion of all 

‘‘related portfolios.’’ 621 Under the final 

rule, however, an adviser may exclude 

related portfolios if the advertised 

performance results are not materially 

higher than if all related portfolios had 

been included, and the exclusion does 

not alter the presentation of any 

applicable prescribed time period. The 

final rule defines ‘‘related performance’’ 

as ‘‘the performance results of one or 

more related portfolios, either on a 

portfolio-by-portfolio basis or as a 

composite aggregation of all portfolios 

falling within stated criteria.’’ 622 It 

defines ‘‘portfolio’’ as ‘‘a group of 

investments managed by the investment 

adviser,’’ and includes in the definition 

that ‘‘[a] portfolio may be an account or 

a private fund.’’ 623 It defines ‘‘related 

portfolio’’ as ‘‘a portfolio with 

substantially similar investment 

policies, objectives, and strategies as 

those of the services being offered in the 

advertisement.’’ 624 The final rule’s 

treatment of related performance, 

including the conditions and 

definitions, is largely the same as the 

proposal. We discuss the few 

differences from the proposal below. 

Commenters broadly supported 

allowing advisers to present related 

performance in adviser 

advertisements.625 They generally 

agreed that related performance can be 

a valuable tool to assist an investor in 

evaluating a particular investment 

adviser or investment strategy, and that 

its use is consistent with industry 

practice. A few commenters also 

generally supported the proposed rule’s 

conditions for the presentation of 

related performance.626 Others, 

however, described the proposed 

conditions as overly prescriptive and 

stated that we should address cherrypicking related portfolios solely through 

the rule’s general prohibitions, such as 

the ‘‘fair and balanced’’ provision.627

Another commenter stated that we 

should remove the conditions and 

permit advisers to identify (and 

document) objective criteria that they 

can apply on a consistent basis to 

exclude certain types of accounts.628

Conversely, one commenter said we 

should require composite performance 

without any exclusions of related 

portfolios because allowing exclusions 

from composites would be different 

from the GIPS standards that require 

composites to include all portfolios that 

are managed in the composite’s 

strategy.629

We continue to believe that 

conditioning the presentation of related 

performance in advertisements on the 

presentation of all related portfolios 

(with limited exceptions) is necessary to 

prevent investment advisers from 

including only related portfolios that 

have favorable performance results or 

otherwise ‘‘cherry-picking.’’ We believe 

our approach will provide advisers 

some flexibility in presenting related 

portfolios, without permitting exclusion 

because of poor performance. We 

believe this approach strikes the right 

balance between commenters that 

advocated for relying solely on the 

rule’s general prohibition (and/or an 

adviser’s own objective criteria), on the 


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630See IAA Comment Letter (‘‘A firm may seek 

to exclude an account that has a superior five-year 

return, but a poor one-year return, or present the 

performance of a representative account that has a 

superior one-year return, but a poor five-year 

return. In this scenario, the advertised performance 

over five and ten years would be lower, but the 1- 

year return would be higher. This practice may be 

prohibited by the proposed rule because the 1-year 

return does not satisfy the rule’s requirements, even 

though the longer term returns do satisfy the rule’s 

requirements.’’). See also CFA Institute Comment 

Letter (noting the same issue but making a different 

recommendation). 

631See CFA Institute Comment Letter. 

632We are not prescribing a specific numerical or 

percentage threshold for materiality or 

immateriality as part of this requirement. Instead, 

based on the facts and circumstances, if the results 

of excluding the related portfolio would be material 

to a reasonable client or investor, the portfolio 

should not be excluded. 

633See final rule 206(4)–1(d)(4)(ii). 

634See, e.g., IAA Comment Letter; Wellington 

Comment Letter; MFA/AIMA Comment Letter I; 

CFA Institute Comment Letter. 

635See Wellington Comment Letter; CFA Institute 

Comment Letter. See also MFA/AIMA Comment 

Letter I (discussing their view that ‘‘investment 

advisers need some flexibility to recognize a 

‘flagship’ fund for a given strategy and to treat that 

‘flagship’ fund as the sole related portfolio in many 

instances.’’). 

636See IAA Comment Letter; CFA Institute 

Comment Letter. 

637See IAA Comment Letter. 

638See MFA/AIMA Comment Letter I; Wellington 

Comment Letter; SIFMA AMG Comment Letter II. 

639Under our final rule, advisers may include 

performance returns of a single portfolio (without 

also providing the performance of other related 

portfolios) if the performance is not materially 

higher than if all related portfolios had been 

included, and the performance does not violate the 

rule’s general prohibitions. 

640See Wellington Comment Letter. 

one hand, and requiring advisers to 

present all related performance, on the 

other hand. Under the final rule, 

although we are permitting an adviser to 

exclude related portfolios subject to 

conditions in the final rule, an adviser 

may nonetheless present performance 

without the exclusion of any related 

portfolios to comply with both the GIPS 

standards and the final marketing rule. 

In a change from the proposed rule, 

the final rule will allow an investment 

adviser to exclude from the presentation 

of related performance in the 

advertisement one or more related 

portfolios so long as the advertised 

performance results are ‘‘not materially 

higher than’’—rather than ‘‘no higher 

than’’—if all related portfolios had been 

included. One commenter 

recommended this change, stating that it 

will not necessarily be clear whether 

performance is ‘‘no higher’’ because 

performance results may vary based on 

the time period presented.630 Another 

commenter cautioned that, even with 

such conditions, an adviser would have 

difficulty demonstrating compliance for 

each period in its track record.631

Furthermore, this commenter stated that 

an adviser would incur the burden of 

calculating performance including all 

related portfolios in order to show that 

the performance presented was ‘‘no 

higher than’’ or ‘‘not materially higher 

than’’ if all related portfolios had been 

included. 

We understand that an adviser will 

likely be required to calculate the 

performance of all related portfolios to 

ensure that the exclusion of certain 

portfolios from the advertisement meets 

the rule’s conditions. Because of the 

special concerns that performance 

advertising raises, however, we believe 

that this burden is warranted to prevent 

related performance advertising from 

misleading investors. We believe that 

the modified condition we are adopting 

will achieve the same policy goal as our 

proposed rule, but give advisers 

additional flexibility to present related 

performance when there may be 

immaterial differences in performance 

results depending on the methods of 

calculation of returns or as between the 

different prescribed time periods.632

Under the final rule, an adviser may 

meet this condition if the results for one 

prescribed time period are no higher 

than if all related portfolios had been 

included for that time period, and the 

results for another prescribed time 

period are higher, but not materially 

higher, than if all related portfolios had 

been included for that time period. It 

may also meet this condition if the 

results for any and all prescribed time 

periods are not materially higher than if 

all related portfolios had been included 

for each time period. 

As proposed, the exclusion for related 

portfolios is also subject to the final 

rule’s time period requirement for the 

presentation of performance in 

advertisements.633 We did not receive 

any comments on this condition. 

Related performance therefore cannot 

exclude any related portfolio if doing so 

would alter the presentation of the 

proposed rule’s prescribed time periods. 

Some commenters recommended that 

we permit advisers to advertise one 

‘‘representative account,’’ such as a 

flagship fund, without any prescribed 

conditions or in addition to providing 

the performance results of all related 

portfolios.634 Commenters generally 

describe representative accounts as 

those that most closely resemble, or are 

most representative of, the advertised 

portfolio’s specific strategy.635 A few 

commenters stated that permitting 

representative accounts would provide 

flexibility to advisers that manage 

separate accounts and may not maintain 

composites that cover all portfolios 

managed to a specific strategy, and to 

smaller advisers that do not have the 

resources to calculate the performance 

of a composite that includes all those 

portfolios.636 One such commenter 

stated that smaller advisers would 

therefore face challenges under the 

proposed rule in demonstrating that the 

performance of a representative account 

is no higher than if all related portfolios 

had been included.637 Others stated that 

permitting representative accounts 

would provide investors with more 

pertinent information than under our 

proposed rule, because they believe that 

prospective fund investors are generally 

less interested in the results of the 

ancillary funds around that flagship 

fund, and could find the additional 

information to be confusing.638

We are not convinced that the benefits 

of an adviser presenting in an 

advertisement a single representative 

account that is not subject to prescribed 

conditions would justify the risks of 

cherry-picking related portfolios with 

higher-than-usual returns.639 We also 

believe the materiality standard we are 

adopting helps to alleviate the burden 

on advisers to present all related 

performance (subject to a conditional 

exception). We therefore decline to 

make this suggested change to the rule. 

An adviser, however, may present the 

results of a single representative account 

(such as a flagship fund) or a subset of 

related portfolios alongside the required 

related performance so long as the 

advertisement would otherwise comply 

with the general prohibitions.640 In 

these circumstances, where the required 

related performance is also presented in 

the advertisement, we believe the 

concerns regarding cherry-picking a 

particular portfolio are mitigated. In 

addition, as proposed, advisers may 

present related performance on a 

portfolio-by-portfolio basis under the 

final rule. Advisers that manage a small 

number of related portfolios may find a 

portfolio-by-portfolio presentation to be 

the clearest way of demonstrating 

related performance in their 

advertisements. Presenting related 

performance on a portfolio-by-portfolio 

basis may illustrate for the audience the 

differences in performance achieved by 

the investment adviser in managing 

portfolios having substantially similar 

investment policies, objectives, and 

strategies. A portfolio-by-portfolio 

presentation also may best illustrate the 

differences in performance between a 

flagship fund and other related 

portfolios in some cases. 

As in the proposal, presenting related 

performance on a portfolio-by-portfolio 


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641See SIFMA AMG Comment Letter II; AIC 

Comment Letter; CFA Institute Comment Letter. 

642A portfolio with substantially similar 

investment policies, objectives, and strategies as 

those of the services being offered in the 

advertisement is a related portfolio. See final rule 

206(4)–1(e)(15). Any performance presented in the 

advertisement, whether or not related, must not 

violate the final rule’s general prohibitions, and the 

applicable requirements for the presentation of 

performance. See final rule 206(4)–1(a) and (d). 

643See CFA Institute Comment Letter. 

644See final rule 206(4)–1(a). 

645See AIC Comment Letter I. 

646See Consumer Federation Comment Letter. 

647See AIC Comment Letter I; Ropes & Gray 

Comment Letter. 

648One commenter requested that we add a 

definition of ‘‘composite’’ that matches a commonly 

accepted industry term. See CFA Institute Comment 

Letter. The final rule does not include a definition 

for composite, because we understand that many 

investment advisers already have criteria governing 

their creation and presentation of composites. 

649See 2019 Proposing Release, supra footnote 7, 

at n.280 (discussing that, for GIPS purposes, a 

composite is an aggregation of portfolios managed 

according to a similar investment mandate, 

objective, or strategy). 650See CFA Institute Comment Letter. 651To simplify the definitions, the final rule 

includes this wording within the definition of 

‘‘portfolio,’’ rather than within the definition of 

‘‘related portfolio,’’ as proposed. 

652See CFA Institute Comment Letter. 

basis will be subject to the general 

prohibitions, including the prohibition 

on omitting material facts necessary to 

make the presentation, in light of the 

circumstances under which it was 

made, not misleading. For example, an 

advertisement presenting related 

performance on a portfolio-by-portfolio 

basis could be potentially misleading if 

it does not disclose the size of the 

portfolios and the basis on which the 

adviser selected the portfolios. The 

alternative for presenting related 

performance, also as proposed, is as a 

composite aggregation of all portfolios 

falling within stated criteria, which we 

discuss below. 

a. Related Portfolio 

Regarding presentations of related 

portfolios in advertisements, the final 

rule is similar to the proposal in that it 

does not identify or prescribe particular 

requirements for determining whether 

portfolios are ‘‘related’’ beyond whether 

there are ‘‘substantially similar’’ 

investment policies, objectives, and 

strategies as those of the services being 

offered in the advertisement. Some 

commenters also requested clarification 

that ‘‘related portfolio’’ does not include 

the performance results of the separately 

managed account or pooled investment 

vehicle being offered.641 We agree that 

the offered portfolio is not included in 

the definition of ‘‘related portfolio.’’ 642

One commenter requested that we 

permit advisers to present performance 

results of a private fund both with and 

without the effect of any side 

pockets.643 Whether a side pocket 

should be considered part of a portfolio 

or a separate portfolio and/or a related 

portfolio subject to the final rule’s 

conditions for presenting related 

performance will be subject to the final 

rule’s conditions for the presentation of 

performance and the rule’s general 

prohibitions.644

A commenter also requested that we 

permit an adviser to exclude a 

separately managed account that has 

similar investment policies, objectives, 

and strategies to a private fund that the 

investment adviser is offering, but is 

customized to reflect a client’s 

investment objectives and desired 

restrictions, and has fees and expenses 

that may not be comparable to the 

private fund.645 Another commenter, 

however, noted that each adviser should 

determine for itself whether portfolios 

having client-specific constraints are 

‘‘substantially similar.’’ 646

Whether a portfolio is a ‘‘related 

portfolio’’ under the rule requires a facts 

and circumstances analysis. An adviser 

may determine that a portfolio with 

material client constraints or other 

material differences, for example, does 

not have substantially similar 

investment policies, objectives, and 

strategies and should not be included as 

a related portfolio. On the other hand, 

different fees and expenses alone would 

not allow an adviser to exclude a 

portfolio that has a substantially similar 

investment policy, objective, and 

strategy as those of the services offered. 

Two commenters also requested that 

the rule permit an adviser that has 

advised multiple private funds over 

time to exclude earlier private funds 

that the adviser determines are no 

longer relevant to investors, even if 

these funds have substantially similar 

investment policies, objectives, and 

strategies (and are therefore related 

portfolios).647 They stated that the 

performance of prior funds may not be 

relevant because the successor fund is 

larger than previous funds and capable 

of different types of investments, and 

that there may have been changed 

market conditions and/or investment 

professional turnover. Under the final 

rule, if the relevant financial markets or 

investment advisory personnel have 

changed over time such that the 

investment policies, objectives, and 

strategies of an adviser’s earlier private 

funds are no longer substantially similar 

to those of the fund being marketed, the 

adviser would not be required to 

include the earlier private funds in its 

related performance. 

In a change from the proposal, the 

final rule refers to presentation of 

related performance as ‘‘a composite 

aggregation’’—rather than ‘‘one or more 

composite aggregations’’—‘‘of all 

portfolios within stated criteria.’’ 648 An 

adviser may use the same criteria to 

construct any composites to meet the 

GIPS standards in order to satisfy the 

‘‘substantially similar’’ requirement of 

the final rule’s definition of ‘‘related 

portfolio.’’ 649 However, in response to a 

comment from the organization that 

developed and administers the GIPS 

standards, our final rule clarifies that an 

adviser may only have one composite 

aggregation for each stated set of 

criteria. We agree with this commenter 

that the rule should not permit advisers 

to create more than one composite 

aggregation of all portfolios falling 

within a stated set of criteria.650 In 

addition, similar to the proposal, the 

final rule does not prescribe specific 

criteria to define the relevant portfolios 

but requires that once the criteria are 

established, all related portfolios 

meeting the criteria are included in the 

composite. 

As with the presentation of related 

performance on a portfolio-by-portfolio 

basis in an advertisement, any 

presentation as a composite is subject to 

the general prohibitions, including the 

prohibition on omitting material facts 

necessary to make the presentation, in 

light of the circumstances under which 

it was made, not misleading. For 

example, an advertisement presenting 

related performance in a composite 

would be false or misleading where the 

composite is represented as including 

all portfolios in the strategy being 

advertised but excludes some portfolios 

falling within the stated criteria or is 

otherwise manipulated by the adviser. 

We also believe that omitting the criteria 

the adviser used in defining the related 

portfolios and crafting the composite 

could result in an advertisement 

presenting related performance that is 

misleading. 

Finally, the final rule’s definition of 

‘‘portfolio’’ includes a portfolio for the 

account of the investment adviser or its 

advisory affiliate. This is substantially 

the same as the proposed definition.651

The only commenter that addressed this 

aspect of ‘‘related performance’’ 

generally agreed with our proposed 

approach.652

5. Extracted Performance 

The final rule prohibits an adviser 

from presenting extracted performance 

in an advertisement unless the 

advertisement provides, or offers to 

provide promptly, the performance 


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653Final rule 206(4)–1(d)(5). 

654Final rule 206(4)–1(e)(6). 

655See MFA/AIMA Comment Letter II. Final rule 

206(4)–1(d)(5). 

656See MFA/AIMA Comment Letter I; LSTA 

Comment Letter; Proskauer Comment Letter; IAA 

Comment Letter; CFA Institute Comment Letter. 

657See MFA/AIMA Comment Letter I; LSTA 

Comment Letter. These commenters did not object 

to the proposed rule’s conditions for presenting 

extracted performance. 

658See IAA Comment Letter; CFA Institute 

Comment Letter. 

659See IAA Comment Letter (stating that advisers 

that present composite performance that includes 

extracted performance would need to present the 

performance of each of the total portfolios from 

which the carve-out segments were extracted under 

the proposed rule). 

660See CFA Institute Comment Letter. 

661See CFA Institute Comment Letter. CFA 

Institute agreed that for advisers presenting segment 

returns, or attribution, of a total portfolio, the 

condition to present performance of the total 

portfolio would be relevant. 

662See CFA Institute Comment Letter (requesting 

guidance on whether the proposed rule’s ‘‘extracted 

performance’’ covers attribution). 

663This context should include any particular 

differences in performance results between the 

entire portfolio and the extract. It may include 

assumptions underlying the extracted performance 

if necessary to prevent the performance results from 

being misleading. We received no comments on the 

‘‘or offer to provide’’ aspect of the proposal’s 

provision to permit an adviser to provide, or offer 

to promptly provide the performance results of the 

entire portfolio from which the extract was 

extracted (italics added). Therefore, we adopted this 

aspect of the proposed rule. 

664The general prohibitions also will apply to any 

presentation of extracted performance. For example, 

we view it as misleading for an adviser to present 

extracted performance without disclosing that it 

represents a subset of a portfolio’s investments (an 

omission of a material fact). Similarly, we would 

view it as misleading to include or exclude 

performance results, or present performance time 

periods, in a manner that is not fair and balanced, 

and able to be substantiated in accordance with the 

general prohibitions. In addition, an extract would 

likely be false or misleading where it excludes 

investments that fall within the represented 

selection criteria. 

results of the total portfolio from which 

the performance was extracted.653

‘‘Extracted performance’’ means ‘‘the 

performance results of a subset of 

investments extracted from a 

portfolio.’’ 654 We are adopting this 

provision substantially as proposed, 

though we are requiring the adviser 

provide, or offer to provide, the results 

of the ‘‘total portfolio,’’ instead of the 

results of ‘‘all investments in the 

portfolio,’’ at the request of a commenter 

that recommended we clarify an adviser 

does not have to highlight individual 

positions.655

Commenters supported permitting 

extracted performance in 

advertisements, although they differed 

on what constitutes extracted 

performance.656 Some commenters 

agreed that an adviser’s extracted 

performance can provide useful 

information to investors, who often 

request such information to assist them 

in evaluating a particular investment 

adviser or investment strategy.657 They 

noted that this is especially true for new 

or modified investment strategies, or 

new investment vehicles using a new or 

modified investment strategy. 

However, two commenters requested 

clarification about the definition of 

extracted performance and objected to 

the proposed conditions.658 One 

questioned whether the proposed 

definition includes composites of 

performance extracted from multiple 

portfolios, stating that the proposed 

conditions would be onerous in this 

case.659 This commenter recommended 

eliminating the conditions and instead 

relying on the general prohibitions to 

ensure advertisements with extracted 

performance are fair and balanced and 

not misleading. The other stated that the 

final rule should distinguish between 

performance that is extracted from a 

single portfolio (e.g., such as segment 

returns), and a standalone strategy 

presented as a composite of extracts 

from multiple portfolios.660 This 

commenter stated that advisers typically 

present standalone composites and the 

final rule should permit them, subject to 

similar conditions as under the GIPS 

standards.661 This commenter further 

agreed with the proposed requirement 

to provide, or offer to provide promptly, 

the performance results of the entire 

portfolio along with the extract when 

extracted performance is not advertised 

as a standalone strategy. 

Like the proposed rule, our final 

rule’s provision for extracted 

performance addresses the performance 

results of a subset of investments 

extracted from a single portfolio. For 

example, an investment adviser seeking 

to manage a new portfolio of only fixedincome investments may wish to 

advertise its performance results from 

managing fixed-income investments 

within a multi-strategy portfolio. If a 

prospective investor already has 

investments in fixed-income assets, it 

may want to use the extracted 

performance to consider the effect of an 

additional fixed-income investment on 

the prospective investor’s overall 

portfolio. The prospective investor may 

also use the presentation of extracted 

performance from several investment 

advisers as a means of comparing 

investment advisers’ management 

capabilities in that specific strategy. 

We continue to believe that extracted 

performance can provide important 

information to investors about 

performance actually achieved within a 

portfolio. It can also provide investors 

with information about performance 

attribution within a portfolio.662

Moreover, we expect that conditioning 

the presentation of extracted 

performance on presenting (or offering 

to provide promptly) the performance 

results of the entire portfolio from 

which the performance was extracted 

will prevent investment advisers from 

cherry-picking certain performance 

results and provide investors necessary 

context for evaluating the extract.663

Requiring advisers to provide (or offer to 

provide promptly) this information 

mitigates the risk of extracted 

performance misleading investors. 

Furthermore, any differences between 

the performance of the entire portfolio 

and the extracted performance might be 

a basis for additional discussions 

between the investor and the adviser, 

which would assist the investor in 

deciding whether to hire or retain the 

adviser. 

On the other hand, performance that 

is extracted from a composite from 

multiple portfolios is not extracted 

performance as defined in the final rule 

because it is not a subset of investments 

extracted from a portfolio. We believe 

that such a performance presentation 

carries a greater risk of misleading 

investors than an extract from a single 

portfolio because an adviser could 

cherry-pick holdings from across the 

composite and deem those holdings part 

of a particular strategy. In addition, 

similar to hypothetical performance, 

this type of composite performance 

presentation may not reflect the 

holdings of any actual investor. As a 

result, the final rule does not prohibit an 

adviser from presenting a composite of 

extracts in an advertisement, including 

composite performance that complies 

with the GIPS standards, but this 

performance information is subject to 

the additional protections that apply to 

advertisements containing hypothetical 

performance, as discussed below. While 

these additional protections may result 

in additional burdens for advisers that 

typically present extracted performance 

from multiple portfolios as a composite, 

we believe that the investor protection 

gained from applying the hypothetical 

performance restrictions to the 

presentation of this type of performance, 

which reflects a hypothetical portfolio, 

justifies such burden.664

One commenter recommended that 

we provide advisers with the option to 

either disclose assumptions underlying 

extracted performance, or provide them 

upon request, stating that detailed 

information about the selection criteria 

and assumptions used by the adviser 

could be overwhelming for a retail 


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665See CFA Institute Comment Letter (discussing 

presentations of performance for standalone 

strategies). 666See CFA Institute Comment Letter. 

667For example, it would be misleading to 

present extracted performance without allocating 

cash when the allocation of cash was part of the 

portfolio management for the subset of investments 

extracted from a portfolio, and such allocation 

would have materially reduced the extracted 

performance returns. 

668We would not view the mere fact that an 

investor would be interested in high returns as 

satisfying the requirement that the hypothetical 

performance is relevant to the likely financial 

situation and investment objectives of the intended 

audience. 669See, e.g., Wellington Comment Letter; 

Comment Letter of Withers Bergman LLP (Feb. 10, 

2020) (‘‘Withers Bergman Comment Letter’’); MMI 

Comment Letter; NAPFA Comment Letter. 670See Mercer Comment Letter (stating that the 

restrictions imposed on hypothetical performance 

by the proposed general prohibitions would not be 

sufficient to prevent advisers from displaying 

hypothetical performance in a materially 

misleading manner). 

671See, e.g., NASAA Comment Letter; Prof. 

Jacobson Comment Letter; Mercer Comment Letter. 672See, e.g., MFA/AIMA Comment Letter I. 

673See proposed rule 206(4)–1(e)(1). The 

proposed rule included one-on-one 

communications in the definition of advertisement. 

While the proposed rule excluded responses to 

unsolicited requests from the definition of 

advertisement, the exclusion did not cover 

hypothetical performance even if such performance 

was included in a one-on-one communication. As 

a result, under our proposed rule, hypothetical 

performance would have been subject to the 

specific conditions of the proposed rule (subsection 

(c)). 

674See, e.g., MFA/AIMA Comment Letter I; IAA 

Comment Letter. 

audience.665 The final rule does not 

require an adviser to provide detailed 

information regarding the selection 

criteria and assumptions underlying 

extracted performance unless the 

absence of such disclosures, based on 

the facts and circumstances, would 

result in performance information that 

is misleading or otherwise violates one 

of the general prohibitions. As 

discussed above, an adviser should take 

into account the audience for the 

extracted performance in crafting 

disclosures. 

Finally, as proposed, the final rule 

does not prescribe any particular 

treatment for a cash allocation with 

respect to extracted performance. One 

commenter recommended that we 

require such an allocation when 

presenting extracted performance 

advertised as a standalone strategy.666

This commenter also stated that 

including an allocation of cash is not 

necessary when showing a segment of a 

strategy that is not used to advertise a 

standalone strategy. We believe that, 

depending on the facts and 

circumstances, presenting extracted 

performance without accounting for the 

allocation of cash could imply that the 

allocation of cash had no effect on the 

extracted performance and would be 

misleading.667 In other cases, however, 

allocating cash to extracted performance 

may not be appropriate, such as when 

cash allocation decisions were made 

separately from the management of the 

extracted investments and the extracted 

performance is not presented as a 

standalone strategy. We, therefore, 

believe that it is appropriate to provide 

advisers with flexibility here since the 

appropriateness of allocating cash will 

be based on the facts and circumstances. 

Regardless, we would view it as 

misleading under the final rule to 

present extracted performance in an 

advertisement without disclosing 

whether it reflects an allocation of the 

cash held by the entire portfolio and the 

effect of such cash allocation, or of the 

absence of such an allocation, on the 

results portrayed. 

6. Hypothetical Performance 

The final rule will prohibit an adviser 

from providing hypothetical 

performance in an advertisement, unless 

the adviser takes certain steps to address 

its potentially misleading nature. 

Largely as proposed, the final rule will 

condition the presentation of 

hypothetical performance in 

advertisements on the adviser adopting 

policies and procedures reasonably 

designed to ensure that the hypothetical 

performance information is relevant to 

the likely financial situation and 

investment objectives of the 

advertisement’s intended audience. We 

intend for advertisements including 

hypothetical performance information 

to only be distributed to investors who 

have access to the resources to 

independently analyze this information 

and who have the financial expertise to 

understand the risks and limitations of 

these types of presentations (referred to 

herein collectively as ‘‘investors who 

have the resources and financial 

expertise’’).668 An adviser also must 

provide additional information about 

the hypothetical performance that is 

tailored to the audience receiving the 

advertisement, such that the intended 

audience has sufficient information to 

understand the criteria, assumptions, 

risks, and limitations. 

While commenters requested 

additional flexibility with regard to 

some of the conditions, they generally 

supported our proposed treatment of 

hypothetical performance.669 However, 

one commenter stated that we should 

not allow the presentation of 

hypothetical performance in 

advertisements.670

We are adopting the hypothetical 

performance provisions of the rule 

largely as proposed because we believe 

that such presentations in 

advertisements pose a high risk of 

misleading investors since, in many 

cases, they may be readily optimized 

through hindsight. Moreover, the 

absence of an actual investor or, in some 

cases, actual money underlying 

hypothetical performance raises the risk 

of a misleading advertisement, because 

such performance does not reflect actual 

losses or other real-world consequences 

if an adviser makes a bad investment or 

takes on excessive risk. However, we 

understand that other information that 

may demonstrate the adviser’s 

investment process as well as 

hypothetical performance may be useful 

to prospective investors who have the 

resources and financial expertise. When 

subjected to this analysis, the 

information may allow an investor to 

evaluate an adviser’s investment process 

over a wide range of periods and market 

environments or form reasonable 

expectations about how the investment 

process might perform under different 

conditions. We believe the three 

conditions discussed below, as well as 

our changes to the definition of 

‘‘hypothetical performance,’’ will make 

it more likely that the dissemination of 

advertisements containing hypothetical 

performance information will be limited 

to investors who have the resources and 

financial expertise to appropriately 

consider such information. 

Certain commenters suggested that we 

only allow advisers to present 

hypothetical performance to Non-Retail 

Persons,671 while others advocated for a 

more nuanced approach (rather than 

categorical exclusions) that would allow 

the dissemination of hypothetical 

performance based on facts and 

circumstances.672 As noted above, the 

final rule will not include different 

provisions for Retail and Non-Retail 

Persons and we believe that the rule is 

sufficiently flexible to facilitate the 

application of the hypothetical 

performance conditions based on facts 

and circumstances. 

Like the proposed rule, the final rule 

applies to communications containing 

hypothetical performance that otherwise 

fall within the definition of 

‘‘advertisement’’ because we believe 

that there is a significant risk that such 

performance could mislead investors.673

Some commenters stated that we should 

not impose the hypothetical 

performance conditions to one-on-one 

communications as such an approach 

would inhibit communications between 

an adviser and prospective or current 

investors.674 As discussed above, 

communications are excluded from the 


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675See final rule 206(4)–1(e)(1)(i)(A) and (C). The 

conditions also will not apply if hypothetical 

performance is included in a regulatory notice. 

Final rule 206(4)–1(e)(1)(i)(B). 

676 In connection with the marketing of private 

funds, the anti-fraud provisions of the Securities 

Act and Exchange Act would also apply. 

677See final rule 206(4)–1(d)(6)(iii). 

678Final rule 206(4)–1(e)(8). 

679See proposed rule 206(4)–1(e)(5). 

680See, e.g., CFA Institute Comment Letter. 

681See section 208(d) of the Act. 

682See 2019 Proposing Release, supra footnote 7, 

at section II.A.5 (describing representative 

performance as including performance generated by 

models that adhered to the same investment 

strategy as that used by the adviser for actual 

clients). 

683See, e.g., CFA Institute Comment Letter; IAA 

Comment Letter. 

684See final rule 206(4)–1(e)(8)(i). Model 

performance would include, among other things, 

the type of ‘‘model performance’’ described in the 

Clover Letter: Performance results generated by a 

‘‘model’’ portfolio managed with the same 

investment philosophy used by the adviser for 

actual client accounts and ‘‘consist[ing] of the same 

securities’’ recommended by the adviser to its 

clients during the same time period, ‘‘with 

variances in specific client objectives being 

addressed via the asset allocation process (i.e., the 

relative weighting of stocks, bonds, and cash 

equivalents in each account).’’ See Clover Letter. 

The rule will treat this as hypothetical performance 

because, although the ‘‘model’’ consists of the same 

securities held by several portfolios, the asset 

allocation process would result in performance 

results that were not actually achieved by any 

portfolio. 

685See Clover Letter. 

686See SIFMA AMG Comment Letter II; IAA 

Comment Letter (discussing ‘‘other types of ‘model’ 

performance that do not reflect investment advice 

actually provided to clients’’). 

687See proposed rule 206(4)–1(e)(5). 

688See, e.g., SIFMA AMG Comment Letter II 

(suggesting that the Commission recognize that 

model portfolios are not limited to the type 

Continued 

scope of the final rule as long as they 

are provided in response to unsolicited 

investor requests; provided to a private 

fund investor in a one-on-one 

communication; or occur 

extemporaneously, live, and orally.675

While the final rule allows advisers to 

provide certain performance 

presentations in advertisements that 

would otherwise be considered 

hypothetical performance (i.e., 

interactive tools and educational 

materials), we believe there are adequate 

protections to address this risk in part 

because the anti-fraud provisions of the 

Advisers Act would apply.676

We also made the following changes 

to the treatment of hypothetical 

performance advertising under the rule 

in response to commenters’ concerns: 

(1) Added more flexibility to the 

policies and procedures requirement of 

the final rule to allow advisers to 

consider the likely financial situation 

and investment objectives of the 

intended audience; (2) added more 

flexibility to allow advisers to consider 

each of the three hypothetical 

performance conditions with respect to 

the intended audience of the 

advertisement (as opposed to the 

specific person receiving the 

advertisement containing hypothetical 

performance information); (3) 

broadened the requirement for advisers 

to provide sufficient information to all 

investors (and not only Retail Persons) 

to enable them to understand the risks 

and limitations of using hypothetical 

performance advertising, except for 

private fund investors; and (4) revised 

the definition of hypothetical 

performance by: (a) Broadening the 

types of model portfolios whose 

performance is considered hypothetical 

performance; (b) excluding the 

performance of proprietary portfolios 

and seed capital portfolios; (c) including 

data from prior periods (and not just 

‘‘market data’’ as proposed) for certain 

backtested performance; and (d) 

excluding interactive analysis tools and 

predecessor performance. The final rule 

also makes clear that an adviser need 

not comply with certain conditions on 

the presentation of performance in 

advertisements, namely the 

requirements to present specific time 

periods, and the particular conditions 

applicable to presenting related or 

extracted performance.677

a. Types of Hypothetical Performance 

The final rule defines ‘‘hypothetical 

performance’’ as ‘‘performance results 

that were not actually achieved by any 

portfolio of the investment adviser’’ and 

explicitly includes, but is not limited to, 

model performance, backtested 

performance, and targeted or projected 

performance returns.678 The proposed 

definition of hypothetical performance 

would have included ‘‘performance 

results that were not actually achieved 

by any portfolio of any client of the 

investment adviser’’ (emphasis 

added).679 In response to one 

commenter’s concerns,680 we removed 

the ‘‘of any client’’ qualifier in order to 

clarify that the actual performance of 

the adviser’s proprietary portfolios and 

seed capital portfolios is not 

hypothetical performance. However, 

advisers should not invest a nominal 

amount of assets in a portfolio in an 

effort to avoid the ‘‘hypothetical 

performance’’ designation. Instead, to 

show that the results are those of an 

actual portfolio, an adviser must invest 

an amount of seed capital that is 

sufficient to demonstrate that the 

adviser is not attempting to do 

indirectly what it is prohibited from 

doing directly,681 or otherwise be able to 

demonstrate that the strategy is 

reasonably intended to be offered to 

investors. 

In a change from the proposal, we also 

narrowed the definition of hypothetical 

performance under the rule to exclude 

interactive analysis tools and 

predecessor performance. While we 

proposed to exclude certain financial 

tools from the hypothetical performance 

provisions, below we clarify the 

treatment of such tools in response to 

commenters’ concerns. We excluded 

predecessor performance because we are 

adopting specific rule text on the 

presentation of predecessor 

performance. 

We discuss each type of hypothetical 

performance in the following sections. 

Model Performance. The proposal 

referred to, but did not define, 

‘‘representative performance’’ and 

discussed model performance as a type 

of representative performance.682 In 

response to commenters’ concerns,683

we are no longer using the term 

‘‘representative performance’’ and are 

treating all ‘‘model performance’’ as 

hypothetical performance.684 We did 

not intend to limit the definition of 

hypothetical performance to only 

performance generated by the models 

described in the Clover no-action letter. 

Rather, we proposed this definition to 

make clear that the rule would apply in 

the context of a common industry 

practice that has evolved around prior 

staff letters.685 But, as one commenter 

noted, the discussion of model 

portfolios in staff letters reflects only the 

specific circumstances of the adviser 

seeking a staff letter, and advisers 

currently employ model portfolios in a 

variety of circumstances.686 Instead of 

limiting the discussion of model 

portfolios to those managed alongside 

portfolios managed for actual 

investors,687 the final rule will broaden 

the definition. Model performance will 

include, but not be limited to, 

performance generated by the following 

types of models: (i) Those described in 

the Clover no-action letter where the 

adviser applies the same investment 

strategy to actual investor accounts, but 

where the adviser makes slight 

adjustments to the model (e.g., 

allocation and weighting) to 

accommodate different investor 

investment objectives; (ii) computer 

generated models; and (iii) those the 

adviser creates or purchases from model 

providers that are not used for actual 

investors. After considering comments, 

we believe it is appropriate for the final 

rule to accommodate the use of these 

variations while ensuring that advisers 

consider whether this information is 

relevant to the intended audience.688


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discussed in the Clover Letter); IAA Comment 

Letter. 

689See CFA Institute Comment Letter (stating that 

‘‘paper portfolios’’ should be treated as hypothetical 

performance). 

690See, e.g., SIFMA AMG Comment Letter II; 

MMI Comment Letter. 

691See, e.g., NYC Bar Comment Letter; NRS 

Comment Letter; MFA/AIMA Comment Letter I 

(stating that ‘‘the Commission should modify the 

Proposed Advertising Rule to allow investment 

advisers to scale the scope of disclosures to the risk 

profile of the type of ‘hypothetical performance’ 

information.’’). 

692See, e.g., SIFMA AMG Comment Letter II; 

MMI Comment Letter (stating that model 

performance is not hypothetical because it ‘‘reflects 

actual performance of an investment strategy in 

real-time’’); IAA Comment Letter (stating that 

‘‘[m]any advisers serve as model providers to wrap 

accounts and other advisers. Such model providers 

would not necessarily have the data on the actual 

performance of the accounts managed to their 

models, as they are not acting directly as advisers 

to the underlying accounts.’’); NYC Bar Comment 

Letter. 

693See 2019 Proposing Release, supra footnote 7, 

at section II.A.5.c.iv. 

694See CFA Institute Comment Letter (stating that 

proposed definition of backtested performance 

would not include ‘‘strategies that take data from 

other portfolios managed by the Adviser or 

someone else and backtest an asset allocation 

strategy.’’). 

695See, e.g., NYC Bar Comment Letter (stating 

‘‘backtested returns are a conditional analysis of 

prior data’’ and advisers use this information to 

stress test investment methodologies that the 

advisers intend to use in the future); MMI Comment 

Letter (stating ‘‘backtested performance figures are 

not purely hypothetical, but rather reflect an 

analysis of actual investment performance based on 

certain assumptions’’ and that such illustrations 

‘‘analyze historical data’’). 

One commenter supported treating 

model performance as hypothetical 

performance,689 while some 

commenters objected because model 

performance could reflect the actual 

performance of a strategy that is 

managed in real time.690 We understand 

that model portfolios can be (but are not 

always) managed alongside portfolios 

with investor or adviser assets and that 

many investors find model performance 

helpful. For instance, model 

performance may present a nuanced 

view of how an adviser would construct 

a portfolio without the impact of certain 

factors, such as the timing of cash flows 

or investor-specific restrictions, which 

may not be relevant to the particular 

investor. Model performance also can 

help an investor assess the adviser’s 

investment style for new strategies that 

have not yet been widely adopted (or 

adopted at all) by the adviser’s 

investors. 

However, we believe that model 

performance is appropriately treated as 

hypothetical performance because such 

performance was not achieved by the 

actual performance of a portfolio and 

could mislead investors. For example, 

advances in computer technologies have 

enabled an adviser to generate hundreds 

or thousands of potential model 

portfolios in addition to the ones it 

actually offers or manages. An adviser 

that generates a large number of model 

portfolios has an incentive to advertise 

only the results of the highest 

performing models and ignore others. 

The adviser could run numerous 

variations of its investment strategy, 

select the most attractive results, and 

then present those results as evidence of 

how well the strategy would have 

performed under prior market 

conditions. Even in cases where an 

adviser generates only a single model 

portfolio, neither investor nor sufficient 

adviser assets are at risk, so the adviser 

can manage that portfolio in a 

significantly different manner than if 

such risk existed. For these reasons, we 

believe it is more likely for an investor 

to be misled where the investor does not 

have the resources to scrutinize such 

performance and the underlying 

assumptions used to generate model 

portfolio performance. We believe 

treating model performance as 

hypothetical performance under the rule 

guards against the investor protection 

concerns addressed above. 

Some commenters suggested that we 

consider more flexible treatment of 

model performance given that 

performance generated by certain types 

of model portfolios would be less likely 

to mislead investors.691 We believe that 

the conditions described below are 

sufficiently flexible to allow advisers to 

tailor their approach based on the 

intended audience of the advertisement 

and the type of hypothetical 

performance, including performance 

generated for different types of model 

portfolios. For example, if an adviser 

believes that model performance is less 

likely to mislead the intended audience, 

the adviser may decide that lessstringent policies and procedures are 

required under the first condition, and 

that the required disclosures may differ 

and be more limited than those required 

for backtested performance. In contrast, 

if an adviser believes that model 

performance is highly likely to mislead 

a particular audience (e.g., it is difficult 

to provide disclosure that is sufficiently 

specific but also understandable), the 

adviser could adopt policies and 

procedures that eliminate the 

presentation of that type of model 

performance to this investor type in its 

advertisements or modify the 

presentation to satisfy the requirements 

of the final rule. An adviser would need 

to consider the intended audience of the 

advertisement and the type of 

hypothetical performance in order to 

satisfy the conditions. 

Commenters suggested that we 

consider the impact of this 

characterization of hypothetical 

performance on model providers to 

wrap fee accounts and advisers that 

provide models to other, end-user 

advisers for implementation.692 We 

understand that model providers may 

not have access to the actual 

performance data generated after the 

end-user adviser implements the model 

and that the performance data they have 

access to may reflect another adviser’s 

fees or adjustments. Even if model 

providers had access to such actual 

performance data, we believe they 

would still be subject to the 

hypothetical performance provisions 

because the performance generated 

would be the performance of a portfolio 

managed by the end-user adviser, not 

the model provider. However, we 

believe that model providers would not 

have difficulty satisfying the three 

hypothetical performance provisions. 

For example, we anticipate the intended 

audience for model provider 

advertisements often will be end-user 

advisers or wrap fee program sponsors. 

Model providers therefore could adopt 

simple policies and procedures because 

the model provider reasonably believes 

that the intended audience is 

sophisticated and should have the 

analytical resources and tools necessary 

to interpret this type of hypothetical 

performance. The model provider could 

similarly satisfy the rule’s disclosure 

requirements for hypothetical 

performance based on the end-user’s 

profile since the model providers would 

know that the end-user adviser is a wellinformed investor with analytical tools 

at his/her disposal. 

Backtested Performance. As 

proposed, the final rule will treat 

backtested performance as a type of 

hypothetical performance. We proposed 

to include ‘‘[p]erformance that is 

backtested by the application of a 

strategy to market data from prior 

periods when the strategy was not 

actually used during those periods.’’ 693

One commenter supported 

broadening the types of backtested 

performance that would be subject to 

the hypothetical performance 

provisions.694 Other commenters said 

that we should not treat backtested 

performance as a type of hypothetical 

performance.695

We acknowledge that backtested 

performance may help investors 

understand how an investment strategy 

may have performed in the past if the 

strategy had existed or had been applied 

at that time. In addition, this type of 


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696See, e.g., David H. Bailey, Jonathan M. 

Borwein, Marcos Lo ́pez de Prado, and Qiji Jim Zhu, 

Pseudo-Mathematics and Financial Charlatanism: 

The Effects of Backtest Overfitting on Out-ofSample Performance, 61(5) Notices of the Am. 

Mathematical Society, 458, 466 (May 2014), 

available at https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2308659 (describing the 

potential to overfit an investment strategy so that 

it performs well in-sample (the simulation over the 

sample used in the design of the strategy) but 

performs poorly out-of-sample (the simulation over 

a sample not used in the design of the strategy)). 

697See CFA Institute Comment Letter. 

698See NRS Comment Letter. 

699The final rule does not define ‘‘targeted 

return’’ or ‘‘projected return.’’ We believe that these 

terms have commonly understood meanings, and 

we do not intend to narrow or expand inadvertently 

the wide variety of returns that may be considered 

targets or projections. We generally would consider 

a target or projection to be any type of performance 

that an advertisement presents as results that could 

be achieved, are likely to be achieved, or may be 

achieved in the future by the investment adviser 

with respect to an investor. 

700See, e.g., Wellington Comment Letter (agreeing 

that projected returns have a heightened ability to 

mislead investors, but stating that targeted returns 

can provide useful information about the risk 

profile of an investment strategy); Fidelity 

Comment Letter; MMI Comment Letter (stating that 

targeted returns ‘‘are performance goals that an 

adviser seeks to achieve with a particular strategy 

or product’’ while hypothetical returns ‘‘represent 

a projection of what returns will or could be based 

on a series of assumptions’’). 

701See, e.g., CFA Institute Comment Letter; AIC 

Comment Letter. 

702See, e.g., CFA Institute Comment Letter. 

703 Id. 

performance information may 

demonstrate how the adviser adjusted 

its model to reflect new or changed data 

sources. While we understand the 

potential value of such data to investors, 

backtested performance information 

also has the potential to mislead 

investors. Because this performance is 

calculated after the end of the relevant 

period, it allows an adviser to claim 

credit for investment decisions that may 

have been optimized through hindsight, 

rather than on a forward-looking 

application of stated investment 

methods or criteria and with investment 

decisions made in real time and with 

actual financial risk. For example, an 

investment adviser is able to modify its 

investment strategy or choice of 

parameters and assumptions until it can 

generate attractive results and then 

present those as evidence of how its 

strategy would have performed in the 

past.696

We believe that backtested 

performance included in an 

advertisement is more likely to be 

misleading to the extent that the 

intended audience does not have the 

resources and financial expertise to 

assess the hypothetical performance 

presentation. The conditions that the 

final rule will impose on displays of 

hypothetical performance in 

advertisements are designed to ensure 

that advisers present backtested 

performance in a manner that is 

appropriate for the advertisement’s 

intended audience. 

In response to a commenter’s 

suggestion,697 the final rule will apply 

to advertisements including 

presentations of performance that is 

backtested by the application of a 

strategy to data from prior time periods 

when the strategy was not actually used 

during those time periods, instead of 

applying only to application of the 

strategy to ‘‘market’’ data from a prior 

time period. Accordingly, the 

hypothetical performance provisions 

will apply to presentations of both 

market and non-market data in 

advertisements. This change will 

account for scenarios where an adviser 

could backtest performance based on 

non-market data (e.g., data from other 

portfolios managed by the adviser). We 

are otherwise adopting this provision as 

proposed. 

Another commenter asked that we 

address which disclosures must 

accompany specific displays of 

backtested performance.698 In the spirit 

of our principles-based approach, we 

decline to prescribe the exact disclosure 

language that should accompany 

displays of backtested performance in 

advertisements. 

Targets and Projections. As proposed, 

the final rule will treat presentations of 

targeted and projected returns in 

advertisements as presentations of 

hypothetical performance. Targeted 

returns reflect an investment adviser’s 

aspirational performance goals. 

Projected returns reflect an investment 

adviser’s performance estimate, which 

is often based on historical data and 

assumptions. Projected returns are 

commonly established through 

mathematical modeling.699

Most commenters that addressed this 

topic opposed the characterization of 

targeted returns as hypothetical 

performance on the grounds that 

targeted returns indicate expectations 

about how a product or strategy is 

intended to perform (e.g., how 

aggressively a strategy will be managed) 

as opposed to predictions of 

performance.700 Several of these 

commenters agreed that the Commission 

should continue to treat projected 

returns as hypothetical performance.701

Targets and projections could 

potentially be presented in such a 

manner to raise unrealistic expectations 

of an advertisement’s audience and thus 

be misleading, particularly if they use 

assumptions that are not reasonably 

achievable. For example, an 

advertisement may present unwarranted 

claims based on assumptions that are 

virtually impossible to occur, such as an 

assumption that three or four specific 

industries will experience decades of 

uninterrupted growth. 

We recognize, however, that there are 

some differences between targeted and 

projected returns. Targeted returns are 

aspirational and may be used as a 

benchmark or to describe an investment 

strategy or objective to measure the 

success of the strategy.702 Projected 

returns, on the other hand, use 

historical data and assumptions to 

predict a likely return.703 Therefore, 

targeted returns may not involve all (or 

any) of the assumptions and criteria 

applied to generate a projection. Still, 

we do not believe that the difference 

between targeted and projected returns 

is always readily apparent to recipients 

of an advertisement. We believe that the 

presentation of targeted returns in such 

context could result in unrealistic 

expectations. We continue to believe, 

therefore, that the presentation of targets 

and projections in advertisements 

should be subject to the rule’s 

hypothetical performance conditions. 

The conditions we are adopting with 

respect to the use of hypothetical 

performance are principles-based, 

allowing the adviser to tailor the 

disclosure to the type of performance 

used in the advertisement. For example, 

in the case of an advertisement that 

presents targeted returns, which are 

generally aspirational in nature and not 

necessarily based on ‘‘criteria and 

assumptions,’’ to meet this disclosure 

requirement an adviser’s disclosure 

could state that criteria and assumptions 

were not used. 

We believe that providing 

hypothetical performance in 

advertisements only to those investors 

with the resources and financial 

expertise to assess targets or projections 

will help avoid scenarios where an 

investor might be misled into thinking 

that such performance is guaranteed. 

We recognize that some investors want 

to consider targeted returns and 

projected returns (along with these 

underlying assumptions) when 

evaluating investment products, 

strategies, and services. For example, 

based on our staff’s outreach and 

experience, we understand that 

financially sophisticated investors in 

particular may have specific return 

targets that they seek to achieve, and 

their planning processes may 

necessarily include reviewing and 

analyzing the targets advertised by 

investment advisers and the information 


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704Final rule 206(4)–1(e)(8)(iii). 

705See 2019 Proposing Release, supra footnote 7, 

at section II.A.5.c.iv. 

706See, e.g., SIFMA AMG Comment Letter II 

(stating that ‘‘[i]n the retail setting it is common to 

use projections that are based on statistically valid 

methodologies (e.g., Monte Carlo simulations) to 

assist clients and investors in understanding 

whether the investment of their current assets will 

allow them to meet future goals’’); BlackRock 

Comment Letter (stating that the rule should 

provide a safe harbor from the hypothetical 

performance provisions for investment analysis 

tools that comply with FINRA rule 2214); IAA 

Comment Letter; T. Rowe Price Comment Letter. 

707FINRA rule 2214 provides a limited exception 

from FINRA rule 2210’s prohibition on 

communications that predict or project 

performance. While FINRA rule 2210 applies 

differently to communications directed to retail 

versus institutional investors, our final rule does 

not have such a bifurcated approach. 

708Under the final rule, general educational 

communications that rely on public information 

and do not reference specific advisory products or 

services offered by the adviser would not qualify as 

advertisements. See supra section II.A.2.a.v. 

Educational presentations of performance that 

reflect an allocation of assets by type or class, 

which we understand investment advisers may use 

to inform investors and to educate them about 

historical trends regarding asset classes would not 

be treated as advertisements and would not be 

subject to the rule’s conditions on the use of 

hypothetical performance. For example, the 

following would not be considered hypothetical 

performance under the final rule: A presentation of 

performance that illustrates how a portfolio 

allocated 60% to equities and 40% to bonds would 

have performed over the past 50 years as compared 

to a portfolio composed of 40% equities and 60% 

bonds. Our approach regarding educational 

presentations of performance would apply even if 

the investment adviser used one of the allocations 

in managing a strategy being advertised or 

illustrated such allocations by reference to relevant 

indices or other benchmarks. 

709See final rule 206(4)–1(e)(8)(iv)(A)(4). Such 

disclosure could state, for example: ‘‘IMPORTANT: 

The projections or other information generated by 

[name of investment analysis tool] regarding the 

likelihood of various investment outcomes are 

hypothetical in nature, do not reflect actual 

investment results and are not guarantees of future 

results.’’ 

710See section 206 of the Advisers Act. See also 

section 17(a) of the Securities Act, section 10(b) of 

the Exchange Act (and rule 10b–5 thereunder), and 

rule 206(4)–8 under the Advisers Act. 

711See IAA Comment Letter; CFA Institute 

Comment Letter (stating that ‘‘indexes created by 

the Adviser should be considered hypothetical 

performance when the Adviser backtests the index 

to see how it would have performed. Other than 

this case, we do not believe that benchmarks should 

be considered hypothetical performance.’’). 

712See e.g., IAA Comment Letter; CFA Institute 

Comment Letter. 

713See final rule 206(4)–1(e)(8) (defining 

‘‘hypothetical performance’’ as ‘‘performance 

results that were not actually achieved by any 

portfolio of the investment adviser’’). Although we 

would not expect an adviser to comply with the 

conditions applicable to hypothetical performance, 

we would expect the adviser to comply with the 

general prohibitions, for instance, by disclosing that 

the volatility of the index is materially different 

from that of the model or actual performance results 

with which the index is compared. Most of the 

other provisions of the rule would be irrelevant. For 

instance, although the conditions on the 

presentation of performance would apply, the 

requirement to show net performance would be 

underlying those targets. Specifically, 

an analysis of these targets or 

projections can inform an investor about 

an adviser’s risk tolerance when 

managing a particular strategy. We 

understand that information about an 

adviser’s targets or projections also can 

be useful to an investor when assessing 

how the adviser’s strategy fits within the 

investor’s overall portfolio, but advisers 

must consider the intended audience 

when making such presentations in 

advertisements. 

The rule will apply only to targeted or 

projected performance returns ‘‘with 

respect to any portfolio or to the 

investment advisory services with 

regard to securities offered in the 

advertisement.’’ 704 This means that 

projections of general market 

performance or economic conditions in 

an advertisement are not targeted or 

projected performance returns subject to 

the provision on presentation of 

hypothetical performance. 

We did not propose to exclude from 

the definition of ‘‘hypothetical 

performance’’ the performance 

generated by interactive analysis tools. 

However, in the proposal, we noted that 

FINRA permits investment analysis 

tools as a limited exception from 

FINRA’s general prohibition of 

projections of performance, subject to 

certain conditions and disclosures, and 

we requested comment on whether we 

should consider FINRA’s approach.705

Commenters generally supported an 

exclusion for such tools and for 

adopting FINRA’s approach.706

As a result, the final rule will exclude 

the performance generated by 

investment analysis tools from the 

definition of hypothetical performance 

and will import a definition of 

‘‘investment analysis tool’’ from FINRA 

Rule 2214 with slight modifications.707

FINRA Rule 2214 defines an 

‘‘investment analysis tool’’ as ‘‘an 

interactive technological tool that 

produces simulations and statistical 

analyses that present the likelihood of 

various investment outcomes if certain 

investments are made or certain 

investment strategies or styles are 

undertaken, thereby serving as an 

additional resource to investors in the 

evaluation of the potential risks and 

returns of investment choices.’’ We will 

adopt this definition, but will require 

that a current or prospective investor 

must use the tool (i.e., input information 

into the tool or provide information to 

the adviser to input into the tool). 

Despite the fact that an investment 

analysis tool is often a computergenerated model that does not reflect 

the results of an actual account, the rule 

will allow an adviser to present these 

tools in advertisements without 

complying with the conditions 

applicable to hypothetical 

performance.708 We do not view these 

tools as presenting the same investor 

risks that model portfolios do because 

they typically present information about 

various investment outcomes based on 

the investor’s situation and require the 

investor to interface directly with the 

tool. In providing an interactive analysis 

tool, an adviser should consider which 

disclosures are necessary in order to 

comply with the general prohibitions of 

the final marketing rule. For example, to 

comply with the first general 

prohibition, the adviser should neither 

imply nor state that the interactive tool, 

alone, can determine which securities to 

buy or sell. 

The final rule will allow advisers to 

use interactive analysis tools, provided 

that the investment adviser: (1) Provides 

a description of the criteria and 

methodology used, including the 

investment analysis tool’s limitations 

and key assumptions; (2) explains that 

the results may vary with each use and 

over time; (3) if applicable, describes the 

universe of investments considered in 

the analysis, explains how the tool 

determines which investments to select, 

discloses if the tool favors certain 

investments and, if so, explains the 

reason for the selectivity, and states that 

other investments not considered may 

have characteristics similar or superior 

to those being analyzed; and (4) 

discloses that the tool generates 

outcomes that are hypothetical in 

nature.709 The fact that an interactive 

tool uses the same underlying 

assumptions does not mean that outputs 

the tool generates are advertisements 

(because the adviser or investor inputs 

investor-specific information). We 

believe that there are adequate investor 

protection guardrails in place to allow 

advisers to provide interactive analysis 

tools.710

Commenters suggested that we clarify 

the treatment of broad market or indexbased performance data.711 We agree 

that the use of index-based data can be 

informative to investors as a 

benchmarking tool.712 For example, in a 

scenario where an actual portfolio tracks 

an index, information regarding the 

index’s performance can provide useful 

information regarding tracking error, 

sector allocation, and performance 

attribution. Accordingly, we believe that 

an index used as a performance 

benchmark in an advertisement would 

not be hypothetical performance, unless 

it is presented as performance that 

could be achieved by a portfolio.713


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inapplicable because there are no fees or expenses 

to deduct from an index. Index information that is 

provided for general educational purposes and not, 

for instance, as a comparison to the adviser’s 

performance presentation, would not be considered 

an advertisement. See supra section II.A.2.a.v. 

714See final rule 206(4)–1(d)(6)(iii). 

715See id. 

716Final rule 206(4)–1(d)(6)(i). 

717We have defined ‘‘retail money market fund’’ 

to mean ‘‘a money market fund that has policies 

and procedures reasonably designed to limit all 

beneficial owners of the fund to natural persons.’’ 

See 17 CFR 270.2a–7(a)(21); see also Money Market 

Fund Reform; Amendments to Form PF, Release No. 

IA–3879 (July 23, 2014) [79 FR 47736 (Aug. 14, 

2014)], at nn.715–716 and accompanying text. 

718See Consumer Federation Comment Letter. 

719See, e.g., MMI Comment Letter (stating this 

condition would be difficult, if not impossible, to 

satisfy for an advertisement that would be 

disseminated to a large number of people); SIFMA 

AMG Comment Letter II; Wellington Comment 

Letter. 

720See Credit Suisse Comment Letter. 

721See CFA Institute Comment Letter. 

722See Comment Letter of Flexible Plan 

Investments, Ltd. on proposed advertising rule (Feb. 

10, 2020) (‘‘Flexible Plan Investments Comment 

Letter II’’) (noting that the relevancy requirement 

would be difficult to administer because ‘‘[i]t will 

be dependent on knowing in many cases the exact 

person to whom the use of (sic) hypothetical 

performance is being delivered.’’). 

b. Conditions on Presentation of 

Hypothetical Performance 

Largely as proposed, the final rule 

will prohibit the presentation of 

hypothetical performance in 

advertisements except under certain 

conditions designed to address the 

potential for hypothetical performance 

to mislead investors. First, the adviser 

must adopt and implement policies and 

procedures reasonably designed to 

ensure that the hypothetical 

performance information is relevant to 

the likely financial situation and 

investment objectives of the intended 

audience of the advertisement. Second, 

the adviser must provide sufficient 

information to enable the intended 

audience to understand the criteria used 

and assumptions made in calculating 

such hypothetical performance (the 

‘‘criteria and assumptions’’). Third, the 

adviser must provide (or, if the intended 

audience is a private fund investor, 

provide, or offer to provide promptly) 

sufficient information to enable the 

intended audience to understand the 

risks and limitations of using 

hypothetical performance in making 

investment decisions (the ‘‘risk 

information’’).714 For purposes of this 

discussion, we refer to the criteria and 

assumptions and the risk information 

collectively as the ‘‘underlying 

information.’’ Finally, the final rule 

does not require an investment adviser 

to comply with several conditions 

applicable to the presentation of 

performance information in 

advertisements, specifically the 

requirement to present specific time 

periods, and the requirements related to 

the presentation of related performance, 

and extracted performance.715

Policies and Procedures. In a 

modification from the proposal, under 

the first condition for displaying 

hypothetical performance information 

in advertisements, advisers must adopt 

and implement policies and procedures 

‘‘reasonably designed to ensure that the 

hypothetical performance is relevant to 

the likely financial situation and 

investment objectives’’ of the intended 

audience.716 The proposed condition 

would have required a higher degree of 

certainty of the financial situation and 

investment objectives of the person to 

whom the advertisement is 

disseminated. Under the final rule, 

reasonably designed policies and 

procedures need not address each 

recipient’s particular circumstances; 

rather, the adviser must make a 

reasonable judgement about the likely 

investment objectives and financial 

situation of the advertisement’s 

intended audience. 

The final rule will not prescribe the 

ways in which an adviser may seek to 

satisfy the policies and procedures 

requirement, including how the adviser 

will establish that the policies and 

procedures are reasonably designed to 

ensure that the hypothetical 

performance is relevant to the likely 

financial situation and investment 

objectives of the intended audience. We 

have previously used policies and 

procedures to establish a defined 

audience.717 We believe that this 

approach will provide investment 

advisers with the flexibility to develop 

policies and procedures that best suit 

their investor base and operations. 

While one commenter supported the 

proposed condition,718 several 

commenters suggested that we eliminate 

it because it is too subjective and 

difficult to implement.719 One 

commenter suggested that the condition 

not apply to institutional investors,720

while another commenter stated that the 

condition imposes a standard so high 

that an adviser could not satisfy the 

standard for retail investors.721 Another 

commenter suggested that we clarify 

that the proposed condition would not 

require an adviser to have knowledge of 

the specific individual circumstances or 

financial condition of each investor 

receiving hypothetical performance 

from the adviser.722

We continue to believe that this 

condition, as modified, will ensure that 

advisers provide advertisements 

containing relevant hypothetical 

performance to the appropriate 

audience without creating unnecessary 

compliance burdens. In response to 

commenters’ concerns, however, the 

final rule will specify that the policies 

and procedures must be reasonably 

designed to ensure that hypothetical 

performance is relevant to the likely 

financial situation and investment 

objectives of the intended audience. We 

added the qualifier ‘‘likely’’ to clarify 

that an adviser is not required to know 

the actual financial situation or 

investment objectives of each investor 

that receives hypothetical performance. 

We also replaced the word ‘‘person’’ 

with ‘‘intended audience’’ to clarify that 

advisers can comply with this 

condition, as well as the other 

conditions related to hypothetical 

performance, by grouping investors into 

categories or types, and to emphasize 

that an investor might not be a natural 

person. We believe that these changes 

will ease the compliance burdens 

commenters identified. 

This condition is designed to help 

ensure that an adviser provides 

advertisements containing hypothetical 

performance information only to those 

investors with the resources and 

financial expertise. Hypothetical 

performance may not be relevant to the 

likely financial situation and investment 

objectives of and may be misleading for 

investors that do not have the resources 

and financial expertise. For example, 

analysis of hypothetical performance 

may require tools and/or other data to 

assess the impact of assumptions 

driving hypothetical performance, such 

as factor or other performance 

attribution, fee compounding, or the 

probability of various outcomes. 

Without being able to subject 

hypothetical performance to additional 

analysis, this information could tell an 

investor little about an investment 

adviser’s process or other information 

relevant to a decision to hire the 

adviser. Instead, providing hypothetical 

performance to an investor that does not 

have access to the resources and 

financial expertise needed to assess the 

hypothetical performance and 

underlying information could mislead 

the investor to believe something about 

the adviser’s experience or ability that is 

unwarranted. We believe that advisers 

generally would not be able to include 

hypothetical performance in 

advertisements directed to a mass 

audience or intended for general 

circulation. In that case, because the 

advertisement would be available to 

mass audiences, an adviser generally 

could not form any expectations about 


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723See rule 205–3(d)(1) under the Act. 

724See section 2(a)(51) of the Investment 

Company Act. 

725See Ropes & Gray Comment Letter. 

726Advisers may already be required to comply 

with similar provisions under other regulatory 

regimes that also require advisers to consider the 

recipient when disseminating communications. 

See, e.g., FINRA rule 2210(d)(1)(E) (‘‘Members must 

consider the nature of the audience to which the 

communication will be directed and must provide 

details and explanations appropriate to the 

audience.’’); Global Investment Performance 

Standards (GIPS) for Firms (2020), Provision 1.A.11; 

GIPS Standards Handbook for Firms (Nov. 2020), 

Discussion of Provision 1.A.11. 

727See CFA Institute Comment Letter (suggesting 

that ‘‘an [a]dviser could consider hypothetical 

performance to be relevant to the financial situation 

and investment objectives of the person if the 

person has expressed interest in the strategy or the 

[a]dviser has determined it is an appropriate 

strategy for the investor based on their (sic) 

investment needs’’). 

728See final rule 206(4)–1(d)(6)(ii). We would 

consider any calculation information provided 

alongside the hypothetical performance to be a part 

of the advertisement and therefore subject to the 

books and records rule. See infra section II.I. 729See Flexible Plan Investments Comment Letter 

II. 730This obligation would be similar to an 

adviser’s obligation to provide full and fair 

disclosure to its clients of all material facts relating 

to the advisory relationship and of conflicts of 

interest. See Fiduciary Interpretation, supra 

footnote 8888, at n.70 (stating that institutional 

clients, as compared to retail clients, generally have 

a greater capacity and more resources to analyze 

and understand complex conflicts and their 

ramifications). 

731See, e.g., Withers Bergman Comment Letter; 

MFA/AIMA Comment Letter I; Resolute Comment 

Letter. 

732See 2019 Proposing Release, supra footnote 7, 

at section II.A.5.c.iv. 

their financial situation or investment 

objectives. 

The adviser’s past experiences with 

particular types of investors should lead 

the adviser to design reasonable policies 

and procedures that distinguish among 

investor types and whether hypothetical 

performance is relevant to the likely 

financial situation and investment 

objectives of an audience composed of 

that type. Such policies and procedures 

could distinguish investor types on the 

basis of criteria, such as previous 

investments with the adviser, net worth 

or investing experience if that 

information is available to the adviser, 

certain regulatory defined categories 

(e.g., qualified purchasers or qualified 

clients), or whether the intended 

audience includes only natural persons 

or only institutions. 

An adviser could determine that 

certain hypothetical performance 

presentations are relevant to the likely 

financial situation and investment 

objectives of certain types of investors 

based on routine requests from those 

types of investors in the past. For 

example, an adviser, based on its past 

experience, might be able to reasonably 

conclude that hypothetical performance 

would be relevant to investors who meet 

certain financial sophistication 

standards such as qualified client 723 or 

qualified purchaser.724 The adviser 

could explain in its policies and 

procedures why it believes that 

hypothetical performance is relevant for 

this intended audience. In addition, an 

adviser’s policies and procedures 

should address how the adviser’s 

dissemination of the advertisement 

would seek to be limited to that 

audience. As discussed above, 

hypothetical performance directed to 

mass audiences generally will not be 

able to meet this standard. 

One commenter expressed concerns 

that this condition would pose a 

compliance challenge for advisers to 

private funds because they do not have 

insight into potential investors, 

especially prior to the time when 

subscription documents are 

disseminated.725 Because an adviser’s 

policies and procedures should be 

informed by its prior experience with 

certain investor types, an adviser that 

plans to advise a private fund can 

develop policies and procedures that 

take into account its experience 

advising a prior private fund for which 

it raised money from investors. That 

experience might indicate that investors 

in the vehicle valued a particular type 

of hypothetical performance because, 

for example, the investors used it to 

assess the adviser’s strategy and 

investment process. Similarly, an 

adviser could determine, based on its 

experience, that hypothetical 

performance is not relevant to the likely 

financial situation and investment 

objectives of certain investors and 

reflect such determination in its policies 

and procedures. New advisers that do 

not have prior client experiences to 

inform their determination of the 

intended audience can rely on other 

resources, including information they 

have gathered from potential investors 

(e.g., questionnaires, surveys, or 

conversations) and academic research, 

to help identify the intended audience 

in connection with the three 

hypothetical performance conditions.726

One commenter expressed concern 

that this condition would effectively 

restrict hypothetical performance only 

to a sub-set of investors with the 

financial and analytical resources to 

analyze such performance even if an 

investor outside of this sub-set 

specifically requested the 

information.727 As noted above, we 

believe that it is appropriate to apply 

the hypothetical performance 

conditions to communications that 

otherwise meet the definition of 

advertisement, even if they take place in 

one-on-one settings due to the potential 

for such information to mislead 

investors. However, advisers would still 

be able to provide investors with 

interactive financial analysis tools 

without subjecting those tools to the 

hypothetical performance conditions. 

Criteria and Assumptions. The second 

condition for the presentation of 

hypothetical performance will require 

the adviser to provide sufficient 

information to enable the intended 

audience to understand the criteria used 

and assumptions made in calculating 

the hypothetical performance.728 The 

rule does not prescribe any particular 

methodology or calculation for the 

different categories of hypothetical 

performance, just as it does not 

prescribe methodologies or calculations 

for actual performance. Instead, advisers 

must provide the information about 

criteria and assumptions so that the 

intended audience can understand how 

the hypothetical performance was 

calculated. We are adopting the second 

condition largely as proposed, except 

that we are replacing the phrase ‘‘such 

person’’ with ‘‘the intended audience’’ 

for consistency with the first condition, 

as discussed above. In addition, and in 

response to one commenter’s 

concerns,729 we are clarifying that the 

adviser is responsible for providing 

sufficient information as we agree that 

it would not be workable to require 

advisers to have a precise understanding 

of exactly what each investor needs in 

order to allow that investor to 

understand the calculations and 

assumptions underlying the 

hypothetical performance.730

Several commenters expressed 

concern that this condition would 

require advisers to disclose proprietary 

or confidential information 731 due to 

the statement in the proposal that this 

condition may require advisers to 

provide the ‘‘methodology used in 

calculating and generating the 

hypothetical performance.’’ 732 To 

clarify, we do not expect advisers to 

disclose proprietary or confidential 

information to satisfy this condition. We 

expect that a general description of the 

methodology used would be sufficient 

information for an investor to 

understand how it was generated. 

Under the final rule, the condition 

will not require an adviser to provide 

information that would be necessary to 

allow the intended audience to replicate 

the performance (e.g., information that 

is confidential or proprietary). With 


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733See, e.g., NYC Bar Comment Letter; AIC 

Comment Letter. 

734See, e.g., NYC Bar Comment Letter; AIC 

Comment Letter (stating that the requirements of 

the second condition are ‘‘consistent with market 

practice’’ but that advisers should not be required 

to state the likelihood that a given event would 

occur). 

735See final rule 206(4)–1(d)(6)(iii). 

736See CFA Institute Comment Letter; Withers 

Bergman Comment Letter. 

737See Flexible Plan Investments Comment Letter 

II. 

738See proposed rule 206(4)–1(c)(1)(v)(C) 

(requiring an adviser to ‘‘[p]rovide[ ] (or, if such 

person is a non-retail person, provide[ ] or offer[ ] 

to provide promptly) sufficient information to 

enable such person to understand the risks and 

limitations of using such hypothetical performance 

in making investment decisions.’’). 

739See, e.g., Ropes & Gray Comment Letter; IAA 

Comment Letter; AIC Comment Letter. 

740See supra section II.B. 

741See final rule 206(4)–1(a)(4). 

742The term ‘‘predecessor performance’’ is 

defined in final rule 206(4)–1(e) and refers to all 

situations where an investment adviser presents 

investment performance achieved by a group of 

investments consisting of an account or a private 

fund that was not advised by the investment adviser 

at all times during the period shown. 

respect to assumptions, investment 

advisers should provide information 

that includes any assumptions on which 

the hypothetical performance rests— 

e.g., in the case of targeted or projected 

returns, the adviser’s view of the 

likelihood of a given event occurring. 

Commenters suggested that we not 

require advisers to disclose the extent to 

which hypothetical performance is 

based on the likelihood of an event 

occurring because this would require 

advisers to make speculative 

statements.733 Yet, commenters agreed 

that an adviser should disclose the 

assumptions it has made.734

It is our view that assumptions 

underlying hypothetical performance 

should be interpreted to include 

assumptions that future events will 

occur. We believe that hypothetical 

performance, by its nature, contains a 

speculative element; therefore, requiring 

advisers to disclose the assumptions 

that informed a model aligns with the 

types of restrictions we seek to place on 

performance presentation that have a 

high potential to mislead investors. We 

believe advisers should provide this 

information so that the intended 

audience is able to determine, in part, 

how much value to attribute to the 

hypothetical performance. Without 

information regarding criteria and 

assumptions, we believe that such 

performance would be misleading even 

to an investor with the resources and 

financial expertise to evaluate it. 

Risk Information. The final rule will 

require the adviser to provide—or, if the 

intended audience is a private fund 

investor, to provide, or offer to provide 

promptly—sufficient information to 

enable the intended audience to 

understand the risks and limitations of 

using the hypothetical performance in 

the advertisement in making investment 

decisions.735

Commenters generally supported this 

condition.736 However, one commenter 

suggested that we add a reasonableness 

component in order to provide more 

flexibility, requiring advisers to provide 

reasonably sufficient information.737 We 

do not believe this change is necessary 

as we believe that advisers’ 

consideration of the intended audience 

will provide advisers with flexibility 

and alleviate some of the burdens 

imposed by these conditions. In a 

change from the proposal, we replaced 

‘‘Non-Retail Person’’ with ‘‘an investor 

in a private fund’’ in order to align with 

broader changes to the rule (i.e., to 

dispense with the distinction between 

Retail and Non-Retail Persons).738 As 

explained above, we also replaced 

references to ‘‘such person’’ with ‘‘the 

intended audience.’’ After considering 

comments,739 the final rule will not 

require advisers to provide private fund 

investors with information on the risks 

and limitations of using the advertised 

hypothetical performance. Instead, 

advisers can merely offer to promptly 

provide such information. 

With respect to risks and limitations, 

investment advisers should provide 

information that would apply to both 

hypothetical performance generally and 

to the specific hypothetical performance 

presented—e.g., if applicable, that 

hypothetical performance reflects 

certain assumptions but that the adviser 

generated dozens of other, varying 

performance results applying different 

assumptions. Risk information should 

also include any known reasons why 

the hypothetical performance might 

differ from actual performance of a 

portfolio—e.g., that the hypothetical 

performance does not reflect cash flows 

into or out of the portfolio. This risk 

information will, in part, enable the 

intended audience to understand how 

much value to attribute to the 

hypothetical performance in deciding 

whether to hire or retain the investment 

adviser or invest in a private fund 

managed by the adviser. An adviser 

should tailor its risk information to its 

intended audience. 

In addition, any communication that 

is an advertisement under the first 

prong of the definition of advertisement, 

and that includes hypothetical 

performance, will be required to comply 

with the general prohibitions.740 As a 

result, the rule will prohibit advisers 

from presenting hypothetical 

performance in such advertisements in 

a materially misleading way. For 

example, we would view an 

advertisement as including an untrue 

statement of material fact if the 

advertised hypothetical performance 

reflected the application of rules, 

criteria, assumptions, or general 

methodologies that were materially 

different from those stated or applied in 

the underlying information of such 

hypothetical performance. Also, we 

would view it as materially misleading 

for an advertisement to present 

hypothetical performance that discusses 

any potential benefits resulting from the 

adviser’s methods of operation without 

providing fair and balanced discussion 

of any associated material risks or 

material limitations associated with the 

potential benefits.741 Similarly, an 

adviser can meets its obligation with 

respect to an advertisement presenting 

hypothetical performance that includes 

an offer to promptly provide risk 

information to a private fund investor if 

the adviser makes reasonable efforts to 

promptly provide such information 

upon the investor’s request. 

F. Portability of Performance, 

Testimonials, Endorsements, ThirdParty Ratings, and Specific Investment 

Advice 

Among the performance results that 

an investment adviser may seek to 

advertise are those of groups of 

investments or accounts for which the 

adviser, its personnel, or its predecessor 

investment adviser firms have provided 

investment advice in the past as or at a 

different entity. In some cases, an 

investment adviser may seek to 

advertise the performance results of 

portfolios managed by the investment 

adviser before it was spun out from 

another adviser. Alternatively, an 

adviser may seek to advertise 

performance achieved by its investment 

personnel when they were employed by 

another investment adviser. This may 

occur, for example, when a portfolio 

management team leaves one advisory 

firm and joins another advisory firm or 

begins its own firm. Predecessor 

performance results may be directly 

relevant to an audience when the 

advertisement offers services to be 

provided by the personnel responsible 

for the predecessor performance, even 

when the personnel did not work for the 

adviser disseminating the advertisement 

(the ‘‘advertising adviser’’) during the 

period for which performance is being 

advertised.742

We believe that the presentation of 

predecessor performance can mislead 


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743See, e.g., Fiduciary Management Associates, 

Inc., SEC Staff No-Action Letter (Feb. 2, 1984) 

(‘‘Fiduciary Management Letter’’). 

744See, e.g., South State Bank, SEC Staff NoAction Letter (May 8, 2018) (‘‘South State Bank 

Letter’’) (the staff stated that it would not 

recommend enforcement action based on 

representations designed to ensure advisory clients 

would not be misled if clients attributed the 

predecessor adviser’s performance to the 

advertising adviser, including, for example, that it 

would operate in the same manner and under the 

same brand name as the predecessor adviser). 

745See Registration of Successors to BrokerDealers and Investment Advisers, Release No. IA– 

1357 (Dec. 28, 1992) [58 FR 7–01 (Jan. 4, 1993)]. 

746See proposed rule 206(4)–1(a) and (c). 

747For the discussion that follows, see generally 

2019 Proposing Release, supra footnote 7, at section 

II.A.6. 

748See Horizon Asset Management, LLC, SEC 

Staff No-Action Letter (Sept. 13, 1996) (‘‘Horizon 

Letter’’); Great Lakes Advisers, Inc., SEC Staff NoAction Letter (Apr. 3, 1992) (‘‘Great Lakes Letter’’); 

Fiduciary Management Letter; South State Bank 

Letter. We requested comment on a number of the 

issues raised by predecessor performance. See 2019 

Proposing Release, supra footnote 7, at section 

II.A.6. 

749See IAA Comment Letter; CFA Institute 

Comment Letter (supporting specific provisions on 

predecessor performance, but suggesting 

compliance with GIPS standards); Fried Frank 

Comment Letter (stating that the final rule should 

explicitly address predecessor performance and 

supporting a ‘‘principles-based, disclosure-driven 

approach’’ that has a similar framework as the 

proposed approach to hypothetical performance); 

Comment Letter of SIFMA (Supplemental) (June 5, 

2020) (‘‘SIFMA Supplemental Comment Letter’’). 

750See IAA Comment Letter; SIFMA 

Supplemental Comment Letter. 

751See final rule 206(4)–1(d)(7)(iv); see also 2019 

Proposing Release, supra footnote 7, at sections 

II.A.5.c.ii and II.A.6. 

752See final rule 206(4)–1(d)(7)(i). Our staff has 

applied a similar principle when considering the 

presentation of predecessor performance. See 

Horizon Letter (stating that the staff would not find 

a display of predecessor performance to be in and 

of itself misleading based on several 

representations, including that ‘‘the person or 

persons who manage accounts at the adviser were 

also those primarily responsible for achieving the 

prior performance results’’). 

investors, especially, for example, 

when: (i) The team that was primarily 

responsible for the predecessor 

performance is different from the team 

whose advisory services are being 

offered in the advertisement, (ii) an 

individual who played a significant part 

in achieving the predecessor 

performance is not a member of the 

advertising adviser’s investment 

team,743 (iii) the adviser that generated 

the performance underwent a 

restructuring, reorganization, or sale,744

or (iv) an advertising adviser does not 

clearly disclose that the performance 

was achieved at a different entity. 

We have previously identified 

characteristics of a restructuring, sale, or 

reorganization (collectively, 

‘‘reorganization’’) that likely support a 

finding that an adviser’s business 

continued to exist where: There was a 

substantial and direct business nexus 

between the successor and predecessor 

advisers; the reorganization was not 

designed to eliminate substantial 

liabilities and/or spin off personnel; 

and, if applicable, the successor adviser 

assumed substantially all of the assets 

and liabilities of the predecessor 

adviser.745 Under the final rule, we 

would consider similar factors when 

analyzing the extent to which an 

advertising adviser must treat a 

predecessor adviser’s performance as 

predecessor performance. For example, 

we do not believe that a change of brand 

name, without additional differences 

between the advisory entity before and 

after the restructuring, would render its 

past performance as ‘‘predecessor 

performance.’’ Likewise, a mere change 

in the form of legal organization (e.g., 

from a corporation to limited liability 

company) or a change in ownership of 

the adviser would likely not raise the 

concerns described in this section. 

In the proposal, we considered 

whether applying the rule’s general 

prohibitions and the more specific 

performance advertising restrictions 

would sufficiently alleviate our 

concerns,746 or whether specific rule 

provisions would more appropriately 

address those concerns.747 For example, 

we questioned whether the untrue or 

misleading implication general 

prohibition would prevent the display 

of predecessor performance containing 

an untrue or misleading implication 

about a material fact relating to the 

advertising adviser. As another 

example, we stated that, depending on 

the circumstances, predecessor 

performance results that exclude 

accounts managed in a substantially 

similar manner at the predecessor firm 

may be misleading and implicate the 

proposed general prohibitions in the 

rule. We stated that such presentations 

could result in the inclusion or 

exclusion of performance results in a 

manner that is neither accurate nor fair 

and balanced. Accordingly, we 

requested comment on whether the 

advertising rule should include 

additional provisions on the 

presentation of predecessor performance 

results, and we specifically asked about 

the approach our staff has taken in 

providing guidance on this issue under 

the current rule.748

Some commenters supported the 

addition of a provision on this topic, 

urging us to address predecessor 

performance in the final rule.749 Two 

commenters supported the approach our 

staff took in its no-action letters and 

suggested we adopt a rule that would 

draw from those requirements, with 

minor modifications.750 In light of these 

comments, we believe that placing 

explicit guardrails on displays of 

predecessor performance will increase 

investor protection, in addition to the 

general prohibitions. Moreover, we 

expect that clarifying our views on 

positions taken by our staff over the 

years will promote consistency of 

practices among advisory firms and 

thereby level the playing field. 

Investments advisers will be 

prohibited from displaying predecessor 

performance in an advertisement, unless 

the following requirements are satisfied: 

(A) The person or persons who were 

primarily responsible for achieving the 

prior performance results manage 

accounts at the advertising adviser; 

(B) the accounts managed at the 

predecessor investment adviser are 

sufficiently similar to the accounts 

managed at the advertising adviser that 

the performance results would provide 

relevant information to investors; 

(C) all accounts that were managed in 

a substantially similar manner are 

advertised unless the exclusion of any 

such account would not result in 

materially higher performance and the 

exclusion of any account does not alter 

the presentation of any prescribed time 

periods; and 

(D) the advertisement clearly and 

prominently includes all relevant 

disclosures, including that the 

performance results were from accounts 

managed at another entity.751

In addition to applying these specific 

provisions, advisers should consider the 

extent to which other provisions of the 

advertising rule, such as the general 

prohibitions (including those pertaining 

to the fair and balanced presentation of 

information), apply to any display of 

predecessor performance. 

Primarily Responsible. In order to 

present predecessor performance in an 

advertisement, the person or persons 

who were primarily responsible for 

achieving the prior performance results 

while employed at the predecessor firm 

must manage accounts at the advertising 

adviser.752 We believe that the 

‘‘primarily responsible’’ requirement 

will help place critical guardrails on the 

use of predecessor performance and will 

require advisers to focus on the role that 

the individual played in producing the 

performance (e.g., the extent of the 

person’s decision-making authority or 

influence). Advisers should consider the 

substantive responsibilities of those 

who are responsible for generating the 

performance at issue and, where more 

than one individual is primarily 


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753Our staff applied a similar principle when 

considering investment teams or committees. See 

Great Lakes Letter, at n.4 (staff declined to take a 

no-action position where only one person from a 

three-person committee transferred from the 

predecessor adviser to the advertising adviser and 

where the other two individuals played a 

significant role stating that, ‘‘at a minimum, there 

would have to be a substantial identity of personnel 

among the predecessor’s and successor’s 

committees.’’); Horizon Letter (staff stated that it 

would not recommend enforcement action under 

rule 206(4)–1 where one individual was primarily 

responsible for achieving performance results at the 

predecessor firm and, upon joining the advertising 

adviser, would be a member of a three-person 

committee. The individual would still have final 

decision-making authority and the other committee 

members would only advise the sole decisionmaker.). 

754Commenters generally supported applying 

guardrails to displays of predecessor performance 

based on existing staff no-action letters and 

industry best practices. See IAA Comment Letter 

(citing Horizon Letter, South State Bank Letter, 

Great Lakes Letter, Fiduciary Management Letter, 

and Conway Asset Management, Inc., SEC Staff NoAction Letter (Jan. 27, 1989)); Fried Frank Comment 

Letter; SIFMA Supplemental Comment Letter. 

755See 2019 Proposing Release, supra footnote 7, 

at section II.A.6. (stating that it may be difficult to 

attach relative significance to the role played by 

each group member where an adviser selects 

portfolio securities by consensus or committee 

decision-making). See also Great Lakes Letter; 

Horizon Letter. Commenters generally supported 

the positon our staff has taken in no-action letters 

on predecessor performance where a committee 

makes investment decisions. See, e.g., IAA 

Comment Letter (suggesting that the final rule 

require that ‘‘substantially all of the investment 

decision-makers who manage accounts at the 

adviser are those primarily responsible for 

achieving the prior performance results’’). 

756See final rule 206(4)–1(d)(7)(ii). Our staff 

applied a similar principle when considering 

whether displays of predecessor performance 

would be relevant to investors. See Horizon Letter 

(stating that the staff would not find a display of 

predecessor performance to be in and of itself 

misleading based on several representations, 

including that ‘‘the accounts managed at the 

predecessor entity are so similar to the accounts 

currently under management that the performance 

results would provide relevant information to 

prospective clients’’). 

757See IAA Comment Letter (suggesting that the 

Commission require the accounts to be ‘‘sufficiently 

similar’’ instead of ‘‘so similar’’). 

758See final rule 206(4)–1(d)(7)(iii). Our staff 

applied a similar principle when considering 

whether displays of predecessor performance 

would be relevant to investors. See Horizon Letter 

(stating that the staff would not find a display of 

predecessor performance to be in and of itself 

misleading based on several representations, 

including that ‘‘all accounts that were managed in 

a substantially similar manner are advertised unless 

the exclusion of any such account would not result 

in materially higher performance’’); IAA Comment 

Letter (supporting this provision). 

759See final rule 206(4)–1(d)(4); 2019 Proposing 

Release, supra footnote 7, at section II.A.5.c.ii, 

n.279. 

760See final rule 206(4)–1(e)(15). Our staff has 

stated that it would not recommend enforcement 

action if advisers present predecessor performance 

where the adviser presents the composite 

performance of all of the predecessor firm’s 

accounts that had the same investment objectives 

and were managed using the same investment 

strategies that the adviser will manage at the new 

firm. See Horizon Letter. 

761 In presenting such performance, advisers 

should also consider the general prohibitions and 

other performance advertising provisions of the 

final rule. 

762See final rule 206(4)–1(d)(7)(iv). Our staff 

applied a similar principle when considering 

whether displays of predecessor performance 

would be relevant to investors. See Horizon Letter 

(stating that the staff would not find a display of 

predecessor performance to be in and of itself 

misleading based on several representations, 

including that ‘‘the advertisement includes all 

relevant disclosures, including that the performance 

results were from accounts managed at another 

entity.’’). Disclosures that are subject to a clear and 

prominent standard under final rule 206(4)–1 

should be included within the advertisement. See 

supra footnote 286. 

763See IAA Comment Letter (suggesting the 

addition of ‘‘including that the performance results 

were from accounts managed at another entity’’ to 

the rule text). 

764See final rule 204–2(a)(16). See also Great 

Lakes Letter (stating that rule 204–2(a)(16) applies 

to a successor’s use of a predecessor’s performance 

data). 

responsible for making investment 

decisions, whether a substantial identity 

of the group responsible for achieving 

the prior performance have moved over 

to the advertising adviser. We anticipate 

that this principles-based approach will 

address scenarios where a committee 

makes the investment decisions and 

where a single person is responsible for 

investment decisions. Where a 

committee managed the group of 

investments at the predecessor firm, a 

committee comprising a substantial 

identity of the membership must 

manage the portfolios at the advertising 

adviser.753

A person or group of persons is 

‘‘primarily responsible’’ for achieving 

prior performance results if the person 

makes or the group makes investment 

decisions.754 Where more than one 

person is involved in making 

investment decisions, advisers should 

consider the authority and influence 

that each person has in making 

investment decisions.755

Sufficiently similar accounts. Under 

the final rule, an advertising adviser 

may not present predecessor 

performance in an advertisement unless 

the accounts managed at the 

predecessor and advertising advisers are 

‘‘sufficiently similar’’ in order to ensure 

the investor receives relevant 

information.756 Prior staff letters took 

no-action positions with accounts that 

were ‘‘so similar’’ to the advertised 

accounts.757 We believe that the 

language in the final rule provides 

advisers appropriate flexibility in 

displaying predecessor performance and 

would not result in investor confusion. 

Managed in a substantially similar 

manner. Under the final rule, an 

investment adviser using predecessor 

performance in an advertisement will be 

required to display all accounts that 

were managed in a ‘‘substantially 

similar manner’’ at the predecessor 

adviser, unless excluding any account 

would not result in materially higher 

performance and the exclusion of any 

account does not alter the presentation 

of any applicable time periods required 

by the rule.758 This condition mirrors 

the related performance provisions of 

the final rule, which requires 

investment advisers to include all 

related portfolios and only permits an 

adviser to exclude a related portfolio if 

performance would not be materially 

higher and if the exclusion of any 

related portfolio does not alter the 

presentation of any applicable time 

periods required by the rule.759

Accounts that are managed in a 

substantially similar manner are those 

with substantially similar investment 

policies, objectives, and strategies.760 As 

a result, advisers can use the same 

approach for determining the scope of 

the accounts that are managed in a 

substantially similar manner as they use 

to determine which accounts are related 

portfolios for purposes of displaying 

related performance. 

An adviser that chooses to display 

predecessor performance information in 

an advertisement must consider the 

related performance requirements of the 

final rule. For example, if an adviser 

includes predecessor performance and 

the advertising adviser manages 

accounts that are related portfolios to 

those groups of investments depicted in 

the predecessor performance, then the 

advertising adviser must include these 

related portfolios in its performance 

display.761

Relevant disclosures. The final rule 

will require an adviser to clearly and 

prominently include all relevant 

disclosures and indicate that the 

performance results were from accounts 

managed at another entity.762 While 

what disclosures are ‘‘relevant’’ will 

depend on the facts and circumstances, 

we agree with a commenter’s suggestion 

that the fact that the performance was 

generated from accounts managed at 

another entity will always be relevant. 

Accordingly, the final rule will 

explicitly require this disclosure.763

Additionally, advisers should consider 

what disclosures would be appropriate 

to comply with the other provisions of 

the final rule, such as the general 

prohibitions. 

Our amendments to the books and 

records rule will require an adviser to 

retain records to support the 

performance presented.764 We believe 

that, in order to avoid misleading 

presentations of predecessor 


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765Our staff took this approach in stating that it 

would not recommend enforcement action under 

section 206 of the Advisers Act or the current 

advertising rule if an advertising adviser presents 

performance results achieved at another firm based 

on several representations, including that the 

advertising adviser would keep the books and 

records of the predecessor firm that are necessary 

to substantiate the performance results in 

accordance with rule 204–2(a)(16). See Horizon 

Letter; see also Great Lakes Letter, at n.3 (stating 

that rule 204–2(a)(16) ‘‘applies also to a successor’s 

use of a predecessor’s performance data’’). We 

understand that investment advisers who consider 

this staff no-action letter currently keep copies of 

all advertisements containing performance data and 

all documents necessary to form the basis of those 

calculations. 

766See final rule 206(4)–1(a)(2). 

767See SIFMA AMG Comment Letter II; IAA 

Comment Letter (stating that an adviser should be 

permitted to substantiate performance using 

publicly available information and audit or 

verification statements); MarketCounsel Comment 

Letter (noting that the books and records of the 

predecessor firm are often unavailable due to 

contractual or privacy restrictions and suggesting 

that the Commission permit advertising advisers to 

recreate performance based on a sampling of client 

statements and/or display performance from a prior 

firm in a scenario where the advertising adviser has 

a copy of the advertisement and where the prior 

firm was subject to the books and records rule). 

768See CFA Institute Comment Letter (stating that 

alternative books and records requirements should 

not be an option for predecessor performance 

because verification reports will not satisfy the 

books and records requirements in most cases, nor 

would performance information that has been 

subject to a financial statement audit). 

769See infra section II.J. 

770See, e.g., MassMutual Institutional Funds, SEC 

Staff No-Action Letter (Sept. 28, 1995); NicholasApplegate, SEC Staff No-Action Letter (Aug. 6, 

1996); Growth Stock Outlook Trust Inc., SEC Staff 

No-Action Letter (Apr. 15, 1986). 

771See Dr. William Greene, SEC Staff No-Action 

Letter (Feb. 3, 1997). 

772See, e.g., Salomon Brothers Asset Management 

Inc., SEC Staff No-Action Letter (July 23, 1999). See 

also, Jennison Associates LLC, SEC Staff No-Action 

Letter (July 6, 2000). 

773See 2019 Proposing Release, supra footnote 7, 

at section II.A.6. 

774See proposed rule 206(4)–1(d). 

775See, e.g., FPA Comment Letter; MFA/AIMA 

Comment Letter I. 

776See, e.g., SBIA Commenter Letter; SIFMA 

AMG Comment Letter I. 

777See, e.g., Commonwealth Comment Letter. 

778See, e.g., NSCP Comment Letter; SIFMA AMG 

Comment Letter I. 

performance, an adviser must have 

access to the books and records 

underlying the performance.765 We have 

applied this concept more generally 

under the final rule, which will also 

require that an adviser have a 

reasonable basis for believing that it will 

be able to substantiate (upon demand by 

the Commission) all material statements 

of fact contained in an advertisement.766

Certain commenters that addressed 

this aspect of the proposal requested 

that we preserve flexibility for the types 

of records that support predecessor 

performance,767 while another 

commenter disagreed that flexibility 

was appropriate and suggested 

permitting predecessor performance 

only where the records required under 

rule 204–2 were available.768 Without 

supporting information, we are 

concerned about the accuracy of such 

performance displays and that such 

information could be misleading. We do 

not believe that an advertising adviser 

could recreate performance based on a 

sampling of investor statements and/or 

display performance from a prior firm 

because we are concerned that such an 

approach has a heightened risk of cherry 

picking performance. Allowing a 

sampling of information to support 

performance displays is inconsistent 

with our general approach to require 

advisers to display all applicable 

performance (e.g., related performance) 

to mitigate these cherry-picking 

concerns. 

Because the final rule addresses the 

portability of adviser performance, our 

staff will withdraw several no-action 

letters our staff has issued on this 

topic.769 However, other related letters 

will not be withdrawn in connection 

with this rulemaking since they address 

different activity than the activity 

covered by our final rule text on 

predecessor performance. Those letters 

address topics including an adviser’s 

use of performance generated by 

predecessor accounts (e.g., separate 

accounts or private funds) in RIC 

advertisements and filings 770 and the 

establishment of pools in order to 

generate performance track records.771

These letters generally address the use 

of performance from predecessor 

accounts (i.e., where the same adviser 

uses performance generated by one 

investment vehicle in an advertisement 

for another product) rather than 

performance of a predecessor advisory 

firm.772

Although we requested comment on 

the portability of testimonials, 

endorsements, third-party ratings, and 

specific investment advice,773

commenters did not address these 

topics. To the extent that testimonials, 

endorsements, third-party ratings, and 

specific investment advice contain 

performance from a predecessor firm, 

the general prohibitions apply to such 

testimonials, endorsements, and thirdparty ratings. We do not believe we 

need to address their portability 

specifically as the general prohibitions, 

depending on the facts and 

circumstances, will have the effect of 

prohibiting advisers from presenting 

misleading information to investors by 

using outdated testimonials, 

endorsements, and third-party ratings. 

G. Review and Approval of 

Advertisements 

The final rule will not require 

investment advisers to review and 

approve their advertisements prior to 

dissemination, unlike the proposal. The 

proposed advertising rule would have 

required an adviser to have an 

advertisement reviewed and approved 

for consistency with the requirements of 

the proposed rule by a designated 

employee before disseminating the 

advertisement, except in certain 

circumstances.774 We proposed this 

requirement because we believed it 

might reduce the likelihood of advisers 

violating the proposed rule. We believed 

it was important that investment 

advisers implement a process designed 

to promote compliance with the 

proposed rule’s requirements. We also 

proposed to require that advisers create 

and maintain a written record of the 

review and approval of the 

advertisement, which would have 

allowed our examination staff to better 

review adviser compliance with the 

rule. 

Many commenters opposed this 

requirement or suggested modifications 

to it. Commenters expressed concern 

that it would impose a significant 

compliance burden on advisers, 

especially smaller firms.775 Many 

commenters also argued that such a 

requirement would be duplicative of the 

compliance rule, pointing out that most 

advisers already have implemented 

policies and procedures to review 

advertisements for accuracy prior to 

dissemination.776 Other commenters 

stated that an inflexible review and 

approval requirement covering nearly 

all advertisements would impair an 

adviser’s ability to communicate timely 

with clients, resulting in poor client 

service or slow responses during 

periods of market volatility.777

Commenters claimed that the proposal, 

which did not exclude one-on-one 

communications from the definition of 

advertisement, would effectively require 

advisers to screen all communications 

to assess whether a communication 

would constitute an advertisement 

subject to the review and approval 

requirement, or met one of the 

requirement’s exceptions.778

Consequently, some of these 

commenters suggested that if we adopt 

this requirement, the final rule should 

expand the exceptions to include, for 

example, responses to questions that 

contain pre-approved template 

language, advertisements to Non-Retail 


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779See, e.g., MFA/AIMA Comment Letter I; MMI 

Comment Letter; ICE Comment Letter. 

780See Compliance Program Adopting Release, 

supra footnote 371, at 74716. Rule 206(4)–7 makes 

it unlawful for an investment adviser to provide 

investment advice unless the adviser has adopted 

and implemented written policies and procedures 

reasonably designed to prevent violations of the 

Advisers Act and rules that the Commission has 

adopted under the Act, which will include final 

rule 206(4)–1 and its specific requirements. See rule 

206(4)–7(a). Rule 206(4)–7 also requires investment 

advisers to review, no less than annually, the 

adequacy of the policies and procedures and the 

effectiveness of their implementation, and to 

designate who is responsible for administering the 

policies and procedures adopted under the rule. See 

id. at (b)–(c). 

781See Compliance Program Adopting Release, 

supra footnote 371, at 74716. 

782See Compliance Program Adopting Release, 

supra footnote 371, at 74716. If advisers indirectly 

market or solicit through third parties, they should 

consider how to tailor policies and procedures 

according to the risks posed by those third parties 

making statements that constitute advertisements 

under the rule. See supra section II.C.3. 

783See, e.g., SBIA Comment Letter; SIFMA AMG 

Comment Letter I (stating that advisers’ 

compliances programs currently include upfront 

reviews of templates, spot-checking or sampling 

advertisements after dissemination, or a risk-based 

approach depending on the type of advertisement). 

784See 15 U.S.C. 80b–4 (section 204 of the 

Investment Advisers Act) (providing the 

Commission with examination authority over ‘‘all 

records’’ of an investment adviser); see rule 204– 

2(g)(2) (requiring prompt production of records); see 

rule 204–2(a)(17) (requiring investment advisers to 

make and keep records of their policies and 

procedures formulated pursuant to rule 206(4)–7). 

785See, e.g., 15 U.S.C. 80b–4 (section 204 of the 

Investment Advisers Act) (providing the 

Commission with examination authority); see also 

17 CFR 275.204–2 (rule 204–2 under the Investment 

Advisers Act) (Commission books and records 

rules). 

786See, e.g., Electronic Recordkeeping by 

Investment Companies and Investment Advisers, 

Release No. IA–1945 (May 24, 2001) [66 FR 29224 

(May 30, 2001)] (explaining that the ‘‘continuing 

accessibility and integrity of fund and adviser 

records are critical to the fulfillment of our 

oversight responsibilities,’’ and noting the 

Commission’s expectation that a fund or adviser 

would be permitted to delay furnishing 

electronically stored records for more than 24 hours 

only in ‘‘unusual circumstances.’’). 

787See proposed rule 204–2(a)(11)(iii). 

788Exempt reporting advisers (that are not also 

registering with any state securities authority) are 

not required to complete Item 5 of Part 1A. 

Accordingly, subsection L of Item 5 of Part 1A will 

not be required for such advisers. See, e.g., 

Instruction 3 to Form ADV: General Instructions 

(‘‘How is Form ADV organized’’). Exempt reporting 

advisers will not be subject to the final rule. See 

supra footnote 21. 

789See CFA Institute Comment Letter; NRS 

Comment Letter; NAPFA Comment Letter. 

790See, e.g., SIFMA AMG Comment Letter I. 

791See, e.g., JG Advisory Comment Letter; Pickard 

Djinis Comment Letter. 

792See CFA Institute Comment Letter. 

793See NRS Comment Letter (suggesting that 

Form ADV specifically request that an adviser 

disclose whether its advertisements include 

backtested performance or projected or targeted 

returns). 

794See SIFMA AMG Comment Letter I. 

795See NRS Comment Letter. 

Persons, and interactive social media 

content.779

After considering these comments, we 

are not adopting the proposed internal 

review and approval requirement. 

Instead, we believe an adviser’s existing 

obligations under the compliance rule 

will allow an adviser to tailor its 

compliance program to its own 

advertising practices to prevent 

violations from occurring, detect 

violations that have occurred, and 

correct promptly any violations that 

have occurred.780 In adopting the 

compliance rule, the Commission stated 

that investment advisers should adopt 

policies and procedures that address 

‘‘. . . the accuracy of disclosures made 

to investors, clients, and regulators, 

including account statements and 

advertisements.’’ 781 We believe for 

these compliance policies and 

procedures to be effective, they should 

include objective and testable means 

reasonably designed to prevent 

violations of the final rule in the 

advertisements the adviser 

disseminates. 

Advisers can establish such an 

objective and testable compliance 

policies and procedures through a 

variety of tools. For example, internal 

pre-review and approval of 

advertisements could serve as an 

effective component of an adviser’s 

compliance program. Other effective 

methods to prevent issues could include 

reviewing a sample of advertisements 

based on risk or pre-approving 

templates. Effective methods to detect 

and correct promptly violations and 

adjust practices to prevent future 

violations might include spot-checking 

advertisements and periodic reviews.782

Commenters confirmed our 

understanding that the internal policies 

and procedures of many advisers 

currently require some level of review 

for advertisements, although not prereview of every advertisement.783

Advisers should also consider the extent 

to which reasonably designed policies 

and procedures should involve training 

on the requirements and prohibitions of 

the advertising rule for any employee(s) 

involved in the creation, review, or 

dissemination of adviser 

advertisements. 

In addition, consistent with the 

Commission’s examination authority, 

upon request, advisers must promptly 

provide information about their 

compliance policies and procedures and 

any records that document 

implementation of those policies and 

procedures to us and our staff.784 The 

Commission’s ability to collect 

information in a timely fashion through 

its examination authority, and evaluate 

such information for compliance with 

the Federal securities laws, is essential 

to our mission of protecting investors 

and our securities markets.785 Indeed, 

the prompt production of records to the 

Commission is central to our mission of 

protecting investors, and is imperative 

to an effective and efficient examination 

program.786

In connection with the proposed 

review and approval requirement, we 

also proposed to require investment 

advisers to maintain a copy of all 

written approvals of advertisements by 

designated employees.787 As we are not 

adopting the proposed pre-use approval 

requirement, we are also not adopting 

this associated recordkeeping 

requirement. 

H. Amendments to Form ADV 

We are adopting, largely as proposed, 

amendments to Item 5 of Form ADV 

Part 1A to improve information 

available to the Commission and the 

public about advisers’ marketing 

practices. Item 5 currently requires an 

adviser to provide information about its 

advisory business.788 We proposed to 

add a subsection L (‘‘Marketing 

Activities’’) to require information about 

an adviser’s use in its advertisements of 

performance results, testimonials, 

endorsements, third-party ratings, and 

references to its specific investment 

advice. 

Several commenters supported the 

proposed additions to Form ADV,789

while others questioned their 

usefulness.790 Some commenters 

suggested removing the question 

regarding whether an adviser’s 

performance results were verified, 

arguing that it could disadvantage 

smaller advisers or could provide 

investors with a false assurance of 

accuracy.791 Other commenters 

suggested that we include questions 

about an adviser’s use of other types of 

performance, such as predecessor 

performance,792 or specific types of 

hypothetical performance.793 One 

commenter opposed including 

questions regarding the amount or range 

of compensation paid for testimonials, 

endorsements, or third-party ratings, 

arguing that this could be commercially 

sensitive information.794 Others 

suggested technical improvements to 

the proposed section. For example, one 

commenter requested that we clarify 

how frequently advisers must update 

responses to Item 5.L.795 Another 

commenter requested that we define 

advertisement and other relevant terms 


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796See Pickard Djinis Comment Letter. 

797See Instruction 4 to Form ADV: General 

Instructions (‘‘When am I required to update my 

Form ADV?’’). 

798The question will exclude testimonials and 

endorsements given by certain affiliated persons of 

the adviser that satisfy rule 206(4)–1(b)(4)(ii). 

799See JG Advisory Comment Letter; CFA 

Institute Comment Letter. 

800This question will appear in Item 5.L(2), but 

had been proposed as Item 5.L(4). 

801See SIFMA AMG Comment Letter I. 

802See, e.g., CFA Institute Comment Letter; NRS 

Comment Letter. 

803See supra section II.F. 

804See final rule 204–2(a)(11)(i)(A). 

805See final rule 204–2(a)(11)(i)(A)(1). 

806See final rule 204–2(a)(11)(i)(A)(2). 

807See final rule 204–2(a)(11)(i)(A) and (15)(i). 

808See JG Advisory Comment Letter; NAPFA 

Comment Letter; FPA Comment Letter. 

809See also NRS Comment Letter (stating that 

‘‘most advisers have developed procedures 

requiring the retention of all written 

communications, so that individuals within the 

firm do not have the discretion to determine 

whether or not a particular communication is 

required under rule 204–2(a)(7).’’). As proposed, we 

are not changing the requirement that advisers keep 

a record of communications other than 

advertisements (e.g., notices, circulars, newspaper 

articles, investment letters, and bulletins) that the 

investment adviser disseminates, directly or 

indirectly, to ten or more persons. 

810See JG Advisory Comment Letter. 

811Final rule 204–2(e)(3)(i). This provision has 

not been amended from the current rule. 

812See final rule 204–2(g)(2)(ii). This provision 

has not been amended from the current rule. 

813See Amendments to the Timing Requirements 

for Filing Reports on Form N–PORT, Release No. 

of Item 5.L in the Form ADV 

Glossary.796

After considering the comments, we 

are adopting new subsection L to Item 

5 of Form ADV with slight 

modifications to the ordering and 

content of the subsection versus the 

proposal. We are also amending the 

Form ADV Glossary to incorporate the 

final rule’s definitions for 

‘‘advertisement,’’ ‘‘endorsement,’’ 

‘‘hypothetical performance,’’ 

‘‘testimonial,’’ ‘‘third-party rating,’’ and 

‘‘predecessor performance.’’ Because 

new subsection L is included under 

Item 5 of Form ADV, advisers will be 

required to update responses to these 

questions in their annual updating 

amendment only.797 We continue to 

believe that this new information will 

be useful for staff in reviewing an 

adviser’s compliance with the final rule, 

including the restrictions and 

conditions on advisers’ use in 

advertisements of performance 

presentations and third-party 

statements. 

First, we are combining several 

proposed questions into Item 5.L(1), 

which will require an adviser to state 

whether any of its advertisements 

include performance results, a reference 

to specific investment advice, 

testimonials, endorsements, or thirdparty ratings.798 Unlike under the 

proposal, this item will require an 

adviser to address separately whether its 

advertisements include testimonials, 

endorsements, and third-party ratings. 

We believe that requiring advisers to 

address each separately will provide 

more specific and useful information to 

our staff regarding whether an adviser 

engages in these marketing practices. 

We are not including the proposed 

related question that would have asked 

whether the performance results in Item 

5.L(1) were reviewed or verified, as 

proposed. We agree with commenters 

that ‘‘verification’’ may inappropriately 

suggest an assurance of accuracy to 

investors, and disadvantage smaller 

advisers that may not obtain third-party 

reviews of their performance results.799

As proposed, we are requiring an 

adviser to state whether the adviser pays 

or otherwise provides cash or non-cash 

compensation, directly or indirectly, in 

connection with the use of testimonials, 

endorsements, or third-party ratings.800

This question will only require ‘yes’ or 

‘no’ responses, and will not require 

additional information about the 

amount or range of compensation 

provided to avoid the disclosure of 

potentially sensitive information as 

suggested by one commenter.801

Third, unlike under our proposal, we 

are adding items requiring an adviser to 

state whether any of its advertisements 

include hypothetical performance and 

predecessor performance, respectively. 

We agree with commenters’ suggestions 

that this information could be useful for 

our staff preparing for examinations, 

especially considering that hypothetical 

performance can pose a heightened risk 

of misleading investors.802 Additionally, 

as explained above, the final rule 

specifically addresses when advisers 

can include predecessor performance in 

advertisements.803 Responses regarding 

predecessor performance will enable 

our examination staff to better assess 

compliance with this new provision of 

the rule. 

I. Recordkeeping 

We are adopting amendments to the 

books and records rule, largely as 

proposed, to reflect the final rule and to 

help further the Commission’s 

inspection and enforcement capabilities. 

Investment advisers must make and 

keep records of all advertisements they 

disseminate, and certain alternative 

methods for complying with this 

provision are available for oral 

advertisements, including oral 

testimonials and oral endorsements.804

If an adviser provides an advertisement 

orally, the adviser may, instead of 

recording and retaining the 

advertisement, retain a copy of any 

written or recorded materials used by 

the adviser in connection with the oral 

advertisement.805 If an adviser’s 

advertisement includes a compensated 

oral testimonial or endorsement, the 

adviser may, instead of recording and 

retaining the advertisement, make and 

keep a record of the disclosures 

provided to investors.806 Further, if an 

adviser’s disclosures with respect to a 

testimonial or endorsement are not 

included in the advertisement, then the 

adviser must retain copies of such 

disclosures provided to investors.807

Commenters generally disagreed with 

this expansion of the books and records 

rule, which currently only requires 

advisers to retain advertisements sent to 

ten or more persons. According to 

commenters, advisory firms of all sizes 

would face compliance challenges, 

especially smaller advisers, if required 

to maintain all advertisements.808 We 

believe, however, that this change is 

necessary to conform the books and 

records rule to the definition of 

advertisement and is designed to ensure 

advisers comply with the requirements 

in the final rule.809 Our decision to 

narrow the proposed definition of 

advertisement by excluding one-on-one 

communications from the first prong of 

the definition (other than most 

communications that include 

hypothetical performance) will lessen 

any burden imposed by the associated 

recordkeeping obligations. 

One commenter asked us to clarify 

that electronic mail (‘‘email’’) archives 

are an acceptable method of maintaining 

records of advertisements that are 

disseminated to investors, and we 

agree.810 The final rule does not 

prescribe or prohibit any particular 

method of maintaining records. Rather, 

it requires the adviser to maintain and 

preserve these records ‘‘in an easily 

accessible place for a period of not less 

than five years, the first two years in an 

appropriate office of the investment 

adviser, from the end of the fiscal year 

during which the investment adviser 

last published or otherwise 

disseminated, directly or indirectly, the 

. . . advertisement.’’ 811 We believe it 

would be permissible for an adviser to 

store records using email archives 

(including in cloud storage or with a 

third-party vendor), provided that the 

adviser can promptly produce records 

in accordance with the recordkeeping 

rule 812 and statements of the 

Commission.813


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IC–33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 

2019)] (interim final rule), at n.44. See also JG 

Advisory Comment Letter (suggesting that the 

Commission clarify that email archives are an 

acceptable method of recordkeeping in certain 

contexts). 

814See current rule 204–2(a)(7)(iv). 

815See final rule 204–2(a)(7)(iv). 

816See current rule 204–2(a)(16). 

817See final rule 204–2(a)(16). See also 

Recordkeeping by Investment Advisers, Release No. 

IA–1135 (Aug. 17, 1988) [53 FR 32033 (Aug. 23, 

1988)] (describing as ‘‘supporting records’’ the 

documents necessary to form the basis for 

performance information in advertisements that are 

required under rule 204–2(a)(16)). 

818See final rule 206(4)–1(d)(6), which will 

prohibit hypothetical performance in an 

advertisement except under certain conditions, 

including a requirement that the investment adviser 

provides (or offers to provide promptly to a 

recipient that is a private fund investor) sufficient 

information to enable the intended audience to 

understand the risks and limitations of using such 

hypothetical performance in making investment 

decisions. Any such supplemental information that 

is required by final rule 206(4)–1 to be a part of the 

advertisement is subject to the books and records 

rule. See final rule 204–2(a)(16). 

819See proposed rule 204–2(a)(7)(iv). See also 

2019 Proposing Release, supra footnote 7, at 

sections II.A.6. and II.C. (requesting comment about 

whether to amend the books and records rule to 

address the substantiation of performance results 

from a predecessor firm and whether the 

Commission should amend the rule to address 

specifically other provisions of the proposed 

advertising rule). 

820See SIFMA AMG Comment Letter II. 

821See supra section I.F. 

822See final rule 204–2(a)(19). See also final rule 

206(4)–1(d)(6) and (e)(10)(ii)(B). 

823See proposed rule 204–2(a)(11)(iii). 

824See, e.g., NRS Comment Letter. 

825See final rule 204–2(a)(15)(ii). 

826See final rule 206(4)–1(b)(2)(ii). 

827Advisers are already required to retain the 

written agreement pursuant to current rule 204– 

2(a)(10). 

The current recordkeeping rule 

requires advisers to retain originals of 

all written communications received 

and copies sent by the adviser relating 

to the performance or rate of return of 

any or all managed accounts or 

securities recommendations.814 As 

proposed, the final rule will amend the 

current rule to also require advisers to 

maintain written communications 

relating to the performance or rate of 

return of any portfolios (as defined in 

the final marketing rule).815

The current recordkeeping rule 

requires advisers to retain all accounts, 

books, internal working papers, and 

other documents necessary to form the 

basis for or demonstrate the calculation 

of the performance or rate of return of 

any or all managed accounts or 

securities recommendations in any 

advertisement.816 As proposed, the final 

rule will amend the current rule to also 

require advisers to maintain accounts, 

books, internal working papers, and 

other documents necessary to form the 

basis for or demonstrate the calculation 

of the performance or rate of return of 

any portfolios (as defined in the final 

marketing rule).817 In addition, the 

supporting records of investment 

advisers that display hypothetical 

performance must include copies of all 

information provided or offered 

pursuant to the hypothetical 

performance provisions of the final 

rule.818 These changes are designed to 

help to facilitate the Commission’s 

inspection and enforcement capabilities. 

In a change from the proposal, the 

final rule will require advisers to 

maintain documentation of 

communications relating to predecessor 

performance.819 This change 

complements the predecessor 

performance provisions of the final rule 

and will help ensure that advertising 

advisers retain appropriate 

documentation to substantiate displays 

of predecessor performance. One 

commenter noted that advisers often 

have difficulty complying with the 

books and records requirements in 

connection with predecessor 

performance.820 For the reasons 

discussed above, we decline to provide 

additional flexibility.821

In a change from the proposal, we will 

require advisers to make and keep a 

record of who the ‘‘intended audience’’ 

is pursuant to the hypothetical 

performance and model fee provisions 

of the final marketing rule.822 Our 

examination staff may choose to review 

the adviser’s policies and procedures 

(for displaying hypothetical 

performance) against the records 

retained in connection with this new 

recordkeeping provision when 

determining whether the adviser 

satisfied the hypothetical performance 

policies and procedures condition. Also, 

we believe this additional requirement 

will assist our examination staff in 

confirming that advisers are 

appropriately considering the target 

audience when preparing and 

disseminating net performance and 

hypothetical performance. 

We proposed to require investment 

advisers to maintain a copy of all 

written approvals of advertisements by 

designated employees in order to track 

a corresponding proposed provision of 

the advertising rule relating to a review 

and approval process.823 Since we are 

not adopting the provision of the 

proposed advertising rule relating to 

review and approval, we are not 

adopting the corresponding proposed 

recordkeeping requirement. As 

discussed above, we are persuaded by 

commenters who asserted that an 

adviser’s own policies and procedures 

would provide an effective compliance 

mechanism.824

The combination of the current 

solicitation rule and current advertising 

rule into a single marketing rule 

resulted in additional changes to the 

books and records rule. We are 

adopting, as proposed, changes to the 

books and records rule in order to 

correspond to the marketing rule’s 

provisions that address testimonials and 

endorsements. The rule will require 

investment advisers to make and keep 

any communication or other document 

related to the investment adviser’s 

determination that it has a reasonable 

basis for believing that a testimonial or 

endorsement complies with rule 206(4)– 

1 and that a third-party rating complies 

with rule 206(4)–1(c)(1).825 We are not 

adopting amendments to the books and 

records rule that would specifically 

reference the adviser’s obligation to 

retain the written agreements with 

promoters 826 because such a provision 

would be duplicative of the current 

books and records rule.827

We did not receive any comments on 

the proposed amendments to the 

recordkeeping rule provisions that 

corresponded to the proposed 

amendments to the solicitation rule. For 

the reasons discussed in the proposal 

regarding amendments to the 

solicitation rule, we are retaining the 

current recordkeeping rule’s 

requirement for investment advisers to 

keep a record of the disclosures 

delivered to investors, which now apply 

to testimonials, endorsements, and 

third-party ratings. However, we are 

adjusting the wording to correspond to 

changes to the final marketing rule that 

permit either the investment adviser or 

the promoter to provide the disclosure. 

Further, in a change from the current 

solicitation rule, the final marketing rule 

will not require a promoter to provide 

an investor with the adviser’s brochure. 

Accordingly, as proposed, we will 

remove the corresponding books and 

records requirement as no longer 

relevant or necessary. 

As discussed above, in a change from 

the proposed amendments to the 

solicitation rule, the final rule contains 

a partial exemption (from the disclosure 

requirements associated with 

testimonials and endorsements in the 

final rule) for an adviser’s affiliated 

personnel. The amended recordkeeping 

rule will now contain a corresponding 

requirement for advisers that rely on the 

exemption to keep a record of the names 

of all affiliated personnel and document 

their affiliates’ status at the time the 


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828See final rule 204–2(a)(15)(iii). 

829See final rule 204–2(a)(11)(ii). 

830See, e.g., Blackrock Comment Letter; AIC 

Comment Letter. 

831The order granting exemptive relief under rule 

206(4)–3 is also terminated. See In the Matter of 

Blackrock, Investment Advisers Release Nos. 2971 

(Jan. 4, 2010) [75 FR 1421 (Jan. 11, 2010)] 

(application) and 2988 (Feb. 26, 2010) (order) 

(stating that ‘‘the Applicant will rely on the Order 

only for so long as the Cash Solicitation Rule in 

effect as of the date of the Order is operative.’’). 

832A list of the letters to be withdrawn will be 

available on the Commission’s website. 

833 IAA Comment Letter; Mercer Comment Letter. 

834See, e.g., SIFMA AMG Comment Letter II; 

Mercer Comment Letter; Stansberry Comment 

Letter. 

835See also, Stansberry Comment Letter. 

836See final rule 206(4)–1(e)(4). 

837We believe that the need for this position will 

likely be temporary since the events covered by 

these letters, over time, will fall outside the ten-year 

lookback period for purposes of disqualification 

under the rule. 

838See FPA Comment Letter; MFA/AIMA 

Comment Letter I. 

839See MFA/AIMA Comment Letter I. 

840See Form ADV General Instruction 4. 

841 5 U.S.C. 801 et seq. 

investment adviser disseminates the 

testimonial or endorsement.828

Finally, we are adopting, as proposed, 

the requirement that an adviser retain a 

copy of any questionnaire or survey 

used in the preparation of a third-party 

rating included or appearing in any 

advertisement.829 Commenters 

expressed concerns about not being able 

to obtain a copy of the questionnaire or 

survey.830 As discussed above, we 

recognize this concern and the rule will 

require an adviser to retain a copy of 

this material only in the event the 

adviser obtains a copy of the 

questionnaire or survey (i.e., an adviser 

would not be required to obtain a copy 

of the questionnaire or survey in order 

to comply with rule 206(4)–1 or rule 

204–2). 

J. Existing Staff No-Action Letters 

Staff in the Division of Investment 

Management reviewed certain of our 

staff’s no-action letters that addresses 

the application of the advertising and 

solicitation rules to determine whether 

any such letters should be withdrawn in 

connection with the adoption of the 

marketing rule. Because we are 

rescinding the solicitation rule, the staff 

no-action letters that address that rule 

will be nullified.831 Additionally, 

pursuant to the staff’s review, the staff 

will be withdrawing the staff’s 

remaining no-action letters and other 

staff guidance, or portions thereof, as of 

the compliance date of the final rules.832

A few commenters supported this 

approach, suggesting that the final rule 

should either supersede or incorporate 

every letter.833 Other commenters 

requested that certain no-action letters 

not be withdrawn that were issued to 

solicitors who would otherwise be 

subject to the rule’s disqualification 

provisions.834 These commenters 

alternatively requested that the 

Commission grandfather such 

solicitation arrangements if these letters 

are withdrawn. 

Based on the staff’s review, we 

understand that some solicitors may 

continue to conduct solicitation activity 

consistent with the conditions stated in 

certain of the solicitor disqualification 

letters identified below.835 The majority 

of these letters, however, pertain to 

events that occurred more than ten years 

prior to the effective date of the 

marketing rule and thus would not be 

disqualifying events under the 

marketing rule.836 The nullification of 

these solicitation disqualification letters 

will not have an impact on the relevant 

solicitor’s eligibility under the rule. For 

the minority of the solicitor 

disqualification letters that involve 

events that occurred within the rule’s 

ten-year lookback period, however, 

nullification of these letters could 

trigger disqualification under the 

marketing rule for that underlying 

event. To avoid this result, we 

understand that the staff will take a noaction position with respect to the 

events in those letters to prevent those 

solicitors from being deemed 

disqualified under the marketing rule. 

This position is designed primarily to 

assist the phase-out of these letters as of 

the compliance date of the final rule.837

K. Transition Period and Compliance 

Date 

The final rule will provide an 

eighteen-month transition period 

between the effective date of the rule 

and the compliance date. While we had 

proposed a one-year transition period, 

two commenters requested a longer 

transition period to prepare for the new 

rule’s requirements.838 One of these 

commenters argued that a two-year 

transition period would be more 

appropriate given the compliance 

burden of implementing the proposed 

review and approval requirement.839 We 

did not adopt the proposed pre-review 

and approval requirement; nevertheless, 

we appreciate commenters’ concerns. 

Accordingly, the compliance date will 

be eighteen months following the 

effective date of the rules. Any 

advertisements disseminated on or after 

the compliance date by advisers 

registered or required to be registered 

with the Commission would be subject 

to the new marketing rule. 

The compliance date for the amended 

recordkeeping rule will also provide an 

eighteen-month transition date from the 

effective date of the rule. Advisers filing 

Form ADV after a similar eighteenmonth transition period from the 

effective date of the rule will be 

required to complete the amended form. 

Importantly, Form ADV does not require 

an adviser to update responses to Item 

5 promptly by filing an other-thanannual amendment, and if an adviser 

submits an other-than-annual 

amendment, the adviser is not required 

to update its response to Item 5 even if 

the response has become inaccurate.840

Therefore, each adviser is only 

responsible for filing an amended form 

that includes responses to the amended 

questions in Item 5 in its next annual 

updating amendment that is filed after 

the eighteen-month transition period. 

L. Other Matters 

Pursuant to the Congressional Review 

Act,841 the Office of Information and 

Regulatory Affairs has designated this 

rule a ‘‘major rule’’ as defined by 5 

U.S.C. 804(2). If any of the provisions of 

these rules, or the application thereof to 

any person or circumstance, is held to 

be invalid, such invalidity shall not 

affect other provisions or application of 

such provisions to other persons or 

circumstances that can be given effect 

without the invalid provision or 

application. 

III. Economic Analysis 

A. Introduction 

We are mindful of the costs imposed 

by, and the benefits obtained from, our 

rules. Whenever we engage in 

rulemaking and are required to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, section 202(c) of the Advisers 

Act requires the Commission to 

consider, in addition to the protection of 

investors, whether the action would 

promote efficiency, competition, and 

capital formation. The following 

analysis considers, in detail, the 

potential economic effects that may 

result from the final rule, including the 

benefits and costs to market participants 

as well as the broader implications of 

the final rule for efficiency, competition, 

and capital formation. Where possible, 

the Commission quantifies the likely 

economic effects of the final rule; 

however, the Commission is unable to 

quantify certain economic effects 

because it lacks the information 

necessary to provide estimates or 

ranges. In some cases, quantification is 

particularly challenging due to the 

number of assumptions that would be 


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required to forecast how investment 

advisers would respond to the new 

conditions of the final rule, and how 

those responses would in turn affect the 

broader market for investment advice 

and the investors’ participation in this 

market. Nevertheless, as described more 

fully below, the Commission is 

providing both a qualitative assessment 

and, where feasible, a quantified 

estimate of the economic effects. 

In large part, the scope of these costs 

and benefits is determined by the scope 

of the rule’s definition of advertisement. 

The final rule’s definition includes 

many of the types of communications 

subject to the current advertising rule. 

The final rule, however, will expressly 

apply the protections of the rule to 

investors in private funds, and advisers 

will now incur costs related to these 

communications, to the extent that their 

current practices differ from the final 

rule. In addition, the definition’s scope 

has been expanded to include 

communications made by promoters, 

including cash-compensated promoters, 

who were previously subject to the cash 

solicitation rule, and non-cashcompensated promoters who were not. 

Some of these affected promoters whose 

communications will be newly defined 

as advertisements may also be registered 

broker-dealers whose communications 

may be subject to other regulatory 

requirements governing 

communications and advertisements, 

including those under the Exchange 

Act, the rules promulgated thereunder 

(including Regulation BI), and FINRA 

rules (including FINRA rule 2210). The 

final rule’s application to promoters that 

are registered broker-dealers relating to 

endorsements to private fund investors 

may create some overlap in regulation to 

the extent regulatory requirements 

under the Exchange Act and FINRA 

rules apply to their promotional 

activities. This may create burdens on 

these promoters to the extent their 

compliance with these other regulatory 

requirements does not fully satisfy the 

final rule. However, both the costs and 

benefits of the testimonial and 

endorsement requirements will be 

mitigated by the exclusions from the 

endorsement requirements that will 

apply to these registered broker-dealers. 

Other aspects of the final rule will 

also yield costs and benefits, such as the 

final rule’s general prohibitions on 

certain marketing practices. The impact 

of these changes are generally limited to 

the extent that communications are 

subject to similar restrictions under the 

current advertising rule, the current 

solicitation rule, and the general antifraud provisions of the securities laws, 

and the extent to which the final rule’s 

prohibitions conform to current market 

practices. The impact is more 

pronounced with respect to 

communications newly subject to the 

definition of an advertisement and not 

previously subject to the solicitation 

rule—particularly to communications 

by solicitors who are not cashcompensated. In addition, the rules and 

rescission of existing no-action letters 

may increase certainty because advisers 

who choose to advertise will be able to 

follow the requirements of the final 

rules rather than various no-action 

letters, which could ultimately reduce 

compliance costs. Conversely, to the 

extent that the specificity of the rules 

prompts some advisers to devote greater 

resources to ensure compliance 

obligations under the final rules, the 

requirements of the rules may impose 

greater costs on such funds and 

advisers. Changes in costs of 

compliance for advisers ultimately 

could affect investors to the extent that 

any changes in costs would be passed 

down to them in the form of changed 

fund operating expenses or higher 

advisory fees. 

In addition, the rule will (i) permit 

investment advisers to use certain 

features in an advertisement, such as 

testimonials and endorsements, subject 

to certain conditions, such as disclosing 

information that would help investors 

evaluate the advertisement, and (ii) 

prohibit third-party ratings and 

investment adviser performance in 

advertisements unless they comply with 

certain conditions. The ability to use 

testimonials and endorsements will 

likely have a less pronounced impact on 

advisers that are currently complying 

with the solicitation rule because this 

aspect of the marketing rule is drawn 

from the current solicitation rule. The 

impact of restrictions in the marketing 

rule related to the use of performance 

advertising is likely similar on advisers 

currently subject to the advertising or 

solicitation rule because this aspect of 

the final rule permits certain activity 

that is not permissible under either 

current rule. If an adviser that is subject 

to the current advertising rule is 

implementing practices similar to those 

of the recipients of staff letters with 

respect to performance advertising, the 

impact of this new aspect of the final 

rule may be less pronounced for these 

advisers as compared to the impact on 

other advisers to the extent that there 

are some similarities between the final 

rule and the staff letters. 

The Commission is also adopting 

amendments to Form ADV that are 

designed to provide additional 

information regarding advisers’ 

marketing practices, and amendments to 

the Advisers Act books and records rule 

to correspond to the features of the 

marketing rule. The final rule reflects 

market developments since 1961 and 

1979, when rules 206(4)–1 and 206(4)– 

3, respectively, were adopted, as well as 

practices addressed in staff no-action 

letters. These market developments 

include advances in communication 

technology and marketing practices that 

did not exist at the time the rules were 

adopted and may fall outside of the 

scope of the current rules. 

B. Broad Economic Considerations 

While we discuss investment 

advisers’ many diverse marketing 

methods and practices in detail later, 

here we discuss the broad economic 

considerations that frame our economic 

analysis of the final rule and describe 

the relevant structural features of the 

market for investment advice and its 

relationship to marketing of advisory 

services and private funds. Key to this 

framework is the problem that investors 

face when searching for an investment 

adviser; specifically the lack of 

information that investors may have 

about the ability and potential fit of an 

investment adviser for the investor’s 

preferences. By setting up this economic 

framework, we can see how the 

characteristics of the market for 

investment advice and its participants 

can influence the costs and benefits of 

the final rule and its impact on 

efficiency, competition, and capital 

formation. 

Information Usefulness 

The usefulness of the information in 

investment adviser advertisements is an 

important factor in determining how 

investors decide with which investment 

advisers to engage. For the purposes of 

the final rule, we use the term ‘‘ability’’ 

to refer to the usefulness of advice an 

investment adviser provides. The 

‘‘potential fit’’ of an investment adviser 

refers to attributes that investors may 

have specific preferences for, such as 

communication style, investment style, 

or risk preference. For example, some 

investors would prefer an investment 

adviser that does not proactively 

provide advice or suggest investments, 

while others might prefer a more active 

communication and management style. 

While the effectiveness and 

usefulness of an investment adviser’s 

advertisements can have direct effects 

on the quality of the matches that 

investors make with investment 

advisers—in terms of both fit and better 

returns from the investment—there may 

be important indirect effects as well. If 

the final rule provides additional 

methods for investment advisers to 


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842See NASAA Comment Letter. 

843Luis Rayo and Ilya Segal, Optimal Information 

Disclosure, 118 J. POL. ECON. 949 (2010); Emir 

Kamenica and Matthew Gentzkow, Bayesian 

Persuasion, 101 a.m. ECON. REV. 2590 (2011); Pak 

Hung Au and King King Li, Bayesian Persuasion 

and Reciprocity: Theory and Experiment, SSRN 

(June 5, 2018), available at https://ssrn.com/ 

abstract=3191203; Jacob Glazer and Ariel 

Rubinstein, On Optimal Rules of Persuasion, 72 

ECONOMETRICA 1715 (2004) (‘‘Glazer’’). 

844See id. for Segal and Rayo 2010, Kamenica and 

Gentzkow 2011, Au Li 2018. 

845See Glazer, supra footnote 843. 846U.S. Securities and Exchange Commission, 

Study Regarding Financial Literacy Among 

Investors As Required by Section 917 of the DoddFrank Wall Street Reform and Consumer Protection 

Act (Aug. 2012), available at https://www.sec.gov/ 

news/studies/2012/917-financial-literacy-studypart1.pdf. (‘‘Financial Literacy Study’’). 847See id. Although the report does not link 

American investors specifically to those who would 

become clients of SEC-registered investment 

advisers or investors in private funds, we believe 

that the study may be indicative of the level of 

financial literacy for prospective investors. 848The financial literacy studies in the Library of 

Congress Report (2011) fall into three categories, 

depending on the population or special topic under 

investigation. Most studies survey the general 

population. For example, the FINRA Investor 

Education Foundation’s 2009 National Financial 

Capability study, which was included in the Library 

of Congress Report, consisted of a national sample 

of 1488 respondents. Other research included in the 

report focus on particular subgroups, such as 

women, or specific age groups or minority groups. 

A third type of study deals specifically with 

investment fraud. These studies do not differentiate 

between qualified purchasers, knowledgeable 

employees, and other investors. Results from 

studies conducted on general populations may not 

apply to private fund investors. 

credibly and truthfully advertise their 

ability and potential fit with investors, 

investment advisers may have a greater 

marginal incentive to invest more in the 

quality of their services, because 

advisers would have additional methods 

to communicate their ability and 

potential fit through advertisements. 

Additionally, because investors might 

be able to better observe the relative 

qualities of competing investment 

advisers, the final rule may also 

enhance competition among investment 

advisers. In summary, to the extent that 

the final rule improves the effectiveness 

and usefulness of investment adviser 

advertisements, the final rule could also 

have a secondary effect of increasing 

competition among investment advisers, 

and encourage investment in the quality 

of services. 

Information Access 

Investors generally have access to a 

variety of sources of information on the 

ability and potential fit of an investment 

adviser. Advertisements, word of mouth 

referrals, and independent research are 

all ways in which investors acquire 

information about investment advisers 

as they search for them. During this 

search, investors trade off the benefits of 

finding a better investment adviser (in 

terms of ability and potential fit) against 

the costs of searching for and obtaining 

information about one. If the cost of 

searching is too high, investors may 

contract with lower quality investment 

advisers on average, because they 

cannot spend the resources to conduct 

a search that would yield an investment 

adviser with higher ability or better fit, 

or they might not be able to evaluate the 

quality of the investment adviser they 

have found. Thus, higher search costs 

can result in inefficiencies because the 

same expected quality of match requires 

an investor to incur higher search costs. 

Similarly, for a fixed amount of 

spending on a search, an investor is less 

able to find information about 

investment advisers, and finds a lower 

expected quality of match. 

Marketing can potentially mitigate 

inefficiencies associated with the costs 

of searching for good products or 

suitable services. To the extent that 

marketing provides accurate and useful 

information to investors about 

investment advisers at little or no cost 

to investors, marketing can reduce the 

search costs that investors bear to 

acquire information and improve the 

ability of investors to identify high 

quality investment advisers. Investors 

have a variety of preferences regarding 

investment adviser characteristics such 

as investment strategies or 

communication styles. Marketing can 

help communicate information about an 

investment adviser’s ability, and that 

may aid an investor in selecting an 

investment adviser who is a good ‘‘fit’’ 

for the investor’s preferences. 

While marketing by or on behalf of 

investment advisers may reduce search 

costs for potential investors, investment 

advisers’ or promoters’ incentives may 

not necessarily be aligned with those of 

potential investors. Such a 

misalignment could undercut the 

potential gains to efficiency. For 

example, investment advisers have 

incentives to structure their 

advertisements to gain potential 

investors, regardless of whether their 

advertisements accurately reflect their 

ability and indicate whether they offer 

a potential fit with an investor’s 

preferences. One commenter suggested, 

for instance, that advisers may be 

incentivized to purchase positive 

testimonials or endorsements, or 

otherwise curate content.842

In addition, advertisements might 

make claims that are costly for investors 

to verify or are inherently unverifiable. 

For example, evaluating a claim that an 

investment adviser’s strategy generates 

‘‘alpha’’ or returns in excess of priced 

risk factors generally requires 

information about the strategy’s returns 

and permitted holdings, as well as a 

model that attributes returns to risk 

factors. While some investors may have 

ready access to these resources or 

information, other investors may not. In 

some cases, an investor may be unable 

to assess the plausibility of an 

investment adviser’s claims. An 

investment adviser might also state facts 

but omit the contextual details that an 

investor would need to properly 

evaluate these facts. 

Several economic models suggest that 

the ability to control or influence an 

investor’s access to information can 

hamper the investor’s ability to process 

information in an unbiased manner, 

even if the specific facts or information 

communicated to an investor are not 

false.843 For example, this type of 

control or influence on information can 

be as explicit as deletion or removal of 

unfavorable ratings or reviews,844 or as 

implicit as a reordering of the ratings or 

a suggestion of which ratings or reviews 

to read.845 Similarly, promoters may 

overstate the quality of the investment 

adviser they are promoting or their 

familiarity with the advisers’ services, 

or hide negative details that would have 

aided an investor when choosing an 

investment adviser or private fund, 

given promoters’ financial incentive to 

recommend the adviser to the investor. 

Information Evaluation 

There are considerable differences 

among investors and potential investors 

in their ability to process and evaluate 

information communicated by 

investment advisers. Many investors 

and prospective investors may lack the 

financial literacy needed to evaluate and 

interpret the types of financial 

information contained in investment 

adviser advertisements. In 2010, the 

Dodd-Frank Act required the 

Commission to study the financial 

literacy among retail investors, 

including methods and efforts that 

could increase financial literacy among 

investors.846 The Commission 

contracted with the Federal Research 

Division at the Library of Congress to 

conduct a review of the quantitative 

studies on the financial literacy of retail 

investors in the United States.847

According to the Library of Congress 

Report, studies show consistently that 

many American retail investors 848 lack 

important elements of financial literacy. 

For example, studies have found that 

many investors do not understand 

certain financial concepts, such as 

compound interest and inflation. 

Studies have also found that many 

investors do not understand other key 


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849See Financial Literacy Study, supra footnote 

846. 

850FINRA Investor Education Foundation, 

Investors in the United States (2016). 

851Annamaria Lusardi and Olivia S. Mitchell, 

The Economic Importance of Financial Literacy: 

Theory and Evidence, 52 J. ECON. LITERATURE 5 

(2014). 

852See Fiduciary Interpretation, supra footnote 

88, at 6–7. 

853See also section 17(a) of the Securities Act, 

section 10(b) of the Exchange Act and rule 10b–5 

thereunder, and rule 206(4)–8 under the Advisers 

Act. 

854See ICAA letter, supra footnote 95. 

855See Investment Adviser Association, SEC Staff 

No-Action Letter (Dec. 2, 2005) (not recommending 

enforcement action if in determining whether a 

third-party rating is a testimonial, the adviser 

considers the criteria used by the third party when 

formulating the rating and the significance to the 

ratings formulation of criteria related to client 

evaluations of the adviser); DALBAR, Inc., SEC Staff 

No-Action Letter (Mar. 24, 1998) (not 

recommending enforcement action if an adviser 

used references to third-party ratings that reflect 

client experiences, based on certain representations 

and certain disclosures made, both of which 

designed to ensure that the rating is developed in 

a fair and unbiased manner and that disclosures 

provide investors with sufficient context to make 

informed decisions). 

856See, e.g., National Examination Risk Alert, 

Office of Compliance, Inspections and 

Examinations (Jan. 4, 2012). 

857See Gallagher and Associates, Ltd., SEC Staff 

No-Action Letter (July 10, 1995) (where the staff 

reiterated its view that rule 206(4)–1 prohibits 

testimonials of any kind concerning the investment 

adviser); see also IM Guidance Update No. 2014– 

04, at n.12 and accompanying text, in which staff 

partially withdrew its Gallagher position. 

858See Interpretive Guidance on the Use of 

Company websites, Release No. IC–28351 (Aug. 1, 

2008); see also Guidance on the Testimonial Rule 

and Social Media, IM Guidance Update No. 2014– 

04, at n.19 and accompanying text. 

859See, e.g., Cambiar Investors, Inc., SEC Staff 

No-Action Letter (Aug. 28, 1997) (stating it would 

not recommend enforcement action when the 

adviser proposed to use partial client lists that do 

no more than identify certain clients of the adviser, 

the Commission staff stated its view that partial 

client lists would not be testimonials because they 

do not include statements of a client’s experience 

with, or endorsement of, an investment adviser); see 

also Denver Investment Advisors, Inc., SEC Staff 

No-Action Letter (July 30, 1993) (stating that partial 

client lists can be, but are not necessarily, 

considered false and misleading under 206(4)– 

1(a)(5)). 

860See New York Investors Group, Inc., SEC Staff 

No-Action Letter (Sept. 7, 1982) (stating that in the 

staff’s view an unbiased third-party article 

concerning an adviser’s performance is not a 

testimonial unless the content includes a statement 

of a customer’s experience with or endorsement of 

the adviser). 

financial concepts, such as 

diversification or the differences 

between stocks and bonds, and are not 

fully aware of investment costs and 

their impact on investment returns.849 A 

2016 FINRA survey found that 56 

percent of respondents correctly 

answered less than half of a set of 

financial literacy questions, and yet 65 

percent of respondents assessed their 

own knowledge about investing as high 

(between five and seven on a sevenpoint scale).850 Moreover, the general 

lack of financial literacy among some 

investors makes it difficult for those 

investors to evaluate claims about 

financial services made in 

advertisements, which increases the risk 

that such investors are unable to 

effectively use the information in 

advertisements to find an investment 

adviser that has high ability and is a 

good fit.851

C. Baseline 

1. Market for Investment Advisers for 

the Advertising Rule 

a. Current Regulation 

The current rule 206(4)–1 imposes 

four broadly drawn limitations on the 

content of advertisements that are 

‘‘directly or indirectly’’ published, 

circulated, or distributed by investment 

advisers. In addition to these specific 

prohibitions, the current rule prohibits 

any advertisement that contains any 

untrue statement of a material fact, or 

which is otherwise false or misleading. 

This prohibition operates more 

generally than the specific prohibitions 

to address advertisements that do not 

violate any of the specific prohibition 

but still may be fraudulent, deceptive, 

or manipulative and, accordingly, may 

risk misleading investors. 

For purposes of the advertising rule, 

the Commission currently defines 

‘‘advertisement’’ to be ‘‘any notice, 

circular, letter or written 

communication addressed to more than 

one person, or any notice or other 

announcement in any publication or by 

radio or television, which offers (1) any 

analysis, report, or publication 

concerning securities, or which is to be 

used in making any determination as to 

when to buy or sell any security, or 

which security to buy or sell, or (2) any 

graph, chart, formula, or other device to 

be used in making any determination as 

to when to buy or sell any security, or 

which security to buy or sell, or (3) any 

other investment advisory service with 

regard to securities.’’ 

Investment advisers owe a fiduciary 

duty under the Advisers Act, which is 

enforceable under the Act’s anti-fraud 

provisions in section 206.852 Section 

206 of the Advisers Act prohibits 

misstatements or misleading omissions 

of material facts and other fraudulent 

acts and practices in connection with 

the conduct of an investment advisory 

business.853

b. Market Practice 

In addition to section 206 and rule 

206(4)–1, investment advisers have 

considered staff no-action letters in their 

advertising practices. For example, the 

staff has issued no-action letters under 

rule 206(4)–1(b), stating that, in general, 

the staff would not view a written 

communication by an adviser to an 

existing client or investor about the 

performance of the securities in the 

investor’s account as an ‘‘offer’’ of 

investment advisory services but instead 

would view it as part of the adviser’s 

advisory services (unless the context in 

which the performance or past specific 

recommendations are provided suggests 

otherwise), and that the staff would not 

view communications by an adviser in 

response to an unsolicited request by an 

investor, prospective client, or 

consultant for specified information as 

an advertisement.854

The staff has also stated that it would 

not recommend enforcement action 

under section 206(4) and rule 206(4)–1 

on issues relating to third-party ratings 

and testimonials. Specifically, the staff 

has stated that it would not recommend 

enforcement action if certain 

circumstances were present regarding 

the use of ratings or testimonials, such 

as: (i) References to independent thirdparty ratings that are developed by 

relying significantly on client surveys or 

clients’ experiences more generally; 855

(ii) the use of ‘‘social plug-ins’’ such as 

the ‘‘like’’ feature on an investment 

adviser’s social media site; 856 and (iii) 

references regarding, for example, an 

adviser’s religious affiliation or moral 

character, trustworthiness, diligence or 

judgement, in addition to more typical 

testimonials that reference an adviser’s 

technical competence or performance 

track record.857 The Commission has 

also stated that an investment adviser 

should consider the application of rule 

206(4)–1, including the prohibition on 

testimonials, before including 

hyperlinks to third-party websites on its 

website or in its electronic 

communications.858 For example, staff 

has stated that it would not recommend 

enforcement action, under certain 

circumstances, when an adviser 

provided: (i) Full and partial client 

lists; 859 and (ii) references to unbiased 

third-party articles concerning the 

investment adviser’s performance.860

Staff no-action letters have also stated 

that the staff would not recommend 

enforcement action under rule 206(4)–1 

for references to specific investment 

advice in an advertisement, 

notwithstanding the rule’s general 

prohibition of the use of past specific 

recommendations. An adviser that acts 

consistently with a staff no-action letter 

may include past specific 

recommendations in an advertisement 


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861See, e.g., Scientific Market Analysis, SEC Staff 

No-Action Letter (Mar. 24, 1976) (the staff would 

not recommend enforcement action when an 

investment adviser offers a list of past specific 

recommendations, provided that the adviser offers 

to provide the list free of charge); and Kurtz Capital 

Management, SEC Staff No-Action Letter (Jan. 18, 

1988) (the staff would not recommend enforcement 

action relating to an adviser’s distribution of past 

specific recommendations contained in third-party 

reports, provided that the adviser sends only bonafide unbiased articles). 

862See The TCW Letter (not recommending 

enforcement action based on certain representations 

such as presenting best and worst-performing 

holdings on the same page with equal prominence; 

disclosing that the holdings identified do not 

represent all of the securities purchased, sold or 

recommended for the adviser’s clients and that past 

performance does not guarantee future results; and 

maintaining certain records, including, for example, 

evidence supporting the selection criteria used and 

supporting data necessary to demonstrate the 

calculation of the chart or list’s contribution 

analysis). 

863See Franklin Letter (not recommending 

enforcement action based on certain representations 

including that the adviser would disclose in the 

advertisement that the specific securities identified 

and described do not represent all of the securities 

purchased, sold, or recommended for advisory 

clients, and that the investor not assume that 

investments in the securities identified and 

discussed were or will be profitable); see also supra 

footnote 204 (citing Clover Letter, Stalker Letter, 

and Eberstadt Letter regarding untrue or misleading 

implications). 

864See, e.g., In the Matter of Van Kampen 

Investment Advisory Corp., Release No. IA–1819 

(Sept. 8, 1999) (settled order); In the Matter of 

Seaboard Investment Advisers, Inc., Release No. 

IA–1431 (Aug. 3, 1994) (settled order). 

865See, e.g., Clover Letter (not recommending 

enforcement action provided that certain 

disclosures about included performance results are 

made). Regarding mutual funds, our staff has stated 

that it would not recommend enforcement action if 

an advertisement included performance data from 

private accounts that are substantially similar in 

size and investment strategy to the fund in the 

fund’s prospectus or sales literature if the 

prospectuses or advertisements: (i) Disclose that the 

performance results are not those of the fund and 

should be considered a substitute for such 

performance; (ii) include the fund’s performance 

results if such results exist and; (iii) disclose all 

material differences between the institutional 

accounts and the fund. See Nicholas-Applegate 

Mutual Funds, SEC Staff No-Action Letter (Aug. 6, 

1996); GE Funds, SEC Staff No-Action Letter (Feb. 

7, 1997); ITT Hartford Mutual Funds, SEC Staff NoAction Letter (Feb. 7, 1997). 

866See Clover Letter (not recommending 

enforcement action provided that if an adviser 

compares performance to that of an index, it would 

disclose all material factors affecting the 

comparison) See also Investment Company 

Institute, SEC Staff No-Action Letter (May 5, 1988); 

Association for Investment Management and 

Research, SEC Staff No-Action Letter (Dec. 18, 

1996) (not recommending enforcement action 

provided that gross performance results may be 

provided to clients so long as this information is 

presented on a one-on-one basis or alongside net 

performance with appropriate disclosure.) See Also 

Securities Industry Association, SEC Staff NoAction Letter (Nov. 27, 1989) (not recommending 

enforcement action provided that an adviser that 

advertises historical net performance using a model 

fee makes certain disclosures). 

867See Clover Letter (stating staff’s view that an 

adviser’s advertisement that suggests or makes 

claims about the potential for profit without also 

disclosing the possibility of loss may be misleading 

for purposes of rule 206(4)–1(a)(5)). 

868See Horizon Letter; see also Great Lakes Letter 

(not recommending enforcement action if a 

successor adviser, composed of less than 100 

percent of the predecessor’s committee, used the 

preceding performance information in their 

calculation when there was a substantial 

identification of personnel, and noting that without 

substantial identification of personnel in such a 

committee, use of the data would be misleading 

even with appropriate disclosure). 

869See South State Bank Letter (the staff stated 

that it would not recommend enforcement action on 

representations including, for example, that the 

successor adviser would operate in the same 

manner and under the same brand name as the 

predecessor adviser). 

870 Global Investment Performance Standards 

(GIPS) for Firms (2020), Provision 1.A.11. (requiring 

the firm to ‘‘make every reasonable effort to provide 

a GIPS Composite Report to all Prospective Clients 

when they initially become Prospective Clients’’), 

and GIPS Standards Handbook for Firms (Nov. 

2020), Discussion of Provision 1.A.11. (stating that 

‘‘[i]t is up to the firm to establish policies and 

procedures for determining who is considered to be 

a prospective client. These include policies and 

procedures for determining when an interested 

party becomes a prospective client. An interested 

provided the recommendations were 

selected using performance-based or 

objective, non-performance-based 

criteria, and in either case, the adviser’s 

practices are consistent with a number 

of specific representations articulated in 

the no-action letters.861 For example, 

the staff stated that it would not 

recommend enforcement action if an 

adviser included in an advertisement a 

partial list of recommendations 

provided that, in general, the list: (i) 

Includes an equal number (at least five) 

of best and worst-performing holdings; 

(ii) takes into account consistently the 

weighting of each holding within the 

portfolio (or representative account) that 

contributed to the performance during 

the measurement period; (iii) is 

presented consistently from 

measurement period to measurement 

period; and (iv) discloses how to obtain 

the calculation methodology and an 

analysis showing every included 

holding’s contribution to the portfolio’s 

(or representative account’s) overall 

performance.862

The staff has also stated that it would 

not recommend enforcement action if an 

adviser includes in an advertisement a 

partial list of recommendations selected 

using objective, non-performance-based 

criteria, provided that, in general: (i) 

The same selection criteria are used 

consistently from measurement period 

to measurement period; (ii) there is no 

discussion of the profits or losses 

(realized or unrealized) of any specific 

securities; and (iii) the adviser 

maintains certain records, including, for 

example, records that evidence a 

complete list of securities recommended 

by the adviser in the preceding year for 

the specific investment category covered 

by the advertisement and the criteria 

used to select the specific securities 

listed in the advertisement.863

Finally, the Commission has brought 

enforcement actions related to the 

presentation of performance results in 

advertisements. For example, we have 

alleged in settled enforcement actions 

that the performance information that 

certain advisers included in their 

advertisements failed to disclose all 

material facts, and thus created 

unwarranted implications or 

inferences.864 Our staff has also 

expressed its views as to the types of 

disclosures that would be necessary in 

order to make the presentation of certain 

performance information in 

advertisements not misleading.865 Our 

staff has taken the position that the 

failure to disclose how material market 

conditions, advisory fee expenses, 

brokerage commissions, and the 

reinvestment of dividends affect the 

performance results would be 

misleading.866 Our staff has also 

considered materially misleading the 

suggestion of potential profits without 

disclosure of the possibility of losses.867

Our staff has taken the position that 

prior performance results of accounts 

managed by a predecessor entity may be 

used so long as: (i) The person 

responsible for such results is still the 

adviser; (ii) the prior account and the 

present account are similar enough that 

the performance results would provide 

relevant information; (iii) all prior 

accounts that are being managed in a 

substantially similar fashion to the 

present account are being factored into 

the calculation; and (iv) the 

advertisement includes all relevant 

disclosures.868 More recently, our staff 

has taken the position that, based on 

certain representations, a surviving 

investment adviser following an internal 

restructuring may continue to use the 

performance track record of a 

predecessor advisory affiliate to the 

same extent as if the restructuring had 

not occurred.869

In addition, the Commission believes 

that many advisers currently prepare 

and present GIPS standard-compliant 

performance information, and also that 

many advisers currently prepare annual 

performance information for investors. 

The GIPS standards require advisers to 

provide certain reports to prospective 

clients at a specific time, and the 

standards provide guidance on how 

advisers can determine whether a 

potential investor qualifies as a 

‘‘prospective client.’’ 870


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party becomes a prospective client when two tests 

are met. First, the interested party must have 

expressed interest in a specific composite strategy 

or strategies. Second, the firm must have 

determined that the interested party qualifies to 

invest in the respective composite strategy’’). 

871 Id. See also In the Matter of LBS Capital 

Mgmt. Inc., Release No. IA–1644 (July 18, 1997) 

(settled order) (The Commission brought an 

enforcement action and stated its view that the 

marketing materials were misleading and that the 

Commission looks at ‘‘investment sophistication or 

acumen’’ of the recipients of an advertisement will 

look into the identity of the intended recipient of 

advertisement when determining if the results were 

misleading.). 

872See In the Matter of Market Timing Systems, 

Inc., et al., Release No. IA–2047 (Aug. 28, 2002) 

(settled order) (The Commission brought an 

enforcement action against, among others, a 

registered investment adviser, asserting that its 

advertising was misleading because it failed to 

disclose that performance results advertised were 

hypothetical and generated by the retroactive 

application of a model, and in other cases failed to 

disclose the relevant limitations inherent in 

hypothetical results and the reasons why actual 

results would differ); see also In the Matter of Leeb 

Investment Advisers, et al., Release No. IA–1545 

(Jan. 16, 1996) (settled order) (The Commission 

brought an enforcement action against, among 

others, a registered investment adviser, asserting 

that advertising mutual fund performance using a 

market-timing program based on backtested 

performance was misleading because the program 

changed during the measurement period and 

certain trading strategies were not available at the 

beginning of the measurement period.). See also In 

the Matter of Schield Mgmt. Co., et al., Release No. 

IA–1872 (May 31, 2000) (settled order) (The 

Commission brought an enforcement action against, 

among others, a registered investment adviser, 

asserting that advertisements presenting backtested 

results were misleading in violation of section 

206(2) and rule 206(4)–1 because, among other 

things, they failed to disclose or inadequately 

disclosed that the performance was backtested, and 

stating that labeling backtested returns 

‘‘hypothetical’’ did not fully convey the limitations 

of the performance.). 

873Rule 204–2(a)(16); See Great Lakes Letter (not 

recommending enforcement action and stating the 

staff’s view that the requirement in rule 204– 

2(a)(16) applies to a successor’s use of a 

predecessor’s performance data.) 

874Similarly, investment advisers registered with 

the Commission may also be registered with the 

National Futures Association and may be subject to 

additional compliance rules on sales practices and 

promotional material. See NFA Compliance Rules 

2–29 and 2–36. See also Municipal Securities 

Rulemaking Board rules G–21(a) and G–40. 

875From Form ADV: A ‘‘Large advisory firm’’ 

either: (a) Has regulatory assets under management 

of $100 million or more or (b) has regulatory assets 

under management of $90 million or more at the 

time of filing its most recent annual updating 

amendment and is registered with the SEC; a ‘‘midsized advisory firm’’ has regulatory assets under 

management of $25 million or more but less than 

$100 million and either: (a) Not required to be 

registered as an adviser with the state securities 

authority of the state where they maintain their 

principal office and place of business or (b) not 

subject to examination by the state securities 

authority of the state where they maintain their 

principal office and place of business. 

876Of the 13,724 RIAs, 8,795 (64 percent) report 

in Item 5.G.(2) of Form ADV that they provide 

portfolio management services for individuals and/ 

or small businesses. In addition, there are 

approximately 17,932 state-registered investment 

advisers. Approximately 14,851 state-registered 

investment advisers are retail facing (see Item 5.D. 

of Form ADV). 

877See Table 1. 

878We use the responses to Items 5(D)(a)(1), 

5(D)(a)(3), 5(D)(b)(1), and 5(D)(b)(3) of Part 1A of 

Form ADV. If at least one of these responses was 

filled out as greater than 0, the firm is considered 

as providing business to retail investors. Form ADV 

Part 1A. Of the 8,134 investment advisers serving 

individual clients, 356 are also registered as brokerdealers. By high net worth (HNW) individual, we 

are referring to an individual who is a ‘‘qualified 

client’’ as defined in rule 205–3 under the Advisers 

Act. Generally, this means a natural person with at 

least $1,000,000 in assets under the management of 

an adviser, or whose net worth exceeds $2,100,000 

(excluding the value of his or her primary 

residence). See rule 205–3(d)(1); Order Approving 

Adjustment for Inflation of the Dollar Amount Tests 

in Rule 205–3 under the Investment Advisers Act 

of 1940, Release No. IA–4421 (June 14, 2016). 

879The aggregate RAUM reported for these 

investment advisers that have retail investors 

includes both retail RAUM as well as any 

institutional RAUM also held at these advisers. 

Regarding the use of model 

performance results, the staff has taken 

the position that such results are 

misleading under rule 206(4)–1(a)(5) if 

the investment adviser does not make 

certain disclosures.871 The Commission 

has also taken the position that the use 

of backtested performance data may be 

misleading unless accompanied by 

disclosure detailing the inherent 

limitations of data derived from the 

retroactive application of a model 

developed with the benefit of 

hindsight.872 Moreover, staff have taken 

the position that the rule 204–2(a)(16) 

requirement to keep records of 

documents necessary to form the basis 

for performance data provided in 

advertisements also applies to a 

successor’s use of a predecessor’s 

performance data.873

Certain investment advisers that must 

comply with the final rule are also 

subject to other regulatory regimes that 

govern communications and 

advertisements. For example, 

investment advisers that are also 

registered as broker-dealers must 

comply with FINRA’s rules.874 FINRA 

rule 2210 governs broker-dealers’ 

communications with the public, 

including communications with retail 

and institutional investors, and provides 

standards for the content, approval, 

recordkeeping, and filing of 

communications with FINRA. In 

particular, FINRA’s rule 2210(d)(6) 

requires any retail communication or 

correspondence providing any 

testimonial concerning the investment 

advice or investment performance of a 

member or its products to prominently 

disclose: (i) The fact that the testimonial 

may not be representative of the 

experiences of other customers; (ii) the 

fact that the testimonial is no guarantee 

of future performance or success; and 

(iii) if more that $100 is paid for the 

testimonial, the fact that it is a paid 

testimonial. FINRA rule 2210(d)(6) also 

requires that if a testimonial in any type 

of communication concerns a technical 

aspect of investing, the person making 

the testimonial must have the 

knowledge and experience to form a 

valid opinion. Regulation BI also 

applies to testimonials or endorsements 

by promoters that are registered brokerdealers to the extent such testimonials 

or endorsements are recommendations 

to retail customers under that 

regulation. Additionally, 

communications to investors in private 

funds are subject to various statutory 

and regulatory anti-fraud provisions, 

such as rule 206(4)–8 under the 

Advisers Act, section 17(a) of the 

Securities Act, section 10(b) of the 

Exchange Act and rule 10b–5 

thereunder. 

c. Data on Investment Advisers 

Based on Form ADV filings, as of 

August 1, 2020, 13,724 investment 

advisers were registered with the 

Commission. Of these registered 

investment advisers (‘‘RIAs’’), 11,653 

reported that they were ‘‘large advisory 

firms,’’ with regulatory assets under 

management (‘‘RAUM’’) of at least $90 

million. 512 reported that they were 

‘‘mid-sized advisory firms,’’ with RAUM 

of between $25 million and $100 

million, and 1,561 did not report as 

either, which implies that they have 

regulatory assets under management of 

under $25 million.875

Form ADV disclosures show $97.05 

trillion in RAUM for all RIAs, with an 

average of $7.07 billion and a median of 

$350 million. These values show that 

the distribution of RAUM is skewed, 

with more RIAs managing assets below 

the average, than above. The majority of 

RIAs report that they provide portfolio 

management services for individuals 

and small businesses.876 In aggregate, 

RIAs have over $97 trillion in RAUM. A 

substantial percentage of RAUM at 

investment advisers is held by 

institutional investors, such as 

investment companies, pooled 

investment vehicles, and pension or 

profit-sharing plans.877 Based on staff 

analysis of Form ADV data, 8,134 (59 

percent) of RIAs have some portion of 

their business dedicated to individual 

clients, including both high net worth 

and non-high net worth individual 

clients.878 In total, firms that have some 

portion of their business dedicated to 

high net worth clients have 

approximately $44 trillion of RAUM,879

of which $12 trillion is attributable to 

individual clients, including both nonVerDate Sep<11>2014 21:12 Mar 04, 2021 Jkt 253001 PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 E:\FR\FM\05MRR2.SGM 05MRR2

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880See rule 206(4)–3(a)(1)(ii). 

881See rule 206(4)–3(b). 

882See rule 206(4)–3(a)(2)(iii)(B). 

883See rule 206(4)–3(a)(1)(ii). 

884Response to Item 8(h)(1) of Part 1A of Form 

ADV. 

885Based on responses to Item 8(h)(1) of Part 1A 

of Form ADV. 

886Form ADV Item 5.F.2 and Item 12.A. 

high net worth and high net worth 

clients. Approximately 7,115 RIAs (52 

percent) serve 35.4 million non-high net 

worth individual clients and have 

approximately $5.2 trillion in RAUM 

attributable to the non-high net worth 

clients, while nearly 7,694 RIAs (56 

percent) serve approximately 4.9 

million high net worth individual 

clients with $7.5 trillion in RAUM 

attributable to the high-net worth 

clients. In addition, there are 3,517 

broker dealers registered with FINRA, 

442 identify themselves as dually 

registered broker-dealers, and 2,394 

investment advisers (17%) report an 

affiliate that is a broker-dealer. 

2. Market for Solicitation Activity 

a. Current Regulations 

The current solicitation rule makes 

paying a cash fee for referrals of 

advisory clients unlawful unless the 

solicitor and the adviser enter into a 

written agreement. A solicitor’s written 

agreement with an advisor must also 

contain an undertaking by the solicitor 

to perform its duties under the 

agreement in a manner consistent with 

the instructions of the investment 

adviser and the provisions of the 

Advisers Act and the rules thereunder. 

In addition, among other provisions, it 

requires the solicitor to provide the 

client with a current copy of the 

investment adviser’s Form ADV 

brochure and a separate written solicitor 

disclosure document at the time of 

solicitation.880 The solicitor disclosure 

must contain information highlighting 

the solicitor’s financial interest in the 

investor’s choice of an investment 

adviser.881 Further, advisers are 

required to have a reasonable belief that 

solicitors are complying with these 

contractual requirements. 

In addition, the solicitation rule 

prescribes certain methods of 

compliance, such as requiring an 

adviser to receive a signed and dated 

acknowledgment of receipt of the 

required disclosures.882 The solicitation 

rule also prohibits advisers who have 

engaged in certain misconduct from 

acting as solicitors.883

b. Data on Solicitors 

Given that there is no current 

registration requirement for solicitors of 

investment advisers based on their 

solicitation activity, our view on 

solicitation practices is through the 

disclosures made by RIAs in Form ADV. 

As of August 1, 2020, 27 percent of RIAs 

reported compensating any person 

besides an employee for client 

referrals.884 As shown in Figure [1], the 

share of RIAs that reported this type of 

arrangement has declined since 2009. 

However, this figure does not capture 

employees of an investment adviser that 

are compensated for client referrals, 

who are solicitors under the solicitation 

rule. The downward trend in Figure [1] 

may suggest that the use of solicitors is 

declining through an overall decline in 

client referral activity. Alternatively, the 

data presented in the figure is also 

consistent with employers shifting their 

solicitation activities in-house. 

c. RIAs to Private Funds 

Based on Form ADV data from August 

1, 2020, 4,925 RIAs report that they are 

advisers to private funds, and 54 of 

these RIAs report that they are a small 

entity.886 Of the RIAs that advise private 

funds, 1,641 RIAs report that they use 

the services of solicitors that are not 

their employees or themselves (‘‘related 

marketers’’ in Form ADV). Among the 

RIAs that hire solicitors, each RIA uses 

3 solicitors on average, while the 

median number of solicitors reported is 

1, and the maximum is 67. There are 

343 RIAs that indicate that they have at 

least one related marketer, and 206 of 

them indicate that they only rely on 

related marketers. Among RIAs that 

report using a related marketer, the 

average number of related marketers 

reported is 1.5, while the median 

reported is 1 and the maximum is 24. 

1,315 RIAs indicate that they have at 

least one marketer that is registered with 

the SEC: The average number of 

marketers, registered with the SEC as 

either IAs or BDs, employed by these 

RIAs is 3.1, while the median number 

reported is 2 and the maximum is 67. 

Finally, 570 RIAs indicate that they 

have at least one non-US marketer: The 

average number of non-US marketers 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13099 

887 Data on solicitors (marketers) hired by RIAs to 

private funds are collected from Form ADV Section 

7.B(1) (28). 888Form ADV Item 5.D. of Part 1A. 889 Data taken from Form ADV data. 890The surveys generally use ‘‘retail investors’’ to 

refer to individuals that invest for their own 

personal accounts. 

891See Angela A. Hung, et al., Investor and 

Industry Perspectives on Investment Advisers and 

Broker-Dealers, RAND Institute for Civil Justice 

Technical Report (2008), available at https://

www.rand.org/content/dam/rand/pubs/technical_

reports/2008/RAND_TR556.pdf (‘‘RAND 2008’’), 

which discusses a shift from transaction-based to 

fee-based brokerage accounts prior to certain 

regulatory changes at the time; see also Financial 

Literacy Study, supra footnote 846. 

892Only one-third of the survey respondents that 

responded to ‘‘method to locate individual 

professionals’’ also provided information regarding 

locating the financial firm. 

893See Financial Literacy Study, supra footnote 

846. 

894The data used in the 917 Financial Literacy 

Study comes from the Siegel & Gale, Investor 

Research Report (July 26, 2012), available at https:// 

www.sec.gov/news/studies/2012/917-financialliteracy-study-part3.pdf. 

reported among these RIAs is 3.1, while 

the median is 1 and the maximum is 

60.887

3. RIA Clients 

RIAs are required to report their 

specific number of clients in 13 

different categories and a catch-all 

‘‘Other’’ category.888 Based on Form 

ADV data collected as of August 1, 

2020, RIAs report having a total of 

approximately 42 million clients, and 

$97 trillion in RAUM. Individual 

investors constitute the majority (95 

percent) of the RIA client base. Columns 

2 and 3 of Table 1 present the 

breakdown of the RIA client base, and 

column 4 shows the total RAUM from 

each investor category as of August 

2020. 

Non-high net worth (HNW) 

individuals comprise the largest group 

of advisory clients by client number—83 

percent of total clients. The number of 

HNW individuals is only 12 percent of 

advisory clients, but RAUM from HNW 

individuals makes up almost 8 percent 

of the industry-wide RAUM ($97 

trillion) in 2018, while RAUM from 

non-HNW individuals accounts makes 

up about 5.4 percent. 

TABLE 1—INVESTOR CATEGORIES BY CLIENTS, RAUM, AND ADVISERS 889

Investor categories Clients Clients 

(%) 

RAUM 

(billions) 

RAUM 

(%) Advisers 

Non-HNW individuals ........................................................... 35,433,736 83.451 $5,228.92 5.39 7,115 

HNW individuals ................................................................... 4,916,781 11.580 7,465.29 7.69 7,694 

Other investment advisers ................................................... 863,785 2.034 1,250.71 1.29 548 

Corporations or other businesses ........................................ 321,471 0.757 2,674.23 2.76 3,320 

Pension and profit sharing plans ......................................... 386,897 0.911 6,504.54 6.70 3,933 

Other .................................................................................... 279,025 0.657 970.50 1.00 951 

Pooled Investment Vehicles (PIVs)—Other ......................... 83,942 0.198 25,883.53 26.68 5,354 

State/municipal entities ........................................................ 24,761 0.058 3,565.01 3.67 970 

Charities ............................................................................... 99,968 0.235 1,189.66 1.23 3,302 

Banking or thrift institutions ................................................. 9,833 0.023 992.93 1.02 281 

Insurance companies ........................................................... 12,070 0.028 6,257.69 6.45 711 

PIVs—Investment companies .............................................. 26,520 0.062 33,362.03 34.39 1,583 

Sovereign Wealth Funds and Foreign official institutions ... 1,643 0.004 1,544.11 1.59 213 

PIVs—Business development companies ........................... 159 0.0004 132.15 0.14 87 

A number of surveys show that 

individuals 890 predominantly find their 

current financial firm or financial 

professional from personal referrals by 

family, friends, or colleagues, rather 

than through advertisements.891 For 

instance, a 2008 study conducted by 

RAND reported that 46 percent of 

survey respondents indicated that they 

located a financial professional from 

personal referral, although this 

percentage varied depending on the 

type of service provided (e.g., only 35 

percent of survey participants used 

personal referrals for brokerage 

services). After personal referrals, RAND 

2008 survey participants ranked 

professional referrals (31 percent), print 

advertisements (4 percent), direct 

mailings (3 percent), online 

advertisements (2 percent), and 

television advertisements (1 percent), as 

their source of locating individual 

professionals. The RAND 2008 study 

separately inquired about locating a 

financial firm,892 in which a smaller 

group of respondents reported selecting 

a financial firm (of any type) based on: 

Referral from family or friends (29 

percent), professional referral (18 

percent), print advertisement (11 

percent), online advertisements (8 

percent), television advertisements (6 

percent), direct mailings (2 percent), 

with a general ‘‘other’’ category (36 

percent). 

The Commission’s 2012 Financial 

Literacy Study provides similar 

responses, although it allowed survey 

respondents to identify multiple sources 

from which they obtained information 

that facilitated the selection of the 

current financial firm or financial 

professional.893 In the 2012 Financial 

Literacy Study,894 51 percent of survey 

participants received a referral from 

family, friends, or colleagues. Other 

sources of information or referrals came 

from: Referral from another financial 

professional (23 percent), online search 

(14 percent), attendance at a financial 

professional-hosted investment seminar 

(13 percent), advertisement (e.g., 

television or newspaper) (11.5 percent), 

other (8 percent), while approximately 4 

percent did not know or could not 

remember how they selected their 

financial firm or financial professional. 

Twenty-five percent of survey 

respondents indicated that the ‘‘name or 

reputation of the financial firm or 

financial professional’’ affected the 

selection decision. 

D. Costs and Benefits of the Final Rule 

and Form Amendments 

The Commission is adopting a final 

combined marketing rule by amending 

rule 206(4)–1, which is related to 

advertisements, and eliminating rule 

206(4)–3, which deals with solicitation. 

The final rule changes the definition of 

advertisement and generally expands 

the set of permitted advertisements. It 

includes general prohibitions of certain 

advertising practices, and will (i) 

impose requirements of or restrictions 

on investment adviser performance in 

advertisements, and (ii) permit 

investment advisers to use certain 

features in an advertisement, such as 

testimonials, endorsements, and thirdparty ratings, subject to certain 

conditions, such as disclosing 


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895See infra section III.B. 

896See infra section III.B. 

897See Fidelity, IAA, MFA/AIMA Comment 

Letters. 

898See Fidelity, IAA Comment Letters. 

899See Fidelity Comment Letter 

900See IAA Letter Comment Letter. 

901See infra section IV.B. 902See MFA/AIMA Comment Letter. 

information that would help investors 

evaluate the advertisement. 

The marketing rule, among other 

things, also applies disclosure, 

oversight, and disqualification 

requirements to compensated 

testimonials or endorsements, including 

those directed at prospective investors 

in private funds. The Commission is 

also adopting amendments to Form 

ADV that are designed to provide 

additional information regarding 

advisers’ marketing practices and 

amendments to the Advisers Act books 

and records rule to correspond to the 

features of the marketing rule. The final 

rule reflects market developments since 

1961 and 1979, when rules 206(4)–1 and 

206(4)–3, respectively, were adopted, as 

well as practices addressed in staff noaction letters. These market 

developments include advances in 

communication technology and 

marketing practices that did not exist at 

the time the rules were adopted and 

may fall outside of the scope of the 

current rules. As a result, the current 

rule is less effective at mitigating some 

information and search problems 

investors face when searching for 

investment advisers than when it was 

initially written.895

Advertisements falling in the two 

categories of communications defined as 

advertisements in the final rule are 

currently subject to different regulatory 

baselines and market practices. We 

discuss the costs and benefits of specific 

provisions of the final rule, taking care 

to note whether a cost or benefit applies 

to the first or the second prong of 

advertisement, or both. 

1. Quantitative Estimates of Costs and 

Benefits 

The economic effects of the final rule 

are generally difficult to quantify for 

several reasons. First, there is little to no 

direct data suggesting how investment 

advisers and promoters might alter their 

marketing practices as a result of the 

final rule or mitigate the compliance 

burdens related to the final rule, and 

commenters did not provide any. It is 

difficult to quantify the impact that 

specific provisions of the final rule will 

have on adviser behavior because the 

final rule may influence adviser 

behavior in opposing directions. For 

example, it might motivate advisers to 

provide more information to potential 

investors that helps such investors more 

accurately evaluate those advisers’ 

abilities and potential fit with such 

investors’ preferences. Alternatively, the 

rule may introduce compliance burdens 

that disincentivize the creation of 

communications that fall within the 

definition of advertisement. This could 

reduce the amount of information that 

advisers provide to potential investors 

through advertisements. 

Second, it is difficult to quantify the 

impact that the specific provisions of 

the final rule will have on investor 

behavior because the final rule may 

influence investor behavior in opposing 

directions. Disclosures might provide 

additional context for investors to make 

better decisions when choosing 

investment advisers; alternatively, they 

might not be used by investors, or might 

make them overconfident when making 

decisions.896 Without knowing the 

magnitude of these opposing effects, it 

is not possible to quantify the effects of 

specific provisions of the final rule. 

Finally, it is difficult to quantify the 

extent to which certain changes in 

adviser, promoter, and investor behavior 

enhance or diminish the welfare of 

specific market participants. For 

example, if investors increased the 

amount of advisers’ RAUM as a result of 

the final rule, it is not clear to what 

extent investor welfare would have 

improved, without knowing the extent 

to which the final rule also affected the 

quality of investment advisers with 

whom investors chose to invest. 

Further, if RAUM increased as advisers 

increased their marketing and incurred 

higher marketing expenditures, a 

portion of these expenditures could be 

transferred to investors through fees 

offsetting, in part, any increase in 

investor welfare. 

Some commenters directly addressed 

the cost estimates in the proposal.897

Two of these commenters stated that the 

proposal underestimated the number of 

advertisements that investment advisers 

use under the current rule.898 One 

commenter stated that heavy advertisers 

would be expected to create new 

advertisements 50 times per year, and 

update their advertisements 250 times 

per year.899 One commenter broadly 

criticized the cost estimates as too low, 

and also specifically criticized the 

proposal’s estimates of the number of 

advertisements that advisers would 

distribute.900 In response to 

commenters, we have adjusted our 

estimates of the annual number of 

advertisements that investment advisers 

will create.901

One commenter made several 

critiques of the cost estimates.902 The 

commenter separated its expected costs 

into three categories—implementation 

costs, ongoing costs, and management 

resource drain, arguing that the proposal 

failed to recognize whole types of costs. 

The commenter broadly criticized many 

of the quantitative estimates in the 

proposal as significantly 

underestimating the cost burden on 

investment advisers. The commenter 

specifically criticized the cost estimates 

for third-party rankings, hypothetical 

performance, and Form ADV changes, 

but did not provide additional estimates 

or data to use. Many of the quantitative 

estimates in the proposal were for the 

Paperwork Reduction Act (‘‘PRA’’), 

which are a subset of the total economic 

costs of the rule. Many of these total 

costs are difficult to quantify, for 

reasons mentioned above. However, 

given the commenter’s feedback on the 

categories and types of costs that the 

rules will impose on investment 

advisers, we have updated our analysis 

of the costs of the rule, as well as our 

PRA-related quantitative cost estimates. 

In the following sections, we have 

quantified some elements of the overall 

cost of the general anti-fraud 

prohibitions as part of the Commission’s 

Paperwork Reduction Act obligations. 

These are costs associated with the 

collection of information that are 

generated by the final rule, but do not 

represent the entire cost of each 

provision. 

2. Definition of Advertisement 

The final rule’s definition of 

advertisement contains two prongs. The 

first prong generally captures traditional 

advertising, and changes the scope of 

communications that fall within the 

scope of the final rule. The first prong 

includes, among other communications, 

communications made to investors and 

potential investors in private funds 

advised by the adviser. The second 

prong generally includes the cashcompensated solicitation activity that 

occurs currently under rule 206(4)–3. In 

addition, the second prong will include 

non-cash compensated communications 

made by promoters and compensated 

solicitation activity for private fund 

investors. 

This definition of ‘‘advertisement’’ 

determines the scope of 

communications affected by the final 

rule, which determines, in part, the 

costs and benefits of the regulatory 

program set forth by the other 

components of the final rule (the 

‘‘programmatic effects’’). For example, if 


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903To the extent that broker-dealers and other 

third parties disseminate communications that are 

defined as advertisements under the final rule, 

including with respect to private funds, they may 

incur compliance costs associated with the final 

rule. These compliance obligations generally will be 

separate from any compliance obligations incurred 

under the requirements of the Exchange Act, the 

rules promulgated thereunder, and FINRA rules. 

904The specific costs and benefits of the rule’s 

changes to the substantive prohibitions and 

conditions applicable to advertisements are 

discussed in later sections. See infra section II.D.3– 

8. 

905The final rule does contain a related 

compliance and recordkeeping requirement that 

requires investment advisers to retain records of 

communications addressed to more than one 

person, which we discuss in further detail later. See 

infra section III.D.8. 

906The rule excludes from the first prong of the 

advertisement definition a communication that 

includes hypothetical performance that is provided 

in response to an unsolicited investor request for 

such information or to a private fund investor in a 

one-on-one communication. See rule 206(4)– 

1(e)(1)(i)(C). Because the current advertising rule 

excludes one-on-one communications from the 

definition of advertisement, we do not anticipate 

Continued 

the definition of ‘‘advertisement’’ is not 

sufficiently broad and excludes 

communications that could serve as a 

substitute for advertisements and that 

raise similar investor protection 

concerns, investment advisers might use 

these alternative communications to 

avoid the costs associated with 

complying with the final rule. This 

would reduce the effect of changes to 

the substantive provisions to the 

advertising rule that would regulate 

advertisements. Conversely, if the scope 

of communications captured by the final 

rule is too broad and captures 

communications that do not aim to 

attract clients, the amendments may 

impose costs on investment advisers 

while yielding insubstantial benefits. 

In response to the final rule’s 

definition of advertisement, investment 

advisers and promoters might modify 

their communication strategies in an 

effort to reduce the amount of 

communication that could be deemed to 

fall within the definition of 

‘‘advertisement.’’ These strategic 

responses could, in turn, impose costs 

on some clients or investors, to the 

extent that they currently rely on 

communications by investment advisers 

or promoters that are advertisements to 

inform their decisions.903 If investment 

advisers or promoters respond by 

reducing the amount of such 

communications, both prospective and 

existing investors may need to search 

more intensively for information about 

investment advisers than they currently 

do or, alternatively, base their choice of 

financial professional on less 

information. This could result, for 

example, in inefficiencies to the extent 

that an existing client of an investment 

adviser is unaware of the breadth of 

services the investment adviser 

provided and incurs costs to open a new 

account with another investment 

adviser to obtain certain services. 

Similarly, a prospective client that 

receives less information from 

investment advisers and promoters 

might ultimately choose an investment 

adviser that is a poorer match for them 

or might be discouraged from seeking 

investment advice. These potential costs 

to investors depend on the extent to 

which the final rules cause investment 

advisers and promoters to reduce their 

advertisements. 

As discussed above, some of the 

affected parties whose communications 

will be newly defined as advertisements 

under the final rule may also be 

registered broker-dealers whose 

communications are subject to other 

regulatory regimes that govern 

communications and advertisements, 

including those under FINRA rules and, 

in some cases, Regulation BI. As a 

result, these parties will incur new 

compliance obligations with respect to 

communications subject to the final 

rule, and may incur incremental costs 

similar to other parties whose 

communications are also newly-subject 

to the rule. In general, however, to the 

extent that these parties may leverage 

existing compliance methods similar to 

those that they currently use, the 

programmatic effects of including these 

communications within the final rule’s 

definition of advertisement may be 

mitigated. 

Below, we address the costs and 

benefits associated with determining the 

scope of communications affected by 

the final rule through specific elements 

of the final rule’s definition of an 

advertisement.904 We address the costs 

and benefits of the two prongs of the 

definition separately. 

a. Communications Other Than 

Compensated Testimonials or 

Endorsements 

The first prong includes within the 

definition of an advertisement any 

direct or indirect communication an 

investment adviser makes to more than 

one person, or to one or more persons 

if the communication includes 

hypothetical performance information, 

and that offers the investment adviser’s 

investment advisory services with 

regard to securities to prospective 

clients or investors in a private fund 

advised by the investment adviser or 

offers new investment advisory services 

with regard to securities to current 

clients or investors in a private fund 

advised by the investment adviser. It 

also excludes (a) extemporaneous, live, 

oral communications, regardless of 

whether they are broadcast; (b) any 

information contained in a statutory or 

regulatory notice, filing, or other 

required communication, provided that 

such information is reasonably designed 

to satisfy the requirements of such 

notice, filing, or other required 

communication; and (c) a 

communication that includes 

hypothetical performance that is 

provided: (i) In response to an 

unsolicited investor request or (ii) to a 

private fund investor in a one-on-one 

communication. 

i. Any Direct or Indirect Communication 

an Investment Adviser Makes 

The first prong includes 

communications directly or indirectly 

made by the adviser, regardless of 

whether they are prepared and 

disseminated by the adviser or by a 

third party. Prong one includes 

communications disseminated by an 

adviser that incorporate statements or 

content prepared by a third party, such 

as positive reviews from clients 

selectively picked by an adviser to be 

posted or attributed, materials an 

adviser helps draft to be distributed by 

third-party promoters, and 

endorsements organized by an adviser 

on social media. This provision (the 

phrase ‘‘directly or indirectly’’) does not 

differ from the current rule, and we 

therefore do not anticipate any 

significant costs or benefits to be 

generated directly by this provision. 

The first prong defines advertisements 

as communications made to more than 

one person, or to any number of persons 

if the communication includes 

hypothetical performance information 

that is not provided in response to an 

unsolicited investor request or to a 

private fund investor in a one-on-one 

communication. Because the 

definition’s limitation to 

communications to more than one 

person does not differ from the current 

rule, we generally do not anticipate any 

significant costs or benefits to be 

generated directly by this part of the 

rule.905 However, the inclusion of oneon-one communications with 

hypothetical performance information 

(except for hypothetical performance 

information that is provided in response 

to an unsolicited investor request or to 

a private fund investor) in the definition 

of advertisement represents a change 

from the current rule.906 We expect that 


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that this exclusion will result in significant costs or 

cost savings for advisers. 

907See, e.g., infra sections III.D.3; III.D.4; III.D.5. 

908See supra section III.D.1 and footnote 902. 

909See supra section II.A.2.b.i. 

910The final rule contains a related compliance 

and recordkeeping requirement that requires 

investment advisers to retain records of 

communications addressed to more than one 

person, which we discuss in further detail later. See 

infra section III.D.8. 

911Under the cash solicitation rule, certain 

affiliated advisers are not required to satisfy all of 

the elements of the written agreement. See rule 

206(4)–3(a)(2)(ii) and (iii). 

912See infra sections III.D.3–8 for discussion of 

the direct costs and benefits of the requirements of 

the rule. 

this change could produce costs and 

benefits with respect to these one-onone communications that are similar to 

those described below that are 

associated with prong one’s inclusion of 

communications that offer investment 

advisory services to prospective 

investors, including for review and 

monitoring of communications. 

While the current definition of 

advertisement includes communications 

directly or indirectly made by the 

adviser, it only explicitly covers written, 

radio, or television advertisements. As a 

result, the first prong of the definition 

could cover additional communications 

with prospective clients as compared to 

the current definition. This change will 

further extend the investor protection 

and benefits of the final rule.907

Investment advisers will also incur costs 

directly as a result of this change, which 

may include dedicating personnel time, 

or conducting training for personnel to 

determine the extent to which the 

substantive content of one of these 

newly-covered types of communication 

subjects it to the final rule.908

These costs may be mitigated to the 

extent that investment advisers may be 

able to leverage existing oversight 

methods similar to those that they 

currently use, including those used by 

dual-registrant advisers or promoters 

who are also broker-dealers in 

connection with compliance with 

FINRA’s rules,909 for example, in 

communicating with prospective clients 

through intermediaries. Additionally, 

investment advisers might reduce 

certain types of communications to 

avoid having to bear these costs of 

complying with the final rule, which 

may mitigate the benefits of additional 

information in advertisements available 

to investors.910

ii. Offers the Investment Adviser’s 

Investment Advisory Services With 

Regard to Securities to Prospective 

Clients or Investors in a Private Fund 

Advised by the Investment Adviser 

Prong one also includes 

communications that offer the 

investment adviser’s investment 

advisory services with regard to 

securities to prospective clients or 

investors in a private fund advised by 

the investment adviser. This prong will 

expressly apply to communications to 

prospective investors in private funds. 

By including communications that offer 

the adviser’s investment advisory 

services with regard to securities to 

private fund investors, the final rule 

will provide more specificity (and 

certainty) regarding what we believe to 

be untrue or misleading statements that 

advisers must avoid in their 

advertisements, which may reduce 

compliance costs for some investment 

advisers. On the other hand, to the 

extent that an adviser’s current practices 

differ from the final rule, an investment 

adviser may incur some increased costs 

to review and monitor its 

communications with potential 

investors for general compliance 

purposes. An investment adviser may 

respond by reducing the number of 

these advertisements or the amount of 

information it distributes to potential 

investors. This could, in turn, reduce 

the amount of information available to 

potential investors in these private 

funds. An investment adviser to a 

private fund also may respond by not 

seeking potential investors likely to 

have less money to invest in the private 

fund, reducing investment opportunities 

for these investors. 

iii. Offers New Investment Advisory 

Services With Regard to Securities to 

Current Clients or Investors in a Private 

Fund Advised by the Investment 

Adviser 

The final definition of advertisement 

under the first prong also includes 

communications that offer new 

investment advisory services with 

regard to securities to existing clients or 

investors in a private fund advised by 

the investment adviser. Investment 

advisers will incur costs similar to those 

described above that are associated with 

prong one’s inclusion of 

communications that offer investment 

advisory services to prospective 

investors, including for review and 

monitoring of communications. 

However, to the extent that an adviser 

uses a single set of communications 

aimed at both new and existing clients, 

these costs may be mitigated because 

the adviser may incur only a single set 

of costs for both prospective and 

existing investors. 

b. Compensated Testimonials and 

Endorsements 

The second prong of the final 

definition of advertisement includes 

testimonials or endorsements for which 

compensation is provided, excluding 

any information contained in a statutory 

or regulatory notice, filing, or other 

required communication, provided that 

such information is reasonably designed 

to satisfy the requirements of such 

notice, filing, or other required 

communication. The baseline for these 

advertisements is generally shaped by 

the current solicitation rule, which 

obligates advisers to enter into written 

agreements with solicitors to require 

them to act in a manner consistent with 

the Advisers Act and rules, including 

the current advertising rule.911 Under 

the current solicitation rule, investment 

advisers must have a reasonable belief 

that solicitors are complying with this 

written agreement. Furthermore, 

solicitations of private fund investors 

are not subject to the current solicitation 

rule. 

Prong two will scope in non-cash 

compensated testimonials and 

endorsements and compensated 

testimonials and endorsements to 

private fund investors, including 

communications from solicitors for 

impersonal advisory services, and, as a 

result, will extend the investor 

protection benefits of the final rule to 

the investors who receive these 

communications. Similarly, it will 

impose certain costs on advisers and 

persons who are solicitors under the 

current rule, including costs associated 

with oversight of these communications 

not currently subject to the rule, 

including endorsements to private fund 

investors.912 Advisers may respond by 

reducing the number of these 

advertisements or the amount of 

information they distribute to potential 

investors. Similarly, advisers to private 

funds also may respond by not seeking 

potential investors likely to have less 

money to invest in the private fund, 

reducing investment opportunities for 

these investors. 

Prong two does not contain the same 

exclusion for one-on-one 

communications as prong one. 

Oversight of one-on-one 

communications will likely involve 

greater costs for investment advisers 

compared to those addressed to more 

than one person because one-on-one 

communications have the potential for 

more variety and volume in their 

content. However, one-on-one 

solicitations are subject to the current 

solicitation rule. Therefore, there will 

likely be incrementally greater costs for 

advisers overseeing promoters under the 

final rule. Of these incremental costs, 


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913See supra section III.D.1 and footnote 902. 

914 In addition to the general prohibitions 

discussed below, the final rule specifically 

prohibits (i) any untrue statement of a material fact, 

or omission to state a material fact necessary in 

order to make the statement made, in the light of 

the circumstances under which it was made, not 

misleading and (ii) otherwise materially misleading 

statements. These provisions prohibit statements 

that would be prohibited by the current advertising 

rule and rule 206(4)–8, for example, and as a result, 

we do not believe that these provisions will 

generate significant costs or benefits. 

the increase in costs is attributable less 

to the inclusion of one-on-one 

communications and more to the 

expansion in compensation type (from 

cash to non-cash) and the expanded 

types of persons who would be 

promoters under the final rule as 

compared to solicitors under the current 

solicitation rule. 

Extending the scope of the rule to 

communications made by solicitors who 

receive non-cash compensation may 

have further benefits for investors. 

Because solicitations provided in 

connection with non-cash compensation 

that solicitors might receive generate 

nearly identical conflicts of interest to 

solicitations provided in connection 

with cash compensation, prong two may 

reduce the risk that investors might be 

unaware of such conflicts for a larger set 

of communications. For example, many 

advisers use brokerage—a form of noncash compensation—to reward brokers 

that refer them to investors. This 

practice presents advisers with conflicts 

of interest as the brokers’ interests may 

not be aligned with investors’ interests. 

Including non-cash compensated 

testimonials and endorsements in the 

definition of advertisement would also 

give cash and non-cash compensation 

more equal regulatory treatment for 

these purposes, which will enhance 

competition between promoters that 

accept non-cash compensation and 

those that accept cash compensation. 

Additionally, to the extent that 

investment advisers currently direct 

order flow to broker-dealers with lower 

execution quality, the final rule’s 

inclusion of non-cash compensation 

into the definition of advertisement 

could potentially affect quality of 

execution. If the final rule’s 

requirements for non-cash 

compensation impose regulatory 

burdens that reduce the usage of 

directed brokerage towards brokers with 

lower quality of execution, these 

investment advisers might instead 

choose brokers with higher execution 

quality, which could result in a benefit 

for their investors. 

The extent of additional benefits and 

costs attributed to prong two of the 

definition will be mitigated to the extent 

that solicitors previously entered into 

written agreements obliging them to act 

in a manner consistent with the 

Advisers Act and its rules, including the 

current advertising rule. As a result of 

such agreements, the additional costs 

and benefits of the final rule’s 

substantive provisions for these 

solicitors will generally be limited to 

changes in the programmatic effects of 

the final rule as compared to the current 

advertising rule. Any solicitors making 

communications subject to the final rule 

who did not previously enter into such 

a contract will, however, incur these 

costs fully and also incur costs 

associated with the creation of written 

agreements. The benefits and costs 

attributed to prong two may also be 

mitigated to the extent that advisers and 

promoters were previously complying 

with the current solicitation rule with 

respect to endorsements to private fund 

investors and to the extent that some 

aspects of the final rule overlap with the 

scope of rule 206(4)–8 under the 

Advisers Act, section 17(a) of the 

Securities Act, or section 10(b) and rule 

10b–5 under the Exchange Act. 

c. Exclusions From the Definition of 

Advertisement 

The first prong of the definition of an 

advertisement excludes 

extemporaneous, live, oral 

communications. The current rule does 

not, however, include these 

communications unless they are 

broadcast by radio or television. As a 

result, to the extent that some 

extemporaneous, live, oral 

communications were previously 

transmitted by radio or television or 

otherwise subject to the current 

advertising rule, the first prong of the 

definition could cover fewer of these 

communications with investors than the 

current definition. While this change 

could reduce investor protection and 

benefits of the final rule to investors 

with respect to these communications, it 

may also reduce the costs associated 

with the fact that advisers might avoid 

making any extemporaneous 

communications because of the 

difficulties in ensuring that they comply 

with the requirements of the rule. 

Both prongs of the definition of 

advertisement contain an exception for 

any statutorily or regulatory required 

notice, filing, or communication, 

provided that such information is 

reasonably designed to satisfy the 

requirements of such notice, filing, or 

other required communication. These 

exceptions are designed to reduce the 

likelihood that the final rule imposes 

costs or burdens on communications 

unrelated to advertising, or adds costs or 

burdens for communications already 

regulated by the Commission. The 

current advertising rule does not 

exclude statutory or regulatory notices, 

so the final rule will entail a reduction 

in costs for investment advisers to the 

extent they currently bear costs to 

comply with the advertising rule for 

their statutory or regulatory notices. 

Advisers will, however, continue to 

incur potential liability for these 

statements under applicable anti-fraud 

provisions. 

3. General Prohibitions 

The final rule generally prohibits 

certain marketing practices as a means 

reasonably designed to prevent 

fraudulent, deceptive, or manipulative 

acts. In general, we anticipate that the 

introduction of these general 

prohibitions will generate new 

interpretive questions regarding 

whether a particular communication is 

prohibited, which will impose 

compliance costs on investment 

advisers, including costs of legal advice 

and managerial resources, on an initial 

and ongoing basis. In addition, 

promoters for investment advisers will 

bear similar compliance costs, such as 

for legal advice and managerial 

resources.913

Below, we analyze the costs and 

benefits of these general prohibitions.914

The baseline for analyzing different 

types of advertisements may, however, 

be different. While advertisements as 

defined under the final rule will be 

subject to a single set of prohibitions 

and requirements, under the baseline, 

the same advertisements as defined by 

the final rule may be subject to different 

regulatory requirements. For example, 

solicitors that receive cash 

compensation are currently subject to 

the solicitation rule and, because they 

have entered into written agreements 

that oblige them to act in a manner 

consistent with the Advisers Act and its 

rules, the advertising rule. However, 

some communications that meet the 

definition of an advertisement do not 

currently fall under the solicitation rule 

or the advertising rule. For example, 

non-cash compensated promoters, and 

promoters for an adviser’s impersonal 

advisory services currently are not 

subject to the requirements of rule 

206(4)–3, while under the final rule 

certain of their communications would 

be defined as advertisements and 

subject to the general prohibitions. 

Further, communications to prospective 

and current investors in private funds 

are currently subject to rule 206(4)–8, 

section 17(a) of the Securities Act, 


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13104 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

915See infra section IV.B.1. 

916See, e.g., MFA/AIMA Comment Letter I; FPA 

Comment Letter; NVCA Comment Letter; Fried 

Frank Comment Letter. 917See supra footnote 221. 918See supra section II.B.2; III.C.1.b. 

section 10(b) of the Exchange Act, and 

rule 10b–5 thereunder. 

We have quantified a subset of the 

costs associated with the general antifraud prohibition, specifically, the 

burden of information collection costs 

estimated for the purposes of the 

Paperwork Reduction Act. The general 

anti-fraud prohibitions do not create any 

collection of information burdens, with 

one exception. The prohibition on 

unsubstantiated statements of material 

fact might cause investment advisers to 

create records to substantiate statements 

either contemporaneously or after the 

fact, and we estimate the costs of this 

collection. We estimate these costs to be 

$657 for each investment adviser per 

year, for a total cost of $9,016,668 per 

year.915

a. Unsubstantiated Material Statements 

of Fact 

The final rule contains a prohibition 

on material statements of fact that an 

investment adviser does not have a 

reasonable basis for believing that it will 

be able to provide substantiation on 

demand by the Commission. Investment 

advisers would need to gather materials 

needed to substantiate the material 

statements of fact made in 

advertisements only if requested by the 

Commission. Currently, there is no 

express prohibition of making 

statements in advertisements that the 

adviser does not have a reasonable basis 

for believing it will be able to 

substantiate on demand, in the current 

rule or the general anti-fraud provisions. 

This prohibition will benefit current 

and prospective investors by reducing 

the likelihood that advisers will make 

material statements of fact in 

advertisements that are not able to be 

substantiated, a practice which could 

potentially mislead investors. 

Additionally, the prohibition could 

incentivize investment advisers to 

invest additional resources to 

substantiate material statements of fact. 

Some commenters noted that a 

substantiation requirement would be 

burdensome,916 and we recognize that 

there will be costs associated with this 

requirement for advisers. We note, 

however, that commenters raised these 

concerns about the proposed 

requirement, which was not limited to 

material statements of fact. Nonetheless, 

there may, for example, be costs to 

determine whether a statement is a 

material statement of fact, whether the 

adviser has a reasonable basis to believe 

that it will be able to substantiate the 

statement upon demand, or how 

statements or facts would be 

substantiated on demand. These costs 

could include, among other things, 

personnel time for review and 

documentation, as well as direct costs 

when demanded by the Commission, 

which might entail personnel time to 

prepare materials for the Commission. 

Further, while an adviser may choose to 

substantiate the material fact after it has 

received the demand from the 

Commission, we recognize that some 

advisers may choose to create such 

records contemporaneously with the 

advertisement for sake of efficiency or to 

manage their compliance risk, which 

will cause them to incur compliance 

costs. 

Compliance costs may, however, be 

mitigated to the extent that advisers 

currently retain records that effectively 

substantiate performance advertising 917

and, upon inquiry by the staff or the 

Commission, demonstrate that the 

adviser’s statements are not untrue 

statements of material fact, consistent 

with the Advisers Act and its rules. 

These costs may be further mitigated to 

the extent that advisers believe there are 

external sources that support the 

material statements of fact they make in 

advertisements, which they also believe 

will be available at the time of any 

subsequent demand by Commission 

staff. We expect that this may be the 

case for some of the material facts, and 

costs may be further mitigated to the 

extent that advisers do not prepare this 

support in advance of such demand. 

We recognize that the costs associated 

with substantiation might induce some 

investment advisers to avoid making 

material statements of fact that are too 

costly to substantiate. This could yield 

benefits for clients or investors, to the 

extent that any such advertisement not 

made has an increased risk of being 

misleading. These decisions could, 

however, have costs to clients or 

investors to the extent that they would 

receive less information about an 

adviser, and costs to advisers to the 

extent that they forgo some 

communications to clients or investors. 

b. Untrue or Misleading Implications or 

Inferences 

The final rule contains a prohibition 

on 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 investment adviser. There 

is no provision in the current 

advertising rule that expressly prohibits 

this type of information, though in staff 

no-action letters, the staff has stated its 

view that in some circumstances an 

advertisement may be false or 

misleading if it implies, or a reader 

would infer from it, something false.918

Further, the current advertising rule and 

rule 206(4)–8 each generally prohibit 

misleading statements. 

To the extent that advisers or 

promoters do not already omit 

information that would reasonably be 

likely to cause an untrue or misleading 

implication or inference, this 

prohibition to be drawn concerning a 

material fact relating to the investment 

adviser will benefit current and 

prospective investors by removing this 

type of information from 

advertisements, which has the potential 

to mislead investors and impair their 

ability to find an investment adviser. In 

addition, because this prohibition will 

generally require the adviser to consider 

the context and totality of information 

presented such that it would not 

reasonably be likely to cause any 

misleading implication or inference to 

be drawn concerning a material fact 

relating to the investment adviser, the 

prohibition will entail compliance costs 

to investment advisers and promoters, 

including those related to interpretation 

of the application of the new rule. We 

expect, however, that the costs and 

benefits of the prohibition will likely be 

mitigated, to the extent that advisers 

and promoters currently exclude from 

their communications this type of 

information. 

c. Failure To Provide Fair and Balanced 

Treatment of Material Risks or Other 

Limitations 

The final rule contains a prohibition 

on advertisements which discuss any 

potential benefits to clients or investors 

connected with or resulting from the 

investment adviser’s services or 

methods of operation without providing 

fair and balanced treatment of any 

associated material risks or other 

limitations associated with the potential 

benefits. Currently, while Form ADV 

requires disclosure of certain material 

risks, there is no provision in the 

current advertising rule, rule 206(4)–8, 

the other rules under the Advisers Act, 

or in the Advisers Act itself that 

explicitly requires such treatment. 

This prohibition will benefit current 

and prospective investors by requiring 

material risks and other limitations to be 

presented in a fair and balanced manner 

included in advertisements. This could 

provide such investors with additional, 

higher quality, information about 


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919See MFA/AIMA Comment Letter I. 

920See infra section II.C.1.b. 

921See supra section III.D.1 and note 902. 

922See supra section II.B.5.a. 

923See supra section III.C.1.b. 924Consumer Federation Comment Letter; 

NASAA Comment Letter. 925See supra section III.D.1 and infra section 

IV.A. 

investment advisers and additional 

context for the claims they make in their 

advertisements. This information would 

allow investors to find better matches 

with investment advisers, and would 

reduce the costs associated with the 

search for investment advisers. 

This prohibition, however, may cause 

advisers and promoters to incur costs 

associated with changes to compliance 

processes, and investment advisers 

might incur costs to adjust their 

advertising materials to discuss material 

risks and limitations in a fair and 

balanced manner, including changes in 

formatting and tailoring disclosures 

based on the form of the 

communication. To the extent that 

investment advisers already prepare 

similar disclosure in existing 

communications with investors or in 

connection with the preparation of 

Form ADV Part 2, we expect the costs 

of compliance to be mitigated. 

One commenter expressed concern 

that this prohibition would expand the 

amount of required disclosures and 

overwhelmingly lengthen 

advertisements.919 We recognize that 

this prohibition will have costs 

associated with changes to the 

formatting of advertisements associated 

with the additional information, 

including with respect to 

communications made to prospective 

and current investors in private funds 

advised by the investment adviser. 

Further, we recognize that the 

associated costs might induce some 

investment advisers and promoters to 

avoid making some types of claims to 

the extent that they will require 

extensive discussion of the associated 

material risks or other limitations. This 

could have costs to investors to the 

extent that they would receive less 

information about an adviser, and costs 

to advisers to the extent that they forgo 

some communications to investors. This 

could, however, yield benefits for 

investors, to the extent that any such 

advertisement not made has an 

increased risk of being misleading. 

d. Anti-Cherry Picking Provisions: 

References to Specific Investment 

Advice and Presentation of Performance 

Results 

The final rule contains two other 

provisions designed to address concerns 

about investment advisers presenting 

potentially cherry-picked information to 

investors in advertisements. 

The first prohibits reference to 

specific investment advice where such 

advice is not presented in a manner that 

is fair and balanced. Currently, there is 

a per se prohibition against past specific 

recommendations in the advertising 

rule, though the current rule allows 

reference to past specific 

recommendations in an advertisement 

where the advertisement offers to 

furnish a list of all recommendations 

made by such investment adviser in the 

last year. Further, the staff has indicated 

that it would not recommend 

enforcement action under rule 206(4)–1 

under certain circumstances.920

The first provision replaces the 

current advertising rule’s per se 

prohibition of past specific 

recommendations with a principlesbased prohibition on presentations of 

specific investment advice that is not 

presented in a manner that is ‘‘fair and 

balanced.’’ We believe that this change 

will provide benefits to advisers and 

promoters by providing additional 

clarity on which market practices are 

prohibited. Further, it will provide 

benefits to current and prospective 

investors related to potentially 

expanding the circumstances under 

which advisers may provide 

information regarding past specific 

advice to investors. In addition, 

investors may be able to better evaluate 

presentations of past or current specific 

advice because of the rule’s requirement 

for fair and balanced presentation. This 

shift in approach might impose costs on 

investment advisers and promoters 

related to compliance, who will need to 

devote personnel time to evaluate 

whether a potential presentation of 

specific investment advice is fair and 

balanced.921 These compliance costs 

may be mitigated to the extent that 

advisers currently present past or 

current specific recommendations in a 

‘‘fair and balanced’’ manner. Further, 

these costs may also be mitigated to the 

extent that an adviser currently 

complies with FINRA’s rule 2210, 

which requires that broker 

communications be ‘‘fair and 

balanced.’’ 922

The second anti-cherry-picking 

provision prohibits presentations of 

performance results, or performance 

time periods that are not presented in a 

fair and balanced manner. Currently, 

there is no express provision in the 

advertising rule requiring presentation 

of performance results in this manner, 

though the staff has stated views 

regarding certain circumstances in 

which the staff may view a presentation 

of performance results as misleading, 

including, for example, where an 

adviser failed to disclose how material 

market conditions, advisory fee 

expenses, brokerage commissions, and 

reinvestment of dividends affect the 

performance results.923

This provision may yield benefits to 

current and prospective investors by 

reducing the likelihood that they are 

misled by advertisements, and requiring 

the provision of information to evaluate 

an investment adviser that is presented 

in a fair and balanced manner. We 

recognize, however, that the standard in 

this rule will impose costs on advisers 

and promoters. Two commenters, for 

example, indicated that the ‘‘fair and 

balanced’’ standard may be difficult in 

application.924 We recognize that this 

‘‘fair and balanced’’ component for the 

second provision also represents a shift 

towards a principles-based approach, 

which could impose compliance costs 

on investment advisers, who might need 

to devote personnel time to update 

compliance processes.925

These costs and benefits may be 

mitigated, however, to the extent that 

advisers already ensure that their 

advertisements are fair and balanced in 

presentation of performance results in 

order to ensure that they are not 

misleading under the current 

advertising rule or other applicable antifraud provisions. 

These costs might, however, induce 

some investment advisers to avoid 

presenting performance results 

altogether. This could have costs to 

investors to the extent that they would 

receive less information about an 

adviser’s performance, and may make 

finding an investment adviser more 

difficult or costly for some investors. 

Additionally, this could impose costs on 

advisers to the extent that they forgo 

some communications to investors. This 

reduction in performance advertising, 

however, could yield benefits for 

investors, to the extent that any such 

advertisement not made has an 

increased risk of misleading investors. 

4. Conditions Applicable to 

Testimonials and Endorsements, 

Including Solicitations 

The final rule prohibits the use of 

testimonials and endorsements unless 

they comply with certain disclosure, 

oversight, and disqualification 

requirements, substantially as originally 

proposed for solicitors. The costs and 

benefits of this provision of the final 

rule differ depending on whether the 

testimonial or endorsement is 

compensated or uncompensated. 


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13106 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

926See supra section III.D.3. 

927See infra section IV.B.2. 

928 Initial cost burden estimate of $1,060 from 

section IV.B.2. 13,724 × 1⁄2 = 6,862 affected 

investment advisers. $1,060 × 6,862 = $7,273,720. 

929Ongoing cost estimate includes disclosure, 

oversight, and annual costs from section IV.B.2. 

$5,679 × 6,862 + $500 external cost × 6,862 advisers 

× 20% mail use = $39,998,598. 

930This number is based on the following 

calculation: $7,273,720 + $39,998,598 = 

$47,272,318. 

931See supra section II.C.5 (discussing partial 

exemptions from disclosure requirements). 

932 ‘‘For instance, they had difficulty calculating 

hourly fees and fees based on the value of their 

assets under management. They also had difficulty 

answering comprehension questions about 

investment adviser compensation involving the 

purchase of a mutual fund and identifying and 

computing different layers of fees based on the 

To clarify the change from the 

baseline for each type of advertisement, 

we analyze the costs and benefits of 

imposing these conditions on 

testimonials and endorsements that are 

not compensated. We then separately 

analyze the costs and benefits of these 

conditions for testimonials and 

endorsements that are compensated. As 

described above, the baseline for each 

type of advertisement is different, 

making the extent of the effects of the 

changes effected by the rule different for 

advisers, depending on whether they are 

complying with the current advertising 

rule and the current solicitation rule.926

We have quantified a subset of the 

costs associated with requirements for 

testimonials and endorsements, 

specifically, the burden of information 

collection costs estimated for the 

purposes of the Paperwork Reduction 

Act.927 The disclosure and oversight 

provisions of the requirements for 

testimonials and endorsements will 

entail information collection costs, and 

investment advisers will incur initial 

implementation costs. We estimate that 

investment advisers will incur an initial 

implementation cost of $1,060 for each 

adviser, or $7,273,720 in total.928 We 

estimate that investment advisers will 

incur an ongoing internal cost of $5,729 

per year per adviser, $500 external cost 

for those advisers that deliver 

disclosures by postal service, and 

$39,998,598 in total.929 We therefore 

estimate a total industry cost in the first 

year of $47,272,318.930

a. Communications Other Than 

Compensated Testimonials or 

Endorsements 

The current advertising rule prohibits, 

but does not define, testimonials and 

does not address endorsements. In 

contrast to the current advertising rule, 

the final rule prohibits advisers from 

using, or compensating promoters for 

testimonials and endorsements, unless 

certain requirements are met, and 

distinguishes statements made by 

investors from those made by noninvestors. 

In general, we believe that the ability 

of advisers to advertise testimonials and 

endorsements will give investors 

additional information about the views 

of clients and non-clients with an 

investment adviser, which could 

improve the matches between investors 

and investment advisers. Additionally, 

the ability to use testimonials and 

endorsements in advertisements might 

incentivize investment advisers to 

further improve the quality of the 

services they provide, because 

investment advisers will be better able 

to advertise any improvements in their 

services. We discuss the costs and 

benefits of the requirements that must 

be met in order to include a testimonial 

or endorsement in an advertisement 

below. 

i. Disclosures 

The final rules impose disclosure 

requirements on investment advisers 

that make use of testimonials and 

endorsements and on persons giving 

testimonials and endorsements, unless 

subject to an exemption.931 Under the 

final rule, an investment adviser must 

disclose, or reasonably believe that the 

person giving the testimonial or 

endorsement discloses, (i) clearly and 

prominently, (A) whether the person 

giving the testimonial or endorsement is 

a client or a non-client, as applicable, 

(B) that cash or non-cash compensation 

was provided for the testimonial or 

endorsement, if applicable, and (C) a 

brief statement of any material conflicts 

of interests; (ii) the material terms of the 

person’s compensation arrangement, if 

any, including a description of the 

compensation provided or to be 

provided to the person for the 

testimonial or endorsement; and (iii) a 

description of any material conflicts of 

interest the person may have that result 

from the investment adviser’s 

relationship with such person and/or 

any compensation arrangement. These 

disclosures must be delivered at the 

time the testimonial or endorsement is 

disseminated. 

These disclosures can aid investors by 

providing information and context with 

which to evaluate a promoter’s claims. 

Investors may benefit from receiving 

information about the experiences of 

other investors or other people. In 

addition, the requirement that the 

advertisement clearly and prominently 

disclose the client status of the 

promoter, the fact of compensation, and 

a brief statement of material conflicts of 

interests will increase the salience of 

these disclosures, and increase the 

likelihood that they are incorporated 

into an investor’s decisions. 

Testimonials and endorsements may 

benefit investment advisers by allowing 

them to show satisfied clients or other 

persons willing to support the 

investment adviser. 

However, the positivity of a 

testimonial or endorsement may not 

always reflect the investment adviser’s 

ability or the adviser’s potential ‘‘fit’’ for 

investors. The final rule may, therefore, 

lead investment advisers, regardless of 

ability, to inefficiently increase 

spending on testimonials or 

endorsements in advertisements to 

attract clients. In this case, the fees that 

result from higher advertising spending 

could mitigate the benefits that the 

additional information in testimonials 

and endorsements might provide to 

investors. Additionally, to the extent 

that market practices have developed in 

such a way that, under circumstances 

described in staff no-action letters, 

market participants already include 

information in advertisements that 

would be a testimonial under the final 

rule, the costs and benefits of the final 

rule’s testimonials and endorsements 

provision will be decreased in 

magnitude relative to the baseline. 

The final rule’s requirement for 

disclosure of client or non-client status 

of the promoter, material terms of 

compensation, and material conflicts of 

interest, will provide useful information 

to prospective clients about the 

potential credibility and incentives of 

the provider of the testimonial or 

endorsement. This provision might also 

yield benefits for investors if investment 

advisers or their promoters are 

incentivized to mitigate their conflicts 

of interest or otherwise improve the 

quality of their services as a result of the 

disclosures. This might improve the 

efficiency of the investment adviser 

search process by improving the quality 

of the matches between investors and 

investment advisers, both because of the 

additional information about promoters’ 

incentives and because it may lead 

investment advisers to alter their 

arrangements to mitigate conflicts of 

interest. 

However, conflict of interest 

disclosures may not necessarily lead to 

optimal decisions by investors. For 

example, the Commission’s Financial 

Literacy Study surveyed investors about 

their understanding of fees as disclosed 

in a typical brochure, finding that many 

respondents had difficulty interpreting 

certain disclosures that are relevant to 

evaluating conflicts of interest.932 These 


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amount of assets under management. Moreover, 

many of the online survey respondents on the 

point-of-sale panel had similar difficulties 

identifying and understanding fee and 

compensation information described in a 

hypothetical point-of-sale disclosure and account 

statement that would be provided to them by 

broker-dealers.’’ See Financial Literacy Study, 

supra footnote 846. 

933See Daylian M. Cain, et al., The Dirt on 

Coming Clean: Perverse Effects of Disclosing 

Conflicts of Interest, 34 J. L. Stud. 1 (2005); George 

Loewenstein, et al., The Limits of Transparency: 

Pitfalls and Potential of Disclosing Conflicts of 

Interest, 101 Am. Econ. Rev. 423 (2011). 934See e.g., Steven Pearson, et al., A Trial of 

Disclosing Physicians’ Financial Incentives to 

Patients, 166 Archives of Internal Medicine 623 

(2006); Sunita Sah, George Loewenstein & Daylian 

M. Cain, The Burden of Disclosure: Increased 

Compliance With Distrusted Advice, 104 J. 

Personality & Soc. Psychol. 289 (2013). 

935 In addition, the final rule requires that an 

investment adviser have ‘‘a written agreement with 

any person giving a compensated testimonial or 

endorsement that describes the scope of the agreedupon activities and the terms of the compensation 

for those activities.’’ However, the rule does not 

contain this requirement in the case of 

uncompensated testimonials and endorsements or 

where de minimis compensation is provided to the 

promoter. For example, promoters providing 

testimonials or endorsements in refer-a-friend 

programs might not be subject to these requirements 

depending on the amount of compensation 

provided in such programs. 936See supra section III.D.4.a. 

findings are consistent with academic 

literature that describes investors’ 

difficulty in understanding financial 

disclosure. For example, one study 

shows that, in an experimental setting, 

even when subjects were told of the bias 

of persons who were giving them 

advice, participants did not fully adjust 

their behavior to reflect the disclosed 

bias.933 In addition, these papers and 

others 934 find that mandating disclosure 

from biased persons may have the 

unintended consequence of making 

these persons appear honest and 

increase trust in them. While the 

context of these studies is not specific 

to investment advisers, promoters, or in 

certain cases, of financial advice 

generally, they provide evidence that 

suggests that disclosures might not fully 

mitigate the incentive problems 

generated by conflicts of interest. 

Additionally, advisers or their 

promoters may incur legal and 

compliance costs in connection with 

reviewing existing disclosures and 

drafting new disclosures to comply with 

the final rule. 

ii. Oversight and Compliance 

The final rule has an oversight and 

compliance provision that requires the 

investment adviser to have a reasonable 

basis for believing that a testimonial or 

endorsement complies with the rule.935

This provision is designed to help 

ensure that communications made by 

promoters comply with the provisions 

of the final rule. This requirement will 

entail costs for both advisers and their 

promoters to devote staff and 

managerial resources, enter into new 

written agreements or amend existing 

written agreements, and update their 

processes to the extent necessary for 

oversight and compliance of 

testimonials and endorsements under 

the final rule. 

b. Compensated Testimonials or 

Endorsements 

The current solicitation rule prohibits 

advisers from providing solicitors with 

cash compensation, unless certain 

requirements are satisfied. Among these 

requirements is a requirement that the 

adviser enter into a written agreement 

requiring the solicitor to act in a manner 

consistent with the Advisers Act and its 

rules. Non cash-compensated 

solicitations are not subject to the 

solicitation rule, however. To the extent 

that non-cash compensated testimonials 

and endorsements are viewed as 

advertisements made directly or 

indirectly by an adviser, they may be 

subject to the current advertising rule, 

including its general prohibition on 

testimonials if applicable. Solicitations 

of private fund investors are not subject 

to the current solicitation rule, though 

they are subject to rule 206(4)–8 and are 

likely subject to restrictions applicable 

to private placements under the Federal 

securities laws. Persons who would be 

promoters under the final rule that are 

registered broker-dealers and FINRA 

members, such as those who transact in 

privately issued securities, are also 

subject to FINRA rules applicable to 

communications, including restrictions 

on the use of compensated testimonials, 

and may be subject to Regulation BI. 

We believe that the costs and benefits 

of the conditions on the use of 

testimonials and endorsements in an 

advertisement will have similar costs 

and benefits to those described 

above,936 though these effects will be 

mitigated to the extent that the adviser 

was complying with the current 

solicitation rule. To some extent these 

effects will also be mitigated to the 

extent the promoter is a registered 

broker-dealer and FINRA member; such 

a promoter could adapt existing 

compliance systems, for instance, but 

will need to modify for any differences 

under the two regulatory constructs. 

i. Disclosures 

We expect similar costs and benefits 

of the disclosure requirements for 

compensated testimonials and 

endorsements as described above for 

non-compensated testimonials and 

endorsements. For example, we expect 

investors to benefit from new 

disclosures, as mitigated to the extent 

that, for example, conflict of interest 

disclosures may not necessarily lead to 

optimal decisions by investors. Further, 

disclosures may impose compliance 

costs on advisers and promoters similar 

to those described above, including 

costs to draft new disclosures in 

connection with, for example, 

advertisements by non-cash 

compensated promoters and in 

connection with compensated 

testimonials or endorsements made to 

prospective or current investors in 

private funds advised by the adviser. 

However, these costs and benefits 

may be mitigated with respect to 

compensated testimonials or 

endorsements for four reasons. First, 

these costs may be mitigated for 

communications made by cashcompensated solicitors, given the 

disclosure requirements under the 

current solicitation rule. Currently, cash 

compensated solicitors must provide 

disclosures to clients pursuant to rule 

206(4)–3(b), as well as provide the 

investment adviser’s Form ADV 

brochure and their disclosure statement 

to potential investors. As a result, we 

expect that these costs will be mitigated 

to the extent that this type of 

information is already known and 

accessible to the investment adviser and 

promoter, and to the extent that similar 

information is already provided under 

the current solicitation rule. Further, the 

final rule’s requirement to provide 

disclosure at the time the testimonial or 

endorsement is disseminated is similar 

to the current solicitation rule’s 

requirement to deliver disclosure at the 

time of any solicitation activities. 

Second, the final rule exempts from 

these disclosure requirements certain 

affiliates of the adviser, provided that 

the affiliation is readily apparent or 

disclosed to the client or investors at the 

time the testimonial or endorsement is 

disseminated. 

Third, the costs and benefits of this 

provision may be mitigated because the 

final rule includes exemptions from 

these disclosure requirements. First, 

there is an exemption from these 

requirements when a broker-dealer 

provides a testimonial or endorsement 

to a retail customer that is a 

recommendation subject to Regulation 

BI. Second, when a broker-dealer 

provides a testimonial or endorsement 

to an investor that is not a retail 

customer as defined by Regulation BI, 

there is an exemption from the 

requirements to disclose the material 

terms of any compensation arrangement 

and a description of any material 


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937See supra section II.C.2. 

conflicts of interest. As a result, the 

extent of the effects of this exemption 

on investors will vary. Where the 

testimonial or endorsement is a 

recommendation to a retail customer 

subject to Regulation BI, broker-dealers, 

including those that are also registered 

as investment advisers, acc will have to 

comply with the Disclosure Obligation 

under Regulation BI and will not also be 

subject to disclosure requirements 

under the final rule. Although these 

investors will not receive the investor 

protection benefits of the marketing rule 

disclosures, the recommendation will be 

subject to Regulation BI requirements 

under the baseline. With respect to 

testimonials or endorsements by a 

broker-dealer to investors that are not 

retail customers (as defined by 

Regulation BI), although we believe 

such investors will be able to request 

from the broker-dealer other information 

about the solicitation, some may not. 

These exemptions may, therefore, result 

in a reduction of costs and benefits of 

the disclosure provisions for 

testimonials and endorsements to these 

investors. 

These exemptions might also make 

advisers more likely to compensate a 

broker-dealer as a promoter rather than 

promoters that are not broker-dealers, 

which would give these broker-dealers a 

competitive advantage. Further, with 

respect to communications made by 

broker-dealers that are not so exempted, 

costs for promoters who are brokerdealers may also be mitigated to the 

extent that broker-dealers are already 

preparing similar disclosures in order to 

comply with other disclosure 

obligations.937

Finally, because there is no Form 

ADV brochure delivery requirement 

under the final rule, as compared to the 

current solicitation rule, we anticipate a 

reduction in costs associated with cashcompensated promoters no longer being 

subject to this requirement. We expect 

that this will not result in a loss of 

benefits to clients, however, because 

they will still receive the brochure from 

advisers as a result of advisers’ delivery 

obligations. We recognize, however, that 

investment advisers and persons who 

are currently cash-compensated 

solicitors will bear costs as a result of 

the replacement of the current rule’s 

disclosure requirements with the final 

rule’s disclosure requirements. 

ii. Oversight and Compliance 

Investment advisers must have a 

reasonable belief that the solicitors 

comply with the provisions of the 

Advisers Act and rules under the 

current solicitation rule, and we 

therefore expect the magnitude of the 

costs and benefits from the application 

of the testimonials and endorsements 

requirements related to oversight and 

compliance to be relatively small for 

advisers complying with the current 

rule and for promoters that are cash 

solicitors under the current solicitation 

rule. 

Under the current solicitation rule, 

investment advisers must make a bona 

fide effort to ascertain whether the cashcompensated solicitor has complied 

with the provisions of its written 

agreement with the adviser and must 

have a reasonable basis for so believing. 

As described above, the final rule has an 

oversight and compliance provision that 

requires the investment adviser to have 

a reasonable basis for believing that a 

testimonial or endorsement complies 

with the rule, and as applicable here, 

the adviser must also have a written 

agreement with the person giving a 

testimonial or endorsement that 

describes the scope of the agreed upon 

activities when making payments for 

compensated testimonials and 

endorsements that are above the de 

minimis threshold. This provision will 

help ensure that communications made 

by promoters comply with the 

provisions of the final rule. Further, this 

requirement would entail costs for both 

advisers and their promoters to devote 

personnel time and managerial 

resources to enter into written 

agreements and update the processes 

necessary for oversight and compliance 

of testimonials and endorsements. 

These benefits and costs may, 

however, be mitigated for several 

reasons. First, to the extent that advisers 

with cash-compensated solicitors are 

already substantially performing this 

oversight in connection with their 

compliance with rule 206(4)–3’s 

oversight requirements, the rule will not 

have these full effects. Second, for 

private placements of private fund 

shares, the written private placement 

agreement could meet the written 

agreement requirement. Third, the final 

rule includes certain exemptions from 

the requirement to enter into a written 

agreement with the adviser. The first 

such exemption applies where de 

minimis compensation is provided to 

the promoter. For example, promoters 

providing testimonials or endorsements 

in refer-a-friend programs will likely be 

eligible for this exemption. The second 

such exemption applies to certain 

affiliates of the adviser, provided that 

the affiliation is readily apparent or 

disclosed to the client or investors at the 

time the testimonial or endorsement is 

disseminated. 

iii. Disqualification 

The final rule contains 

disqualification provisions which 

prohibit an adviser from compensating 

a person, directly or indirectly, for any 

testimonial or endorsement if the 

adviser knows, or, in the exercise of 

reasonable care, should have known, 

that the person is an ineligible person at 

the time the testimonial or endorsement 

is disseminated. The rule defines an 

‘‘ineligible person’’ to mean a person, 

who is subject to a disqualifying 

Commission action or disqualifying 

event, and certain of that person’s 

employees and other persons associated 

with an ineligible person. The definition 

further encompasses, as appropriate, all 

general partners or all elected managers 

of an ineligible person. 

Ineligible Persons and Disqualifying 

Events 

Currently, the solicitation rule 

categorically bars advisers from making 

cash payments to certain disqualified 

persons. The final rule’s disqualification 

provisions generally expand the set of 

ineligible persons by including certain 

disciplinary actions that are not part of 

the current solicitation rule. For 

example, under the final rule a 

disqualifying event is expanded to also 

include generally actions of the CFTC 

and self-regulatory organizations. It also 

newly includes Commission cease and 

desist orders from committing or 

causing a violation or future violation of 

any scienter-based anti-fraud provision 

of the Federal securities laws, and 

Section 5 of the Securities Act. 

The final rule’s prohibition on 

compensating such ineligible persons 

could yield benefits for investors by 

prohibiting investment advisers from 

hiring promoters most likely to abuse 

investors’ trust—that is, promoters who 

have been subject to certain 

Commission opinions or orders, other 

regulatory actions, civil actions, or 

convictions for certain conduct. This 

prohibition could, however, also yield 

costs for advisers. For example, an 

adviser may not be able to hire a 

solicitor that the adviser otherwise feels 

to be best able to promote its service. 

This may reduce the number of persons 

available to advisers to serve as 

promoters, increase the cost of obtaining 

referrals for investment advisers, and 

impose costs on those promoters who 

are disqualified. The application of the 

final rule’s definition of ineligible 

person could also impose additional 

compliance and search costs on 

investment advisers. For example, 

investment advisers will need to check 

that a promoter is not an ineligible 


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938See supra section II.C.4.a. 

939See DALBAR, Inc., SEC Staff No-Action Letter 

(Mar. 24, 1998). 

person. In addition, to the extent the 

disqualification provisions under the 

new rule result in an increase in the 

number of disqualified persons as 

compared to the current rule, the 

number of available potential promoters 

would fall, which could increase the 

difficulty of finding a promoter for an 

adviser. 

We expect that the benefits and costs 

of this provision may be mitigated for a 

number of reasons. First, to the extent 

a solicitor is currently cashcompensated and currently subject to 

the solicitation rule, the final 

disqualification provisions are not 

entirely new, and only those changes 

from the solicitation rule’s 

disqualification provisions, including 

new bars on persons subject to CFTC 

and self-regulatory organization orders, 

will have any economic effects. 

Second, the final rule includes certain 

exemptions from this requirement. The 

first such exemption is available for 

promoters who receive de minimis 

compensation. The second exemption is 

available for promoters that are brokers 

or dealers registered with the 

Commission in accordance with section 

15(b) of the Exchange Act, provided 

they are not subject to statutory 

disqualification under the Exchange 

Act. Broker-dealers currently have 

similar provisions that protect investors 

by disqualifying certain individuals 

from acting as a broker-dealer. This 

exemption may further have the effect of 

making it more likely that an adviser 

will compensate a broker-dealer as a 

promoter. In addition, persons that are 

covered by rule 506(d) of Regulation D 

under the Securities Act with respect to 

a rule 506 securities offering and whose 

involvement would not disqualify the 

offering under that rule (such as persons 

acting as placement agents for a private 

fund) will also not be disqualified under 

this disqualification provision of the 

final rule, which could similarly 

encourage the use of such agents in 

connection with marketing activities for 

private funds. 

Finally, the final rule’s 

disqualification provisions will not 

disqualify any promoter for any 

matter(s) that occurred prior to the 

effective date of the rule, if such matter 

would not have disqualified the 

promoter under rule 206(4)–3, as in 

effect prior to the effective date of the 

rule. We expect this will reduce the 

costs and benefits of the disqualification 

provisions when the rule initially goes 

into effect. 

The final rule also provides a 

conditional carve-out from the 

definition of disqualifying event, with 

respect to a person that is subject to 

certain Commission opinions or orders, 

provided certain requirements are met. 

The provisions of this conditional carveout are similar to statements in staff noaction letters in which the staff stated 

that it would not recommend 

enforcement action to the Commission 

under section 206(4) and rule 206(4)–3 

if the solicitor’s practices were 

consistent with certain representations 

made in connection with those letters. 

Diligence Standards 

In addition to changing what 

promoters are ineligible to be 

compensated by an adviser, the final 

rule changes the diligence standards of 

investment advisers when hiring 

promoters. It establishes a knowledge or 

reasonable care standard for the 

disqualification provisions, which 

replaces the current solicitation rule’s 

absolute bar on paying cash for 

solicitation activities to a person with 

any disciplinary history enumerated in 

the rule. 

In general, we believe that the 

requirement to exercise reasonable care 

at the time of dissemination will yield 

indirect benefits for investors, because it 

will require advisers to help ensure that 

the protections of the rule’s 

disqualification provisions are realized 

for investors. This standard will also 

generally impose costs on advisers 

related to the necessary investigation of 

the promoter and to ensuring that they 

remain in compliance. 

We expect that the benefits and costs 

of this provision may be mitigated to the 

extent a solicitor is cash-compensated 

and previously subject to the 

solicitation rule. The required diligence 

standard in the final rule is formally less 

burdensome than was required under 

the current solicitation rule, which 

could lower compliance costs for 

advisers, including by reducing the 

likelihood that advisers will 

inadvertently violate the provision due 

to disqualifying events that they would 

not, even in the exercise of reasonable 

care, have known existed. We do not, 

however, believe that this standard will 

significantly affect the client and 

investor protections of the 

disqualification provisions, because we 

do not believe that investigation beyond 

what is reasonable under the 

circumstances would yield substantial 

benefits. Under the final rule, an adviser 

will need to inquire into the relevant 

facts of an engagement, with the method 

or level of due diligence or other inquiry 

varying depending on the circumstances 

of the compensated promoter and its 

arrangement with the adviser.938 To the 

extent that an engagement presents 

greater risk, greater screening and 

compliance mechanisms would be 

required under the rule, which we 

believe would preserve these benefits. 

For example, to the extent that there are 

indicators suggesting bad actor 

involvement, increased levels of due 

diligence will be required. Further, we 

believe that advisers will generally use 

many of the same mechanisms that they 

use today to determine whether a 

disqualified person is an ineligible 

person under the final rule. To the 

extent that the mechanisms currently in 

use already resemble or satisfy the final 

rule’s diligence standard, the cost 

burden of the new standard may be 

mitigated. 

5. Third-Party Ratings 

The final rule will also restrict the use 

of third-party ratings in advertisements, 

subject to certain requirements about 

the structure of the rating, and clear and 

prominent disclosures about the date of 

the rating, the identity of the third party, 

and compensation provided for 

obtaining or using the rating. We 

analyze the costs and benefits of 

imposing restrictions on the use of 

third-party ratings on communications 

subject to these restrictions below. 

While the current advertising rule 

does not mention third-party ratings, it 

prohibits an advertisement that contains 

a third-party rating if it contains an 

untrue statement or a material fact or is 

otherwise false or misleading. Further, 

the current solicitation rule, like the 

current advertising rule, does not 

expressly mention third-party ratings. 

The staff has taken the position that 

certain ratings may constitute 

testimonials and stated it would not 

recommend enforcement action under 

the prohibition of testimonials if an 

adviser made references in an 

advertisement to third-party ratings that 

reflect client experiences, based on 

certain representations.939 Specifically, 

no-action letters have stated the staff 

would consider the following when not 

recommending an enforcement action 

for potentially false or misleading 

ratings in an advertisement: Whether 

the advertisement disclosed the criteria 

on which the rating was based, whether 

favorable ratings were selectively 

disclosed, whether there were any 

untrue implications of being a top-rated 

adviser, the identity of who created and 

conducted the rating, and whether 

investors can expect similar 


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940See id.; see Investment Adviser Association, 

SEC Staff No-Action Letter (Dec. 2, 2005). 

941See supra section III.B. 

942Although the investment advisers bear the 

legal burden of complying with third-party ratings 

requirement, we expect that the costs of this 

requirement will be partially borne by other parties, 

such as persons communicating on behalf of an 

investment adviser. 

943See infra section IV.B.3. 

944 Initial cost burden estimate of $1,011 from 

section IV.B.3. 13,724 × 1⁄2 = 6,862 affected 

investment advisers. $1,011 × 6,862 = $6,937,482. 

945Ongoing cost estimate includes disclosure, 

oversight, and annual costs from section IV.B.3. 

$252.74 × 6,862 = $1,734,301.88. For the total first 

year cost, $6,937,482 + $1,734,301.88 = 

$8,671,783.88. 

946See infra section IV.B.4. 

947These total cost estimates differ from those in 

section IV.B.4, because the estimates in those 

sections amortize the initial implementation costs 

over three years, while the cost estimates in this 

section do not. However, both estimates make 

identical assumptions about the resources required 

to comply with the rule. The initial burden 

associated with net performance is based on 15 

hours × $337 (compliance manager and compliance 

attorney, split evenly) = $5,055 for each of the 

13,038 investment advisers expected to be affected, 

implying an initial cost of $65,907,090. The initial 

burden associated with performance time periods is 

based on 35 hours × $337 (compliance manager and 

compliance attorney, split evenly) = $11,795 for 

each of the 13,038 investment advisers expected to 

be affected, implying an initial cost of 

$153,783,210. The initial burden associated with 

related performance is based on 30 hours × $337 

(compliance manager and compliance attorney, 

split evenly) = $10,110 for each of the 10,979 

investment advisers expected to be affected, 

implying an initial cost of $110,997,690. The initial 

burden associated with extracted performance is 

based on 10 hours × $337 (compliance manager and 

compliance attorney, split evenly) = $3,370 for each 

of the 686 investment advisers expected to be 

affected, implying an initial cost of $2,311,820. The 

initial burden associated with hypothetical 

performance is based on 15 hours × $337 

(compliance manager and compliance attorney, 

split evenly) + 7 hours × $530 (compliance officer) 

= $8,765 for each of the 6,862 investment advisers 

expected to be affected, implying an initial cost of 

$60,145,430. The initial burden associated with 

predecessor performance is based on 20 hours × 

$337 (compliance manager and compliance 

attorney, split evenly) = $6,740 for each of the 275 

investment advisers expected to be affected, 

implying an initial cost of $1,853,500. Therefore, 

the total initial industry burden associated with the 

final rule is $197,721,270 + $153,783,210 + 

$110,997,690 + $2,311,820 + $60,145,430 + 

$1,853,500 = $394,998,740. See infra section II.B.4. 

948The ongoing burden associated with net 

performance is based on 10.5 hours × $337 

(compliance manager and compliance attorney, 

split evenly) = $3,538.50 for each of the 13,038 

investment advisers expected to be affected, 

implying an ongoing cost of $46,134,963. The 

ongoing burden associated with performance time 

periods is based on 28 hours × $337 (compliance 

manager and compliance attorney, split evenly) = 

$9,436 for each of the 13,038 investment advisers 

expected to be affected, implying an ongoing cost 

of $123,026,568. The ongoing burden associated 

with related performance is based on 17.5 hours × 

$337 (compliance manager and compliance 

attorney, split evenly) = $5,897.50 for each of the 

10,979 investment advisers expected to be affected, 

implying an ongoing cost of $64,748,652.50. The 

ongoing burden associated with extracted 

performance is based on 7 hours × $337 

(compliance manager and compliance attorney, 

split evenly) = $2,359 for each of the 686 

investment advisers expected to be affected, 

implying an ongoing cost of $1,618,274. The 

ongoing burden associated with hypothetical 

performance is based on 10.5 hours × $337 

(compliance manager and compliance attorney, 

performance in the future from the 

investment adviser.940

The disclosure requirements of the 

final rule will provide investors more 

information to judge the context of a 

third-party rating, which might reduce 

the likelihood that investors will be 

misled by an investment adviser’s 

ratings.941 Additionally, the final rule 

requires that the adviser have a 

reasonable basis for believing that any 

questionnaire or survey used in the 

preparation of a third-party rating be 

structured to make it equally easy for a 

participant to provide favorable and 

unfavorable responses, and not designed 

or prepared to produce any 

predetermined result, which might also 

reduce the likelihood that investors will 

be misled. Investors will benefit from 

the disclosure requirements for thirdparty ratings, not only because the 

disclosures provide investors with 

additional context to evaluate the 

information provided in ratings, but also 

because the required disclosures may 

dissuade advisers from including 

misleading third-party ratings. 

The disclosures required by the final 

rule might reduce the incentives of 

investment advisers to include thirdparty ratings that might be stale or 

otherwise misleading. The requirement 

to create these disclosures could impose 

costs on advisers, including compliance 

costs related to drafting these 

disclosures and ensuring that they 

comply with the requirements of the 

final rule. In addition, the final rule 

requires that investment advisers make 

certain disclosures or reasonably believe 

that such disclosures have been made, 

which will impose additional costs on 

investment advisers. Investment 

advisers and the associated personnel 

that use third-party ratings in their 

advertisements will bear costs 

associated with compliance with this 

aspect of the final rule.942 These costs 

could entail the dedication of personnel 

time and managerial resources to draft 

disclosures and to satisfy due diligence 

requirements. 

However, these costs and benefits 

may be mitigated because the thirdparty rating requirements of the final 

rule are similar to the representations 

made in staff letters in which it has 

previously stated that it would not 

recommend enforcement under section 

206(4) and rule 206(4)–1. As a result, 

advisers may only bear the incremental 

costs of modifying compliance systems 

to account for the differences of the final 

rule requirements, though these advisers 

would also bear the costs of evaluating 

those differences. 

We have quantified a subset of the 

costs associated with requirements for 

the use of third-party ratings in 

advertisements, specifically, the burden 

of information collection costs 

estimated for the purposes of the 

Paperwork Reduction Act.943 The 

disclosure provisions of the 

requirements for testimonials and 

endorsements will entail information 

collection costs, and investment 

advisers will incur initial 

implementation costs. We estimate that 

investment advisers will incur an initial 

implementation cost of $1,011 for each 

adviser, or $6,937,482 in total.944 We 

estimate that investment advisers will 

incur an ongoing cost of $252.74 per 

year per adviser, or $1,734,301.88 total 

ongoing cost per year. We therefore 

estimate a total industry cost in the first 

year of $8,671,783.88.945

6. Performance Advertising 

The final rule includes provisions that 

impose specific requirements and 

prohibitions on the inclusion of 

performance information in 

advertisements. These provisions 

include net performance requirements, 

prescribed time period requirements, 

prohibitions of statements expressing or 

implying Commission approval or 

review of the calculation or presentation 

of performance results in the 

advertisement, and requirements for 

related performance, extracted 

performance, hypothetical performance, 

and predecessor performance. We 

analyze the costs and benefits of 

imposing these specific requirements on 

the use of performance advertising in 

communications below. 

We have quantified a subset of the 

costs associated with the restrictions on 

the use of performance advertising in 

advertisements, specifically, the burden 

of information collection costs 

estimated for purposes of the Paperwork 

Reduction Act.946 The provisions of the 

requirements for performance 

advertising will entail information 

collection costs and modification of the 

presentation of performance. These 

collection of information costs primarily 

entail an initial cost to update 

performance calculations, and an 

ongoing annual cost for investment 

advisers. We estimate that investment 

advisers will incur a total initial 

implementation cost $394,998,740 947

and a total ongoing cost of $273,772,232 

per year.948 We therefore estimate the 


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split evenly) + 3.75 hours × $530 (compliance 

officer) = $5,526 for each of the 6,862 investment 

advisers expected to be affected, implying an 

ongoing cost of $37,919,412. The ongoing burden 

associated with predecessor performance is based 

on 3.5 hours × $337 (compliance manager and 

compliance attorney, split evenly) = $1,179.50 for 

each of the 275 investment advisers expected to be 

affected, implying an initial cost of $324,362.50. 

Therefore, the total initial industry burden 

associated with the final rule is $138,404,889 + 

$123,026,568 + $64,748,652.50 + $1,618,274 + 

$37,919,412 + $324,362.50 = $273,772,232. See 

infra section II.B.4. 

949 $394,998,740 (total initial cost) + $273,772,232 

(total ongoing cost) + $3,774,000 (external cost) = 

$672,544,972 (total first year cost). 

950See supra section III.C.1.b. 951See supra section II.E.2. 

total cost in the first year to be 

$672,544,972.949

a. Net Performance Requirement 

The final rule will prohibit any 

presentation of gross performance 

unless the advertisement also presents 

net performance with at least equal 

prominence to the presentation of gross 

performance. In addition, the net 

performance must be calculated over the 

same time period, and using the same 

type of return and methodology as, the 

gross performance. While the current 

advertising rule does not mention 

performance advertising, it prohibits 

any untrue statement of a material fact 

and statements that are otherwise false 

or misleading, which includes 

statements made in the context of 

performance advertising. The staff has 

stated its views about the types of 

circumstances in which it may view the 

presentation of performance results as 

misleading, including, for example, 

where an adviser did not disclose how 

advisory fee expenses, commissions, 

and reinvestment of dividends affect the 

performance results.950

This provision will likely benefit 

investors by providing them with 

additional information about the 

performance generated by an investment 

adviser, including the effect of fees and 

expenses on that performance, and 

reducing the chance that they are misled 

by presentations of gross performance. 

To the extent that investment advisers’ 

current practices differ from the 

requirements of this provision, these 

requirements may impose costs on 

advisers, including advisers that serve 

private funds, to compute and include 

net performance in their marketing 

communications, to the extent that 

advisers do not currently compute and 

include net performance. These costs 

could involve devoting personnel time, 

modifying marketing materials, and 

devoting managerial resources. In 

addition, some investors may be better 

able to make their own risk adjusted 

return assessments, and these investors 

may similarly derive fewer benefits from 

this requirement. 

However, these costs and benefits 

may be mitigated to the extent that this 

requirement is similar to the 

circumstances under which the staff has 

previously stated that it would not 

recommend enforcement under section 

206(4) and rule 206(4)–1. Given that 

many investment advisers already 

provide this information in light of staff 

no-action letters, there are not likely to 

be significant costs or benefits to this 

provision. 

b. Prescribed Time Periods 

The final rule prohibits the 

presentation of performance results of 

any portfolio or any composite 

aggregation of related portfolios, other 

than any private fund, in advertisements 

unless the results for one, five, and ten 

year periods are presented as well. Each 

of the required time periods must be 

presented with equal prominence and 

end on a date that is no less recent than 

the most recent calendar-year end.951 If 

the portfolio was not in existence for the 

full duration of any of these three 

periods, the lifetime of the portfolio can 

be substituted. Under the baseline for 

current advertisements, there is no such 

Commission requirement relating to 

performance advertising. 

Requiring advertisements to include 

one, five, and ten year period 

performance will benefit investors other 

than private fund investors by giving 

them standardized information about 

the performance and limiting the 

potential that an investor could be 

unintentionally misled about an 

investment adviser’s performance 

through the investment adviser’s 

selection of performance periods. The 

requirement will impose costs on 

investment advisers, who will need to 

compute the performance for the 

prescribed time periods, update their 

advertising materials, and devote 

personnel time to ensure compliance 

with the final rule. These costs may 

disincentivize the presentation of 

performance results of any portfolio or 

any composite aggregation of related 

portfolios. 

However, these benefits and costs 

may be mitigated to the extent that this 

requirement is similar to information 

currently collected and provided to 

clients in order to comply with GIPS 

standards to present performance 

information. In addition, to the extent 

that advisers already present, for 

example, performance information for 

these time periods, these costs and 

benefits may also be mitigated. 

c. Statements of Commission Approval 

or Review 

The final rule prohibits any 

advertisement that includes a statement, 

whether express or implied, that the 

calculation or presentation of 

performance results has been reviewed 

or approved by the Commission. This 

prohibition will benefit investors by 

preventing misleading advertisements 

that could lead investors to draw false 

conclusions about the Commission’s 

approval of a presentation or calculation 

of performance. Any such statement 

would be false, as the Commission does 

not review or approve of calculations or 

presentations of performance. The 

prohibition may likely impose costs 

associated with legal review of 

performance presentation, but these 

costs are likely to remain small. Further, 

such costs may be mitigated to the 

extent that advisers currently have 

procedures to ensure compliance with 

section 208(a), which contains a similar 

prohibition from representing or 

implying that an adviser’s abilities or 

qualifications have been passed upon by 

the United States or any agency thereof. 

d. Related Performance 

The final rule will condition the 

presentation of ‘‘related performance’’ 

in all advertisements on the inclusion of 

all related portfolios. However, the final 

rule will allow related performance to 

exclude related portfolios as long as the 

advertised performance results are not 

materially higher than if all related 

portfolios had been included. This 

exclusion will be subject to the rule’s 

requirement that the presentation of 

performance results of any portfolio 

include results for one-, five-, and tenyear periods. The final rule will allow 

related performance to be presented 

either on a portfolio-by-portfolio basis 

or as a composite of all related 

portfolios. The inclusion of related 

performance in advertisements may give 

investment advisers flexibility in how 

they choose to advertise their 

performance, such as which aspects of 

their performance they can advertise, 

and might give investors additional 

information about how an investment 

adviser managed portfolios having 

substantially similar investment 

policies, objectives and strategies. 

The requirements for related 

performance may, however, impose 

costs on investment advisers related to 

the creation of composites to the extent 

that they do not currently create 

composites or create composites using 

the final rule’s criteria for related 

portfolios. For example, the ‘‘not 

materially higher than’’ requirement for 


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952See IAA Comment Letter. 

953The use by investment advisers that are also 

broker-dealers of certain forms of related 

performance in advertisements may be viewed by 

FINRA as inconsistent with the content standards 

in FINRA rule 2210. 

954See MFA Comment Letter I; Proskauer 

Comment Letter. 

955Final rule 206(4)–1(e)(6). 956See supra section III.C.1.b. 

excluding related portfolios may 

generate an additional need to 

recalculate performance to verify that 

the related performance satisfies the 

requirement. Further, as discussed 

above, we understand that an adviser 

will likely be required to calculate the 

performance of all related portfolios to 

ensure that any exclusion of certain 

portfolios meets the rule’s conditions, 

which may be burdensome on advisers, 

particularly smaller advisers.952

However, we expect investment 

advisers to incur these calculation costs 

only if they expect sufficient benefits 

from inclusion of related performance. 

Further, we expect that these costs and 

benefits may be mitigated to the extent 

that advisers currently include related 

performance presentations in their 

advertisements that comply with the 

current rule.953 Commenters generally 

described the related performance 

definition that was originally proposed 

as being similar to industry practice.954

In addition, advisers that comply with 

GIPS standards are permitted to show 

related performance in advertisements, 

and presentations that meet the GIPS 

standard requirements to show all 

related performance will also satisfy the 

requirements of this provision to show 

all related performance. 

e. Extracted Performance 

The final rule will condition the 

presentation of extracted performance in 

all advertisements on the advertisement 

providing, or offering to provide 

promptly, the performance results of the 

total portfolio from which the 

performance was extracted. ‘‘Extracted 

performance’’ means ‘‘the performance 

results of a subset of investments 

extracted from a portfolio.’’ 955 While 

the current advertising rule does not 

mention extracted performance, it 

prohibits any untrue statement of a 

material fact and statements that are 

otherwise false or misleading, which 

includes statements made in the context 

of advertising extracted performance. 

The use of extracted performance in 

advertisements will benefit investors by 

giving them information about 

performance results applicable to a 

particular subset of the adviser’s 

investments, and the accompanying 

disclosures could help investors 

contextualize the claims of an 

investment adviser about its extracted 

performance, thereby reducing the risk 

that investors might be misled by such 

extracted performance. 

Investment advisers who use 

extracted performance in their 

advertisements will likely incur costs to 

prepare the performance results of the 

total portfolio from which the 

performance was extracted, to the extent 

that they do not do this already. The 

final rule does not prohibit an adviser 

from presenting a composite of extracts, 

including composite performance that 

complies with GIPS standards. 

However, any presentation of a 

composite of extracts is subject to the 

additional protections that apply to 

hypothetical performance, as discussed 

below, and as a result, these additional 

protections may result in additional 

burdens for advisers that typically 

present extracted performance from 

multiple portfolios as a composite, and 

potentially limit these types of 

presentations of performance to 

institutional investors. 

However, these benefits and costs 

may be mitigated to the extent that the 

restrictions imposed by this provision 

are similar to the manner in which 

advisers currently present extracted 

performance, including under GIPS 

standard requirements applicable to 

similar presentations of extracted 

performance, or other requirements. 

f. Hypothetical Performance 

The rule also prohibits the use of 

hypothetical performance in 

advertisements unless (i) the investment 

adviser adopts and implements policies 

and procedures reasonably designed to 

ensure that the hypothetical 

performance is relevant to the likely 

financial situation and investment 

objectives of the intended audience of 

the advertisement; (ii) provides 

sufficient information to enable the 

intended audience to understand the 

criteria used and assumptions made in 

calculating such hypothetical 

performance; and (iii) provides, or if the 

intended audience is an investor in a 

private fund provides, or offers to 

provide promptly, sufficient 

information to enable the intended 

audience to understand the risks and 

limitations of using such hypothetical 

performance in making investment 

decisions. The rule defines several types 

of hypothetical performance—model 

performance, performance derived from 

model portfolios; backtested 

performance, performance that is 

backtested by the application of a 

strategy to data from prior time periods 

when the strategy was not actually used 

during those periods; and targeted or 

projected performance returns with 

respect to any portfolio or to the 

investment services offered in the 

advertisement. 

The current advertising rule does not 

explicitly address hypothetical 

performance. The Commission has, 

however, brought enforcement actions 

alleging that the presentation of 

performance results that were not 

actually achieved would be misleading 

where certain disclosures were not 

made, including disclosure that the 

performance results were hypothetical 

or disclosure of the relevant limitations 

inherent in hypothetical results and the 

reasons why actual results would 

differ.956

The final rule’s imposes minimum 

standards for the presentation of 

hypothetical performance in 

advertisements, which could potentially 

increase the willingness of investment 

advisers to use hypothetical 

performance. If investment advisers 

increase their use of hypothetical 

performance in advertising, investors 

may benefit from the additional 

information provided by hypothetical 

performance advertising, together with 

information and context that may help 

investors to better understand it. This 

additional information could aid an 

investor in the choice of an investment 

adviser by helping investors find a 

better match or reducing costs 

associated with finding an investment 

adviser. 

To the extent that these requirements 

will help ensure that hypothetical 

performance is disseminated to the 

specific investors who have access to 

the resources to independently analyze 

this information and who have the 

financial expertise to understand the 

risks and limitations of these types of 

presentations, these requirements on the 

presentation of hypothetical 

performance will benefit investors. 

Although investors will not face any 

direct costs from the inclusion of 

hypothetical performance, they may 

face indirect costs associated with 

processing and interpreting this new 

information if investment advisers 

increase their use of hypothetical 

performance. Even if investors are 

provided with sufficient information to 

contextualize hypothetical performance, 

they may need time and expertise to 

interpret that contextual information. 

Some, investors might have difficulty 

interpreting the context of hypothetical 

performance because of a lack of 

resources of financial expertise, which 

could lead to poorer matches with 

investment advisers. However, the final 


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957See supra section II.E.6.b. 958See Horizon Letter. 

959The total cost increase for exempt reporting 

advisers reflects an increase in the number of 

exempt reporting advisers rather than a per adviser 

cost increase generated by the final rule. 

960See infra section IV.E. Cost estimates were 

calculated by subtracting current Form ADV cost 

burdens from the new Form ADV cost burdens. 

rule requires disclosures and contextual 

information for hypothetical 

performance that are sufficient for the 

intended audience, which should 

mitigate these costs to investors. 

Advisers may incur costs associated 

with complying with the three 

conditions described above, such as 

consulting with in-house counsel, time 

to draft these policies and procedures 

and disclosures, and requiring firms to 

pay outside counsel or consultants to 

draft or review these policies and 

procedures and disclosures. These 

requirements could also entail costs 

such as training of staff to comply with 

the policies and procedures, and 

demands on personnel time and counsel 

to draft and review advertisements and 

disclosures to ensure compliance with 

the policies and procedures and the 

rule’s requirements. We recognize that 

investment advisers will need to 

evaluate their intended audiences, as 

well as ensure that the advertisement is 

tailored to the audience receiving it, 

which will cause advisers to incur costs. 

An adviser may make such evaluations 

based on past experiences with investor 

types, including, for example, routine 

requests from those types of investors in 

the past, or based on information they 

have gathered from potential investors 

(e.g., questionnaires, surveys, or 

conversations) or academic research.957

Investment advisers are, however, 

unlikely to incur these costs if they do 

not expect the benefits of hypothetical 

performance advertising to exceed the 

costs associated with screening. 

The costs and benefits associated with 

these restrictions may, however, be 

mitigated to the extent that advisers 

currently present information that meets 

the final rule’s definition of 

‘‘hypothetical performance’’ in 

circumstances consistent with the 

representations made in staff no-action 

letters. Additionally, to the extent that 

some investment advisers already 

maintain policies and procedures to 

screen prospective clients in order to 

comply with the GIPS standards, the net 

costs and benefits associated evaluating 

an ‘‘intended audience’’ for purposes of 

complying with this requirement may 

be mitigated. Under these 

circumstances, advisers may only bear 

the incremental costs of modifying 

compliance systems and disclosures to 

account for the differences of the final 

rule’s requirements, though these 

advisers would also bear the costs of 

evaluating those differences. 

g. Predecessor Performance 

The final rule subjects the 

presentation of predecessor performance 

to several requirements: (i) The person 

or persons who were primarily 

responsible for achieving the prior 

performance results manage accounts at 

the advertising adviser; (ii) the accounts 

managed at the predecessor investment 

adviser are sufficiently similar to the 

accounts managed at the advertising 

investment adviser that the performance 

results would provide relevant 

information to clients or investors; (iii) 

all accounts that were managed in a 

substantially similar manner are 

advertised unless the exclusion of any 

such account would not result in 

materially higher performance and the 

exclusion of any account does not alter 

the presentation of any applicable time 

periods required by the final rule; and 

(iv) the advertisement includes, clearly 

and prominently, all relevant 

disclosures, including that the 

performance results were from accounts 

managed at another entity. 

Under the current advertising rule, 

predecessor performance is not 

explicitly addressed; however, the staff 

has stated in no-action letters that it 

would not view advertisements that 

include predecessor performance as 

misleading under certain 

circumstances.958 These circumstances 

are similar to the requirements of the 

final rule, and costs and benefits may 

flow from the extent to which the rule 

imposes requirements for use of 

predecessor performance. 

To the extent that the final rule’s 

provisions permit the use of predecessor 

performance in advertisements, 

predecessor performance has the 

potential to provide additional 

information and context for investors. 

This information could improve 

investor decisions and reduce the costs 

associated with searching for an 

investment adviser. However, the rule 

has requirements that will impose costs 

on investment advisers that present 

predecessor performance. Determining 

the extent to which the personnel and 

the portfolios of a predecessor adviser 

are sufficiently similar under the rule 

can require resources, especially when 

portfolios are managed by multiple 

people, or have long or complicated 

performance histories. Additionally, 

investment advisers may bear additional 

costs to analyze any intellectual 

property issues or non-compete 

agreements between portfolio 

management personnel and their 

previous firms. 

7. Amendments to Form ADV 

Under the final rule, Form ADV will 

include additional questions about 

investment advisers’ advertising 

practices, including performance 

advertising, the use of testimonials and 

endorsements, and compensation for 

promoters. Current Form ADV does not 

contain any questions about advertising 

practices, and the changes to Form ADV 

will support the Commission’s 

compliance oversight efforts, thus 

helping the Commission monitor market 

practices and the effects of its rules. For 

example, the changes to Form ADV will 

allow the Commission to understand the 

relative popularity of certain advertising 

practices and compensation practices 

for promoters. To the extent that these 

amendments do facilitate compliance 

oversight, these changes may benefit 

clients. These investors may also derive 

benefits from the information provided 

in the Form ADV, as amended, which 

may help them make better decisions 

with respect to which advisers’ services 

to utilize. Additionally, it will enable 

the Commission to evaluate the final 

rule’s requirements, and their impact on 

how investment advisers choose to 

advertise. Investment advisers that use 

advertisements will likely incur 

additional costs associated with 

collecting information to answer these 

questions, as investment advisers will 

need to accurately track the types of 

content in their advertisements. 

We have quantified a subset of the 

costs associated with changes to Form 

ADV, specifically the burden of 

information collection costs estimated 

for the purposes the Paperwork 

Reduction Act. The amendments to 

Form ADV will impose additional 

ongoing costs for investment advisers. 

We estimate the marginal increase in the 

aggregate cost burden of these changes 

to Form ADV will be $4,355,288 per 

year for RIAs not obligated to prepare 

and file relationship summaries, 

$3,429,942 per year for RIAs obligated 

to prepare and file relationship 

summaries, and $171,881 per year for 

exempt reporting advisers.959 We 

therefore estimate the total annual cost 

increase for all advisers to be $7,957,111 

per year.960 However, we note that some 

portion of the increase in costs is due to 

an increase in the number of RIAs that 

will bear these costs, and not entirely 


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961See final rule 204–2(a)(11)(i)(A)(1). 

962See final rule 204–2(a)(11)(i)(A)(2). 

963See final rule 204–2(a)(11)(i)(A) and (15)(i). 

964See rule 204–2(a)(16); See Great Lakes Letter 

(not recommending enforcement action and stating 

the staff’s view that the requirement in rule 204– 

2(a)(16) applies to a successor’s use of a 

predecessor’s performance data). 

due to an increase in the cost burden for 

an individual RIA. 

8. Recordkeeping 

The amendments to the recordkeeping 

rule will require investment advisers to 

make and keep records of all 

advertisements they disseminate. 

Generally, the amended recordkeeping 

rule will require additional retention of 

written or distributed communications 

of an investment adviser, including 

certain oral communications. For 

example, the current recordkeeping rule 

requires the retention of advertisements 

disseminated to ten or more individuals. 

In contrast, the amendments require that 

advisers retain all advertisements, with 

the two exceptions. First, for oral 

advertisements, the adviser may, instead 

of recording and retaining the 

advertisement, retain a copy of any 

written or recorded materials used by 

the adviser in connection with the oral 

advertisement.961 Second, if an adviser’s 

advertisement includes a compensated 

oral testimonial or endorsement, the 

adviser may, instead of recording and 

retaining the advertisement, make and 

keep a record of the disclosures 

provided to investors.962 In addition, if 

the required disclosures with respect to 

a testimonial or endorsement are not 

included in the advertisement, then the 

adviser must retain copies of such 

disclosures provided to investors.963

The recordkeeping rule will continue to 

require that advisers keep a record of 

communications other than 

advertisements (for example, notices, 

circulars, newspaper articles, 

investment letters, and bulletins) that 

the investment adviser disseminates, 

directly or indirectly, to ten or more 

persons. Additionally, there are some 

types of newly required records that can 

be particularly costly to retain. For 

example, creating and retaining records 

of orally delivered disclosures will 

impose extra costs on investment 

advisers and promoters. These 

requirements may result in costs on 

investment advisers, such as dedicating 

personnel time to capture and retain 

these records. 

The amendments to the recordkeeping 

rule will also require investment 

advisers to make and keep: (i) 

Documentation of communications 

relating to predecessor performance; (ii) 

documentation to support performance 

calculations; (iii) copies of any 

questionnaire or survey used in 

preparation of a third-party rating (in 

the event the adviser obtains a copy of 

the questionnaire or survey); (iv) if not 

included in an advertisement, a record 

of disclosures provided to the client; (v) 

documentation substantiating the 

adviser’s reasonable basis for believing 

that a testimonial, endorsement, or 

third-party rating complies with the 

applicable tailored requirements of the 

marketing rule and copies of any written 

agreement made with promoters; (vi) a 

record of certain affiliated personnel of 

the adviser; and (vii) a record of who the 

‘‘intended audience’’ is. 

These requirements will impose 

compliance costs on advisers related to 

the creation and retention of these 

records. These costs will be associated 

with additional personnel time to 

capture or retain these communications. 

Notably, retaining documents that form 

the basis of a calculation could be more 

expensive due to the requirement that 

advisers retain calculation information 

for portfolios (and not only for managed 

accounts and securities 

recommendations). However, we believe 

that there is overlap between accounts 

included in ‘‘portfolios’’ and those 

‘‘managed accounts’’ already captured 

by the current recordkeeping rule. 

Retaining these documents might 

require an investment adviser to 

evaluate which documents are relevant 

for a performance calculation, which 

could potentially generate costs for the 

investment adviser. Similarly, advisers 

will incur costs related to required 

records that are not communications, 

including a record of who an 

advertisement’s ‘‘intended audience’’ is, 

for example. Creation of these records 

might involve research and collection of 

information about an investment 

adviser’s intended audience. 

Furthermore, the recordkeeping rule 

requires advisers to retain documents 

that support the inclusion of 

predecessor performance in an 

advertisement, including a requirement 

to make and keep originals of all written 

communications received and copies of 

all written communications sent by an 

investment adviser relating to 

predecessor performance and the 

performance or rate of return of any 

portfolios. In contrast, this provision in 

the current recordkeeping rule only 

requires advisers to make and keep 

originals of all written communications 

received and copies of all written 

communications sent by an investment 

adviser relating to the performance or 

rate of return of any or all managed 

accounts or securities 

recommendations. The recordkeeping 

rule also requires that a list of certain 

affiliated personnel be retained, to 

parallel the exemption for certain 

affiliated personnel from the 

compensated testimonials and 

endorsements requirements. This 

requirement may generate costs for the 

investment adviser to retain and update 

this list. Some of these costs may 

ultimately be passed on to clients or 

investors through higher fees. 

These costs may, however, be 

mitigated to the extent that advisers are 

already retaining similar records. Under 

the current recordkeeping rule, for 

example, advisers are required to retain 

originals of documentation supporting 

the calculation of performance or rate of 

return of all managed accounts or 

securities recommendations. The 

amendments to the recordkeeping rule, 

in contrast, will also require 

documentation supporting the 

calculation of performance or the rate of 

return for any or all portfolios. As a 

result, the total costs of compliance for 

advisers with respect to 

communications previously included in 

the definition of an advertisement will 

be mitigated somewhat. Further, the 

staff has, for example, taken the position 

that rule 204–2(a)(16) also applies to a 

successor’s use of a predecessor’s 

performance data.964 As a result, 

retention of some documentation and 

written communications required to be 

retained under the recordkeeping rule 

will impose relatively minor costs on 

investment advisers with respect to 

communications currently subject to the 

existing recordkeeping requirements. 

Under the baseline, there are no 

recordkeeping requirements for the 

communications of solicitors, except for 

the disclosure documents that solicitors 

are required to provide to clients 

pursuant to the current solicitation rule. 

Investment advisers that currently use 

solicitors will incur additional costs 

associated with the substantive changes 

to the final recordkeeping requirements 

discussed in this section, as well as the 

expansion of the definition of 

advertisement to include testimonials 

and endorsements. In addition, given 

that the recordkeeping obligations fall 

upon investment advisers and not their 

promoters, we do not anticipate this 

provision will generate substantial costs 

or benefits for promoters. 

We have quantified a subset of the 

costs associated with the recordkeeping 

provisions, specifically, the burden of 

information collection costs estimated 

for the purposes of the Paperwork 

Reduction Act. The amendments to the 

recordkeeping requirements will cause 


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965See infra section IV.D. 966See supra section III.B. 967See supra section III.B. 

investment advisers to incur annual 

ongoing costs related to the creation and 

retention of records. We estimate these 

costs to have a total cost of $16,636,198 

per year.965

E. Efficiency, Competition, Capital 

Formation 

We believe the final amendments 

could have positive effects on 

efficiency, competition, and capital 

formation. As discussed below, we 

expect the amendments could improve 

efficiency by improving the quantity 

and quality of information in 

advertisements. Further, if investors are 

thereby able to make more informed 

decisions about investment advisers and 

more easily learn about the ability and 

potential fit of investment advisers, 

investment advisers might have a 

stronger incentive to invest in the 

quality of their services, which could 

promote increased competition among 

investment advisers. However, if 

advertisements attract customers for 

investment advisers in a manner 

unrelated to the quality of their services, 

competition among investment 

advertisers could result in an inefficient 

‘‘arms race.’’ To the extent that the final 

rule results in improved matches in the 

market for investment advice, potential 

investors may be drawn to invest 

additional capital, which could promote 

capital formation. 

1. Efficiency 

The final rules have the potential to 

improve the information in investment 

adviser advertisements by improving 

the quantity and quality of information 

available to investors. This in turn could 

improve the efficiency of the market for 

investment advice in two ways. 

First, the final rule could increase the 

overall amount of information in 

investment adviser advertisements by 

increasing the types of information that 

investment advisers include in their 

advertisements and prescribing 

requirements and restrictions on the 

presentation of certain kinds of 

information in adviser and private fund 

advertisements. This could either be 

directly through the provisions of the 

rule, or indirectly, through competition 

among investment advisers on how 

informative their advertisements are. 

For example, to the extent that the rules 

and rescission of existing no-action 

letters increase certainty for advisers 

and thereby reduce compliance costs, 

advisers may increase their use of the 

types of marketing activities covered by 

the final rules. This may increase 

investor access to information regarding 

the ability and potential fit of 

investment advisers, which may 

improve the quality of the matches that 

investors make with investment 

advisers. In addition, advertisements 

can improve the efficiency of the 

investment adviser search process 

through the investor protections and 

disclosures that the final rule will 

provide. On the other hand, investment 

advisers, promoters, and related 

personnel may reduce the overall 

amount of information in these 

communications, because of the 

expanded definition of an advertisement 

and related costs imposed on 

communications newly brought within 

the definition, which could reduce the 

overall efficiency of an investor’s 

investment adviser search. 

The information from testimonials, 

endorsements, performance data, and 

third-party ratings presented in 

accordance with the provisions of the 

rule can potentially provide valuable 

information for investors. Better 

informed investors could improve the 

efficiency of the market for investment 

advice by improving the matches 

between investors and investment 

advisers and reducing search costs, as 

they may be better able to evaluate 

investment advisers based on the 

information in their advertisements.966

To the extent that the rule improves the 

usefulness of the recommendations of 

non-cash compensated promoters, 

another programmatic benefit of the rule 

is that it may improve the efficiency of 

matches between investment advisers 

and investors. 

Although the final rule requires 

additional disclosures when investment 

advisers include certain elements in 

their advertisements, the value of these 

disclosures to investors depends on the 

extent to which investors are able to 

utilize the disclosures to better 

understand the context of an adviser’s 

claims. By providing information to 

investors in the required disclosures to 

aid their evaluation of an adviser’s 

advertisements, these disclosures could 

mitigate the potential that 

advertisements mislead investors, and 

improve their ability to find the right 

investment adviser for their needs. 

Second, the final rule could increase 

the overall quality of information about 

investment advisers. To the extent that 

the rules mitigate misleading or 

fraudulent advertising practices, 

investors may be more likely to believe 

the claims of investment adviser 

advertisements. Because information in 

advertisements is more likely to 

increase the number of investors 

interested in an investment adviser, 

advisers may include more information 

that will improve the choices of 

investors. One potential consequence of 

modifying the regulatory standards for 

advertisements provided by the final 

rule is that investment advisers may 

increase the amount of resources they 

allocate to advertising their services 

(including resources aimed to address 

compliance with the final rule). While 

additional spending on advertisements 

may facilitate matching between 

investment advisers and investors, 

under some circumstances, this 

additional spending may be inefficient 

if the benefits of better matches fall 

short of the resources required to 

facilitate better matches. 

The final rule also merges certain 

solicitation activity into the definitions 

of testimonials and endorsements and 

expands the scope by covering all forms 

of compensation. The rule also includes 

persons providing testimonials or 

endorsements to investors in a private 

fund. In addition, the rule will continue 

to require disclosures to make salient 

the nature of the relationship between a 

promoter and the investment advisers. 

These provisions could improve the 

efficiency of the market for promoters 

and their investment advisers by 

ensuring that the provisions for 

testimonials and endorsements apply to 

all forms of potential conflicts of 

interest. If investors are aware of these 

conflicts of interest through disclosures, 

they may be better able to interpret 

testimonials and endorsements and 

choose an investment adviser that is of 

higher quality, or a better match. 

2. Competition 

As discussed earlier, the final rule 

might result in an increase in the 

efficiency of investment adviser 

advertisements, providing more useful 

information to investors about the 

abilities of an investment adviser than 

advertisements under the baseline, 

which would allow them to make better 

decisions about which investment 

advisers to choose.967 In this case, if 

investors make more informed decisions 

about investment advisers based on the 

content of their advertisements, 

investment advisers might have a 

stronger incentive to invest in the 

quality of their services, as the final rule 

will permit them more flexibility to 

communicate the higher quality of their 

services by providing additional 

information about their services. This 

could promote competition among 

investment advisers based on the 


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13116 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

968Firms that face a change in costs will bear 

some portion of these costs directly, but will also 

pass a portion of the cost to their consumers 

through the price. In a competitive market, the 

portion of these costs that firms are able to pass on 

to consumers depends on the relative elasticities of 

supply and demand. For example, if demand for 

investment adviser services is elastic relative to 

supply of investment adviser services, investment 

advisers will be limited in their ability to pass 

through costs. For more, see Mankiw, Gregory, 

Principles of Economics (2017). 

969See NAPFA Comment Letter. 970See supra sections III.E.1 and III.E.2. 

quality of their services, and result in a 

benefit for investors. 

However, the final rule might instead 

provide investment advisers with a 

stronger incentive to invest in the 

quality of their advertisements rather 

than the quality of their services. If 

investment advisers increase spending 

on advertisements in a way that does 

not improve the information quality in 

advertisements, but still attracts 

investors, the competition could 

potentially be inefficient. Although the 

direct costs of advertisements would be 

borne by the investment adviser, it is 

possible that some portion of the costs 

of advertisement will be indirectly 

borne by investors.968 As a result, 

investments in advertisements may 

result in higher fees for investors. 

The final rule has conditions that can 

affect market participants in different 

ways. For example, the final rule’s 

restriction on the presentation of 

performance results unless results for 

one, five, and ten year periods are 

presented does not restrict the 

presentation of performance of private 

funds. This could give investment 

advisers that are able to advertise both 

private funds and general funds more 

options in how they advertise 

performance, and provide them a 

competitive advantage over investment 

advisers that only advertise non-fund 

performance. Further, to the extent that 

advisers increase their usage of 

compensated testimonials or 

endorsements as a result of the final 

rule, this could provide competitive 

advantages to advisers who are better 

able to pay fees for such testimonials or 

endorsements, or for larger firms who 

have larger audiences with which to 

leverage favorable testimonials and 

endorsements.969 In addition, 

provisions for different types of 

performance advertising can have a 

disparate impact on newer investment 

advisers versus older ones. Generally, 

newer investment advisers have fewer 

performance advertising options and 

shorter performance histories than older 

investment advisers, and might prefer to 

rely on hypothetical or related 

performance advertising. To the extent 

that the final rule’s provisions place 

different requirements on these types of 

performance, newer investment advisers 

could face competitive disadvantages 

relative to older investment advisers. 

In addition, the final rule affects 

current solicitors by including non-cash 

compensation in the scope of the rule’s 

requirements for testimonials and 

endorsements. The final rule could 

improve competition among investment 

advisers and solicitors by subjecting all 

forms of compensation for testimonials 

and endorsements to the same 

requirements, and not imposing a higher 

regulatory burden on solicitors 

compensated in cash and their 

respective investment advisers do not 

receive a higher regulatory burden. 

Under the final rule, providers of 

testimonials or endorsements that prefer 

or accept cash compensation for their 

activities will not be subject to a higher 

burden relative to persons that prefer or 

accept non-cash compensation. In 

addition, non-cash compensated 

promoters will bear additional costs 

associated with being scoped into the 

marketing rule. We expect that some 

portion of these costs will be passed 

onto investors through higher fees. 

Differences in the scope of 

disqualification between investment 

advisers subject to the disqualification 

provisions in this final rule, brokerdealers, and promoters of private funds 

under Regulation D may create 

competitive disparities in the personnel 

that are available to provide 

testimonials or endorsements. 

Investment advisers that operate as 

broker-dealers or advise private funds 

might have more flexibility to use 

personnel that might be disqualified 

from providing testimonials or 

endorsements under the final rule, but 

are not disqualified under section 

3(a)(39) of the Exchange Act for brokerdealers or Regulation D for advisers of 

private funds. This flexibility could 

impose an uneven burden on 

investment advisers, as those that are 

also registered as broker-dealers or 

broker-dealer affiliates, or advise private 

funds, will potentially able to draw 

upon a larger pool of personnel to 

provide testimonials or endorsements. 

3. Capital Formation 

To the extent that the final rule results 

in improved matches in the market for 

investment advice, potential investors 

may be drawn to invest additional 

capital, which could promote capital 

formation, to the extent that the 

additional capital does not reduce other 

forms of capital formation. However, the 

final rule could induce some investment 

advisers to increase their advertising 

such that the additional expenses of 

advertising may offset any gains to the 

quality of matches with investors.970 In 

this case, any benefits to capital 

formation as a result of the final rule 

could be reduced or eliminated. 

Similarly, if the costs associated with 

the disclosure, oversight, and 

recordkeeping requirements of the final 

rule result in a reduction of 

advertisements, the information 

available to investors might decrease. 

This could decrease the quality of 

matches between investors and 

investment advisers, leading investors 

to divert capital away from investment 

to other uses, hindering capital 

formation. 

The final rule’s expansion of the types 

of compensation subject to solicitor 

regulation for providers of testimonials 

or endorsements might improve the 

efficiency of the ultimate choice of 

investment adviser that investors make. 

Improving the efficiency of the 

investment adviser selection process 

could improve the efficiency of the 

investing overall for investors, which 

may lead them to devote more capital 

towards investment. In addition, the 

final rule expands the set of 

disqualifying events that would bar an 

adviser from compensating an 

individual to provide a testimonial or 

endorsement, which may improve an 

investor’s confidence in a testimonial or 

endorsement’s recommendation of an 

investment adviser, which, in turn, 

could lead investors to allocate more of 

their resources towards investment, thus 

promoting capital formation. 

F. Reasonable Alternatives 

1. Reduce or Eliminate Specific 

Limitations on Investment Adviser 

Advertisements 

We could change the degree to which 

the marketing rule relies on specific 

limitations on investment adviser 

marketing. One alternative to the 

marketing rule would be reducing or 

eliminating specific limitations on 

investment adviser advertising, and 

instead relying on general prohibitions 

to achieve the programmatic benefits of 

the rule. For example, such an 

alternative might include reducing or 

eliminating the specific limitations on 

the different types of hypothetical 

performance or testimonials and 

endorsements. The specific prohibitions 

of the final rule are prophylactic in 

nature, and many of the advertising 

practices described in the specific 

prohibitions would also be prohibited 

under the general prohibition on fraud 


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971For anti-fraud provisions applicable to the 

marketing of private funds, see Section 17(a) of the 

Securities Act, Section 10(b) of the Exchange Act, 

rule 10b–5, and rule 206(4)–8 under the Advisers 

Act. 

972See supra section III.C.1.b. 

973See supra footnote 279 and accompanying text 

for a discussion of comments we received on this 

point. 

974See supra section II.C.5.c. 

975See Financial Literacy Study, supra footnote 

846. See also Mark Egan, Gregor Matvos and Amit 

Seru, The Market for Financial Adviser Misconduct, 

127 J. Pol. Econ. 233 (2019). The paper uses the 

term ‘‘financial advisors,’’ to refer to broker-dealer 

representatives. The authors argue that brokerdealer representatives target different groups of 

investors and that this segmentation permits firms 

with high tolerance for misconduct on the part of 

their associated persons to coexist with firms 

maintaining clean records in the current market. 

They find that misconduct is more common among 

firms that advise retail investors, and in counties 

with low education, elderly populations and high 

incomes (when controlling for other 

characteristics). 

and deceit in section 206 of the Act, 

among other provisions.971

As a consequence, advisers might bear 

greater compliance costs in interpreting 

the rule or may otherwise restrict their 

advertising activities unnecessarily, and 

may reduce their advertising as a result. 

Alternatively, advisers may face lower 

compliance costs associated with the 

specific prohibitions. In addition, under 

such an approach, investors may also 

not obtain some of the benefits 

associated with the final rule. For 

example, in the absence of a specific 

advertising rule, investors would not 

necessarily obtain the benefits 

associated with the comparability of 

performance presentations provided in 

the proposed rule, or the requirement to 

provide performance over a variety of 

periods (except in private fund 

advertisements) so that an investor may 

sufficiently evaluate the adviser’s 

performance. Investors would also not 

benefit from the specific protections 

against the potential for misleading 

hypothetical performance contained in 

the final rule, such as the requirement 

to have policies and procedures 

designed to ensure that such 

performance is relevant to the likely 

financial situation and investment 

objectives of the investor and includes 

sufficient disclosures to enable persons 

receiving it to understand how it is 

calculated and the risks and limitations 

of relying on it. Although some advisers 

might provide such information, even in 

the absence of the final specific 

requirements to help ensure that their 

performance presentations comply with 

section 206 of the Act or other 

applicable anti-fraud provisions, others 

may not. As a consequence, this 

approach may benefit certain advisers 

by allowing them to avoid the costs of 

the specific requirements of the final 

rule, but investors would not receive the 

benefit of the other protections of the 

rule. 

One variation of this alternative 

would be to eliminate the marketing 

rule and instead rely solely on the 

general prohibitions against fraud or 

deceit in section 206 of the Advisers Act 

and certain rules thereunder. Under 

such an approach, a rule specifically 

targeting adviser advertising practices 

might be unnecessary. In the absence of 

a marketing rule, however, an adviser 

might have not sufficient clarity and 

guidance on whether certain advertising 

practices would likely be fraudulent and 

deceptive. As a consequence, advisers 

may bear costs in obtaining such 

guidance or may otherwise restrict their 

advertising activities unnecessarily in 

the absence of such clarity and guidance 

that would be provided through a rule, 

and may reduce their advertising as a 

result. 

Conversely, another alternative to the 

marketing rule would be to make the 

rule more prescriptive, prescribing 

certain specific and standardized 

disclosures in lieu of the principlesbased approach of the final rule. On the 

one hand, such an approach may 

provide investors with disclosures that 

may be more comparable across 

advisers, and ease the costs associated 

with interpretation and compliance. 

However, standardized disclosures 

could both impose costs on investment 

advisers by requiring disclosures when 

they might not provide much investor 

protection benefit, and also not require 

disclosures when an investor might 

benefit from one. The broad framework 

of the final rule is designed to permit 

investment advisers to tailor their 

disclosures to their specific marketing 

practices, subject to certain specific 

requirements. 

A related alternative to the final rule 

would be to align the marketing rule 

more closely with FINRA rule 2210 and 

related rules. FINRA rule 2210 governs 

broker-dealers’ communications with 

the public, including communications 

with retail and institutional investors, 

and provides standards for the content, 

approval, recordkeeping, and filing of 

communications with FINRA.972 To the 

extent that such an alternative 

resembles Rule 2210, this alternative 

might impose lower compliance cost 

burdens for dual-registrants who are 

subject to Rule 2210 and related rules 

than under the final rule. However, as 

discussed above, standardized 

disclosures for investment advisers 

could be over- or under-inclusive given 

the variety of investment advisory 

services and advertising practices 

associated with investment advisers, 

and we believe that the final rule’s 

approach of providing advisers’ with a 

broad framework within which to 

determine how best to present 

advertisements so they are not false and 

misleading is consistent with the 

features of the market for investment 

advice.973 Further, because FINRA rule 

2210 does not contain similar 

provisions to all of the requirements of 

the final rule, this alternative would not 

have offered the same investor 

protections of the final rule. For 

example, FINRA rule 2210 does not 

contain a similar provision to the final 

rule’s requirement to disclose 

compensation for a solicitation or 

referral or for the conflict of interest that 

results.974

2. Bifurcate Some Requirements 

One alternative to the final rule would 

be to separate requirements of the 

originally proposed rule that currently 

apply to all advertisements. For 

example, one alternative approach to 

regulation that we considered is 

prohibiting hypothetical performance in 

advertisements to retail investors, but 

not others, provided that certain 

disclosures were made. 

Evidence from academic research 

suggests that investors are highly 

segmented in their financial literacy and 

access to resources.975 The fact that 

certain market segments are susceptible 

to misconduct suggests that the lack of 

financial literacy or access to resources 

may also leave them susceptible to false 

or misleading statements in 

advertisements or solicitations. 

Tailoring requirements to suit the 

segmented nature of the market for 

investment advice may yield benefits to 

investor protection for investors with 

lower financial literacy or access to 

resources, as advertisements directed 

towards these specific market segments 

vulnerable to misleading statements 

would face additional requirements. 

Similarly, advertisements not directed 

towards those segments would benefit 

from additional flexibility and 

information contained in these 

advertisements. However, bifurcating 

the requirements in the final rule might 

also impose additional costs on 

investment advisers, who may need to 

expend additional resources to create 

advertisements that complied with two 

increasingly different sets of 

requirements. 


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976 44 U.S.C. 3501 et seq. 

3. Hypothetical Performance 

Alternatives 

One alternative to the final rule’s 

treatment of hypothetical performance 

would be to prohibit all forms of 

hypothetical performance in all 

advertisements. The Commission 

considered this alternative because it 

believes hypothetical performance 

generally presents a high risk of 

misleading investors. This alternative 

would eliminate the possibility that 

investors are misled by hypothetical 

performance, but also eliminates the 

possibility that investors might gain 

useful information from some types of 

hypothetical information. This 

additional information might have been 

useful for improving the quality of the 

matches that investors make with 

investment advisers. While a 

prohibition on hypothetical 

performance might improve the 

efficiency of investment adviser 

advertising by reducing the chance that 

investors are misled by advertisements, 

efficiency can also be reduced if 

investors are less able to receive 

relevant information about the 

investment adviser. 

Conversely, another alternative would 

be to permit all hypothetical 

performance in all advertisements, 

without any additional requirements. 

This could increase the relevant 

hypothetical performance that reaches 

investors. While such statements would 

still be subject to the final rule’s general 

prohibitions, we believe that this 

approach would still pose a high risk 

that hypothetical performance would 

mislead investors. This approach would 

lack the final rule’s protections that are 

designed to help ensure that 

hypothetical performance is 

disseminated to investors who have 

access to the resources to independently 

analyze this information and who have 

the financial expertise to understand the 

risks and limitations of these types of 

presentations. 

4. Alternatives to the Combined 

Marketing Rule 

In the proposal, we also considered 

retaining separate advertising and 

solicitation rules and instead updating 

and clarifying each rule separately. 

However, in the proposal the 

advertising rule was expanded to permit 

advertisements containing testimonials 

and endorsements, subject to certain 

requirements, which had the potential 

to subject promoters and solicitors to 

duplicative requirements from both the 

advertising and the solicitation rule. 

These duplicative requirements would 

have imposed additional costs to 

promoters and their investment 

advisers, and potentially decreased the 

usefulness of the disclosures made to 

investors. 

We also considered the alternative of 

not applying the final amended merged 

marketing rule to the solicitation of 

existing and prospective private fund 

investors. Under this alternative, the 

rule would apply only to the adviser’s 

clients (including prospective clients), 

which, in the case of funds, are the 

private funds themselves, and would 

not apply to investors in private funds. 

However, while investors in private 

funds may often be financially 

sophisticated, they may not be aware 

that the person engaging in the 

solicitation activity may be 

compensated by the adviser or aware of 

the other disclosure items that we are 

requiring, and we believe investors in 

such funds should be informed of that 

fact, those disclosure items and the 

related conflicts. In addition, we believe 

that the application of the final merged 

marketing rule to investors in private 

funds is consistent with the portions of 

the rule that concern investment adviser 

advertising. This consistency could 

avoid any competitive disparities 

between investment advisers that advise 

private funds and those that do not, and 

reduce the costs that investment 

advisers bear, by potentially removing 

costs associated with identifying 

whether the target of a communication 

is a private fund investor or not. We 

believe that harmonizing the scope of 

the merged rule with the advertising 

portions of the rule to the extent 

possible should ease compliance 

burdens. 

5. Alternatives to Disqualification 

Provisions 

We also considered an alternative to 

current rule 206(4)–3 wherein the 

disqualification provisions of the rule 

would not apply if the solicitor has 

performed solicitation activities for the 

investment adviser during the preceding 

twelve months and the investment 

adviser’s compensation payable to the 

solicitor for those solicitation activities 

was $1,000 or less (or the equivalent 

value in non-cash compensation). We 

considered the alternative of not having 

any de minimis exemption in the 

proposal, which would expand the set 

of individuals for whom the investment 

adviser would need to assess for 

disqualification, potentially extending 

the costs and benefits of the proposed 

solicitation rule to these solicitation 

activities, we believe the solicitor’s 

incentives to defraud an investor are 

significantly reduced when receiving de 

minimis compensation, and that the 

need for heightened safeguards is 

likewise reduced. 

Conversely, we also considered the 

alternative of adopting a higher 

threshold for a de minimis exemption. 

However, we believe that an aggregate 

$1,000 de minimis amount over a 

trailing year period is consistent with 

our goal of providing an exception for 

small or nominal payments. Regarding 

the trailing period, we understand that 

a very engaged solicitor who is paid 

even a small amount per referral could 

potentially receive a significant amount 

of compensation from an adviser over 

time even if the solicitor receives less 

than $1,000 per year. Over multiple 

years, such an investment adviser’s 

compensation could accumulate to a 

more significant amount. In such a case 

we believe that investors should be 

informed of the conflict of interest and 

gain the benefit of the other provisions 

of the rule. 

IV. Paperwork Reduction Act Analysis 

A. Introduction 

Certain provisions of our rule 

amendments will result in new 

‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).976 The rule amendments will 

have an impact on the current collection 

of information burdens of rule 204–2 

under the Investment Advisers Act (‘‘the 

Act’’) and Form ADV. The title of the 

new collection of information we are 

proposing is ‘‘Rule 206(4)–1 under the 

Investment Advisers Act.’’ The Office of 

Management and Budget (‘‘OMB’’) has 

not yet assigned a control number for 

‘‘Rule 206(4)–1 under the Investment 

Advisers Act.’’ The titles for the existing 

collections of information that we are 

amending are: (i) ‘‘Rule 206(4)–3 under 

the Investment Advisers Act of 1940 (17 

CFR 275.206(4)–3)’’ (OMB number 

3235–0242); (ii) ‘‘Rule 204–2 under the 

Investment Advisers Act of 1940’’ (OMB 

control number 3235–0278); and (iii) 

‘‘Form ADV’’ (OMB control number 

3235–0049). The Commission is 

submitting these collections of 

information to OMB for review and 

approval in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. An agency 

may not conduct or sponsor, and a 

person is not required to respond to, a 

collection of information unless it 

displays a currently valid OMB control 

number. 

We published notice soliciting 

comments on the collection of 

information requirements in the 2019 

Proposing Release and submitted the 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13119 

977Fidelity Comment Letter; IAA Comment 

Letter. 978MFA/AIMA Comment Letter I. 

979Final rule 206(4)–1(b), (c). 

980See supra section III.C.1.c. 

981See MFA/AIMA Comment Letter I; Fidelity 

Comment Letter. 

982See supra section II.B.2. 

983See supra section II.B.2. 

proposed collections of information to 

OMB for review and approval in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. Although we received 

no comments directly on the proposed 

collections of information burdens, we 

did receive three comments on aspects 

of the economic analysis that implicated 

estimates we used to calculate the 

collection of information burdens. Two 

commenters generally stated that 

advisers would disseminate new 

advertisements and update existing 

advertisements much more frequently 

than estimated in our proposal, due to 

the proposed expanded definition of 

advertisement.977 Two other 

commenters suggested that our 

assumptions underestimated the 

amount of time and costs required to 

implement the proposed amendments to 

the advertising and solicitation rules.978

We address these comments below. 

We discuss below the new collection 

of information burdens associated with 

the amendments to rule 206(4)–1, as 

well as the revised existing collection of 

information burdens associated with the 

amendments to rule 204–2 and Form 

ADV. There will no longer be a 

collection of information burden with 

respect to rule 206(4)–3 because we are 

rescinding this rule. Responses 

provided to the Commission in the 

context of its examination and oversight 

program concerning the amendments to 

rule 206(4)–1 and rule 204–2 will be 

kept confidential subject to the 

provisions of applicable law. However, 

because some of the information 

collection pursuant to rule 206(4)–1 

requires disclosures to investors, these 

disclosures will not be kept 

confidential. Responses to the 

disclosure requirements of the 

amendments to Form ADV, which are 

filed with the Commission, are not kept 

confidential. 

B. Rule 206(4)–1 

The marketing rule states that, as a 

means reasonably designed to prevent 

fraudulent, deceptive, or manipulative 

acts, practices, or courses of business 

within the meaning of section 206(4) of 

the Act, it is unlawful for any 

investment adviser registered or 

required to be registered under section 

203 of the of the Act, directly or 

indirectly, to disseminate any 

advertisement that violates any of 

paragraphs (a) through (d) of the rule, 

which include the rule’s general 

prohibitions, as well as conditions 

applicable to an adviser’s use of 

testimonials, endorsements, third-party 

ratings, and performance 

information.979

Each requirement under the final rule 

that an adviser disclose information, 

offer to provide information, or adopt 

policies and procedures constitutes a 

‘‘collection of information’’ requirement 

under the PRA. The respondents to 

these collections of information 

requirements will be investment 

advisers that are registered or required 

to be registered with the Commission. 

As of August 1, 2020, there were 13,724 

investment advisers registered with the 

Commission.980 Investment adviser 

marketing is not mandatory; however: 

(i) Marketing is an essential part of 

retaining and attracting clients; (ii) 

marketing may be conducted easily 

through the internet and social media; 

and (iii) the definition of 

‘‘advertisement’’ expands the scope of 

the advertising rule. Accordingly, we 

estimate that all investment advisers 

will disseminate at least one 

communication that meets the rule’s 

definition of ‘‘advertisement’’ and 

therefore be subject to the requirements 

of the marketing rule. 

While commenters claimed that our 

assumptions in the proposal 

significantly underestimated the scope 

of communications that would 

constitute an advertisement under the 

proposed amendment to the advertising 

rule, we made several modifications 

versus the proposal that will reduce the 

amount of communications subject to 

the rule to address commenters’ 

concerns.981 For example, the marketing 

rule will exclude certain one-on-one 

communications from the first prong of 

the definition and communications to 

current clients that do not offer new or 

additional advisory services. These 

changes from the proposal will 

significantly reduce the scope of 

communications subject to the 

marketing rule. 

Because the use of testimonials, 

endorsements, third-party ratings, and 

performance results in advertisements is 

voluntary, the percentage of investment 

advisers that would include these items 

in an advertisement is uncertain. 

However, we have made certain 

estimates of this data, as discussed 

below, solely for the purpose of this 

PRA analysis. 

1. General Prohibitions 

The general prohibitions under the 

rule do not create a collection of 

information and are, therefore, not 

discussed, with one exception. The final 

rule will prohibit advertisements that 

include a material statement of fact that 

the adviser does not have a reasonable 

basis for believing that it will be able to 

substantiate upon demand by the 

Commission. As discussed above, 

advisers would be able to demonstrate 

this reasonable belief in a number of 

ways.982 For example, they could make 

a record contemporaneous with the 

advertisement demonstrating the basis 

for their belief. An adviser might also 

choose to implement policies and 

procedures to address how this 

requirement is met. This will create a 

collection of information burden within 

the meaning of the PRA. 

As stated above, we estimate that all 

investment advisers will disseminate at 

least one communication that meets the 

rule’s definition of ‘‘advertisement’’ and 

therefore be subject to the requirements 

of the marketing rule. We also estimate 

that such advertisements will include at 

least one statement of material fact that 

will be subject to this general 

prohibition, for which an adviser will 

create and/or maintain a record 

documenting its reasonable belief that it 

can substantiate the statement. This 

estimate reflects that many types of 

statements typically included in an 

advertisement (e.g. performance) can 

likely be substantiated by other records 

that an adviser will be required to create 

and maintain under the final rule.983

Table 1 summarizes the final PRA 

estimates for the internal and external 

burdens associated with this 

requirement. 


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13120 Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 

984Final rule 206(4)–1(b)(1). 

985 Id. 

986 Id. 

987See 2019 Proposing Release, supra footnote 7, 

at section IV. 

988See 2019 Proposing Release, supra footnote 7, 

at section IV. 

2. Testimonials and Endorsements in 

Advertisements 

Under the marketing rule, investment 

advisers are prohibited from including 

in any advertisement, or providing any 

compensation for, any testimonial or 

endorsement unless the adviser 

discloses, or the investment adviser 

reasonably believes that the person 

giving the testimonial or endorsement 

discloses: (i) Clearly and prominently: 

(A) That the testimonial was given by a 

current client or investor, or the 

endorsement was given by a person 

other than a current client or investor; 

(B) that cash or non-cash compensation 

was provided for the testimonial or 

endorsement, if applicable; and (C) a 

brief statement of any material conflicts 

of interest on the part of the person 

giving the testimonial or endorsement 

resulting from the investment adviser’s 

relationship with such person; (ii) the 

material terms of any compensation 

arrangement, including a description of 

the compensation provided or to be 

provided, directly or indirectly, to the 

person for the testimonial or 

endorsement; and (iii) a description of 

any material conflicts of interest on the 

part of the person giving the testimonial 

or endorsement resulting from the 

investment adviser’s relationship with 

such person and/or any compensation 

arrangement.984 The rule also imposes 

an oversight obligation that requires that 

an investment adviser have a reasonable 

basis to believe that the testimonial or 

endorsement complies with the 

marketing rule and have a written 

agreement with the person giving a 

testimonial or endorsement (except for 

certain affiliated persons of the adviser) 

that describes the scope of the agreed 

upon activities and the terms of the 

compensation for those activities when 

making payments for compensated 

testimonials and endorsements that are 

above the de minimis threshold.985 This 

collection of information consists of two 

components: (i) The requirement to 

disclose certain information in 

connection with the testimonial and 

endorsement, and (ii) the requirement to 

oversee the testimonial or endorsement, 

including a written agreement with 

certain persons giving the testimonial or 

endorsement. 

The final rule’s definitions of 

testimonials and endorsements 

generally contain three elements: (i) 

Statements about the client’s/nonclient’s or investor’s experience with the 

investment adviser or its supervised 

persons, (ii) statements that directly or 

indirectly solicit any prospective client 

or investor in a private fund for the 

investment adviser, or (iii) statements 

that refer any prospective client or 

investor in a private fund to the 

investment adviser. The first element is 

drawn from the definitions of these 

terms in our proposed advertising rule. 

The second and third elements are 

drawn from the scope of our proposed 

solicitation rule.986 Accordingly, our 

PRA analysis will be drawn from our 

proposed estimates and discussion of 

both proposed rules in the 2019 

Proposing Release.987

In our advertising rule proposal, from 

which the first element of these 

definitions is drawn, we estimated that 

50 percent of advisers would include a 

testimonial or endorsement under the 

proposed advertising rule. We also 

estimated in our advertising proposal 

that an investment adviser that includes 

testimonials or endorsements in 

advertisements would use 

approximately 5 testimonials or 

endorsements per year, and would 

create new advertisements with new or 

updated testimonials and endorsements 

approximately once per year. In the 

solicitation rule proposal, from which 

elements two and three of the 

definitions are drawn, we estimated that 

47.8 percent of advisers would 

compensate a solicitor for solicitation 

activity under the proposed solicitation 

rule.988 We also estimated in our 

proposal that for each registered 

investment adviser that would conduct 

solicitation activity, they would use 

approximately 30 referrals annually, 

distributed by an average of three 

solicitors. We did not receive comment 

on any of these estimates. 

We are revising our estimates from the 

advertising rule proposal to account for 

the merger of solicitation concepts into 

the definitions of testimonial and 

endorsement. We continue to estimate 

that 50 percent of advisers will use a 

testimonial or endorsement; however, 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13121 

990MFA/AIMA Comment Letter I. 

991We estimate the hourly wage rate for 

compliance manager is $309 and a compliance 

attorney is $337. The hourly wages used are from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2013 (‘‘SIFMA Report’’), 

modified by Commission staff to account for an 

1800-hour work-year and inflation, and multiplied 

by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. 

992We do not have specific data regarding how 

the cost of printing and mailing the underlying 

information would differ, nor are we able to 

specifically identify how the cost of printing and 

mailing the underlying information might be 

affected by the rule. For these reasons, we estimate 

$500 per year to collectively print and mail, upon 

request, the underlying information associated with 

hypothetical performance for purposes of our 

analysis. In addition, investors may also request to 

receive the underlying information electronically. 

We estimate that there would be negligible external 

costs associated with emailing electronic copies of 

the underlying information. 

993This estimate is based on the following 

calculation: 1 hour per each solicitor relationship 

× 5 promoter relationships. Although in our 

proposal we estimated that the oversight 

requirement would impose a burden of 2 hours per 

adviser, we believe that because the marketing rule 

does not require a written agreement, the burden to 

oversee the promoter relationship will be less than 

proposed. 

994MFA/AIMA Comment Letter I. Accordingly, 

the amortized average burden will be 0.67 hours for 

each of the first 3 years. 

995We estimate that the hourly wage for a chief 

compliance officer is $530. The hourly wage is from 

SIFMA’s Management & Professional Earnings in 

the Securities Industry 2013, modified by 

Commission staff to account for an 1800-hour workyear and inflation, and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits, 

and overhead. 

we are increasing our estimate of the 

amount of testimonials and estimates 

each adviser will use to reflect the 

definitions’ inclusion of solicitation 

concepts.989 Accordingly, we estimate 

that each adviser will use an average of 

five promoters and use 35 testimonials 

or endorsements annually, which 

includes testimonials and endorsements 

incorporated into an adviser’s own 

advertisement and those communicated 

by promoters directly. This estimate 

also reflects the elimination of the 

proposed exemptions for solicitations 

for impersonal advisory services or by 

non-profit referral programs, as well as 

the addition of the final rule’s 

exemptions for registered broker-dealers 

and ‘‘covered persons’’ under rule 

506(d) of Regulation D. 

Under the marketing rule, an adviser 

that uses a testimonial or endorsement 

will be required to disclose certain 

information at the time it is 

disseminated, which incorporates many 

of the disclosure elements required 

under the proposed solicitation rule. As 

such, we are drawing from the burden 

estimate we attributed to solicitation 

disclosures in the 2019 Proposing 

Release in developing the burden 

estimate for all testimonials and 

endorsements under the final rule, not 

just for the types of testimonials and 

endorsements that were drawn from the 

proposed rule. To address one 

commenter’s contention that we 

underestimated this burden, and 

recognizing the changes from the 

proposal, we are revising this estimate 

upwards to 0.20 hours per disclosure.990

We believe that advisers will incur this 

same burden each year, since each 

testimonial and/or endorsement used 

will likely be different and thus require 

updated disclosures. An investment 

adviser’s in-house compliance managers 

and compliance attorneys will likely 

prepare disclosures, which will likely 

be included in the advertisement.991

Some of these third-party testimonials 

and endorsements will require delivery; 

thus, we estimate that 20 percent of the 

disclosures would be delivered by the 

U.S. Postal Service, with the remaining 

80 percent delivered electronically or as 

part of another delivery of documents. 

For the 20% of advisers that will use 

physical mail, we estimate that the 

average annual costs associated with 

printing and mailing this information 

will be collectively $500 for all 

disclosure documents associated with a 

single registered investment adviser.992

We estimate the average burden hours 

each year per adviser to oversee 

testimonials and endorsements will be 

one hour for each promoter, or five 

hours in total for each adviser that is 

subject to this collection of 

information.993 While the final rule 

provides flexibility as to how advisers 

conduct this oversight, we generally 

believe that this burden will include 

contacting solicited clients, prereviewing testimonials or endorsements, 

or other similar methods. Additionally, 

we estimate that each adviser will incur 

an average burden hour of one hour for 

each promoter, or five hours in total, to 

prepare the required written 

agreements. In-house compliance 

managers and compliance attorneys are 

likely to provide oversight of the third 

party testimonials and endorsements 

and prepare the written agreements. 

Finally, in response to one commenter 

who argued that we did not account for 

upfront implementation costs for using 

testimonials and endorsements, we 

estimate that each adviser that uses a 

compensated testimonial or 

endorsement will incur an initial 

burden of two hours to modify its 

policies and procedures to reflect the 

adviser’s oversight of testimonials and 

endorsements.994 We believe that an 

adviser’s chief compliance officer will 

complete this task.995 Table 2 

summarizes the final PRA estimates for 

the internal and external burdens 

associated with these requirements. 


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996See MFA/AIMA Comment Letter I. 

Accordingly, we estimate that the amortized 

average burden will be 1 hour for each of the first 

3 years for each investment adviser to comply with 

the conditions for including third-party ratings in 

an advertisement (3.0 hours/3 years = 1 hour). We 

believe that this burden will be split evenly 

between an adviser’s compliance attorney and 

compliance manager. 

997We believe that this burden will also be split 

evenly between an adviser’s compliance attorney 

and compliance manager. 

3. Third-Party Ratings in 

Advertisements 

As discussed above, rule 206(4)–1(c) 

will prohibit an investment adviser from 

including a third-party rating in an 

advertisement unless certain conditions 

are met, including that the adviser must 

clearly and prominently disclose (or 

reasonably believe that the third-party 

rating clearly and prominently 

discloses): (i) The date on which the 

rating was given and the period of time 

upon which the rating was based, (ii) 

the identity of the third-party that 

created and tabulated the rating, and 

(iii) if applicable, that cash or non-cash 

compensation has been provided 

directly or indirectly by the adviser in 

connection with obtaining or using the 

third-party rating. 

As discussed in the advertising rule 

proposal, we continue to believe that 

approximately 50 percent of advisers 

will use third-party ratings in 

advertisements, and that they will 

typically use one third-party rating on 

an annual basis. We believe that 

advisers will incur an initial internal 

burden of 3.0 hours to draft and finalize 

the required disclosures for third-party 

ratings, which we are adjusting upwards 

from 1.5 hours in the advertising rule 

proposal to address one commenter’s 

concern that we underestimated this 

burden.996 As discussed in the 

advertising rule proposal, because many 

of these ratings or rankings are done 

yearly (e.g., 2018 Top Wealth Adviser), 

we continue to estimate that an adviser 

that continues to use a third-party rating 

will incur ongoing, annual costs of 0.75 

burden hours to draft the third-party 

rating disclosure updates.997 Table 3 

summarizes the final PRA estimates for 

the internal and external burdens 

associated with these requirements. 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13123 

998Final rule 206(4)–1(d). 

999 Id. at (d)(2). 

1000 Id. at (d)(4). 

1001 Id. at (d)(5). 1002 Id. at (d)(7). 

1003Accordingly, we estimate that the amortized 

initial burden will be 5 hours for each of the first 

3 years for each investment adviser to prepare net 

performance (15 hours/3 years = 5 hours/year). We 

believe that this burden will be split evenly 

between an adviser’s compliance attorney and 

compliance manager (2.5 hours each). 

1004See MFA/AIMA Comment Letter I. 

1005The burden associated with calculating net 

performance in connection with presenting related 

performance is discussed in section IV.B.3.c. below. 

4. Performance Advertising 

The marketing rule will impose 

certain conditions on the presentation of 

performance results in advertisements, 

as discussed above. Below we discuss 

the conditions that create ‘‘collection of 

information’’ requirements within the 

meaning of the PRA. First, the rule will 

prohibit any presentation of gross 

performance unless the advertisement 

also presents net performance that 

meets certain criteria.998 Second, the 

rule will prohibit any presentation of 

performance results of any portfolio or 

any composite aggregation of related 

portfolios, other than any private fund, 

unless the advertisement includes 

performance results of the same 

portfolio or composite aggregation for 

one-, five-, and ten-year periods, except 

that if the relevant portfolio did not 

exist for a particular prescribed period, 

then the life of the portfolio must be 

substituted for that period.999 Third, the 

rule will prohibit an advertisement from 

including related performance, unless it 

includes all related portfolios, subject to 

a conditional exception.1000 Fourth, the 

rule will prohibit an advertisement from 

including extracted performance, unless 

the advertisement provides, or offers to 

provide promptly, the performance 

results of the total portfolio from which 

the performance was extracted.1001

Fifth, the rule will also prohibit an 

advertisement from including 

predecessor performance, unless certain 

conditions are satisfied.1002 Finally, the 

rule will require that an adviser that 

advertises hypothetical performance: (i) 

Adopts and implements policies and 

procedures reasonably designed to 

ensure that the hypothetical 

performance is relevant to the likely 

financial situation and investment 

objectives of the intended audience of 

the advertisement; (ii) provide 

reasonably sufficient information to 

enable the intended audience to 

understand the criteria used and 

assumptions made in calculating such 

hypothetical performance; and (iii) 

provide (or, if the intended audience is 

an investor in a private fund provide, or 

offers to provide promptly) reasonably 

sufficient information to enable the 

intended audience to understand the 

risks and limitations of using such 

hypothetical performance in making 

investment decisions. 

We estimate that almost all advisers 

provide, or seek to provide, performance 

information to their clients. Based on 

staff experience, we estimate that 95 

percent, or 13,038 advisers, provide 

performance information in their 

advertisements. The estimated numbers 

of burden hours and costs regarding 

performance results in advertisements 

may vary depending on, among other 

things, the complexity of the 

calculations, the type of performance 

and the risks that investors may not 

understand the limitations of the 

information, and whether preparation of 

the disclosures is performed by internal 

staff or outside counsel. 

a. Presentation of Net Performance in 

Advertisements 

We estimate that an investment 

adviser that elects to present gross 

performance in an advertisement will 

incur an initial burden of 15 hours in 

preparing net performance for each 

portfolio, including the time spent 

determining and deducting the relevant 

fees and expenses to apply in 

calculating the net performance and 

then actually running the 

calculations.1003 We have adjusted this 

estimate upwards from the proposal to 

reflect one commenter’s claim that we 

underestimated this burden in the 

proposal.1004 Based on staff experience, 

we estimate that the average investment 

adviser will present performance for 3 

portfolios over the course of a year, 

excluding any related portfolios that an 

adviser may need to include for 

purposes of presenting related 

performance.1005 As noted above, we 

estimate that 95 percent, or 13,038 

advisers, provide performance 

information in their advertisements and 


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1006See MFA/AIMA Comment Letter I. 

1007We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (3 hours × 3.5 times per 

year = 10.5 hours; 10.5 hours/2 = 5.25 hours each). 

1008Accordingly, we estimate that the amortized 

initial burden will be 11.67 hours for each of the 

first 3 years for each investment adviser to prepare 

performance results that comply with this 

requirement (35 hours/3 years = 11.67 hours/year). 

We believe that this burden will be split evenly 

between an adviser’s compliance attorney and 

compliance manager (5.83 hours each). 

1009We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (8 hours × 3.5 times per 

year = 28 hours; 28 hours/2 = 14 hours each). 

1010Accordingly, we estimate that the amortized 

initial burden will be 10 hours for each of the first 

3 years for each investment adviser to prepare 

related performance in connection with this 

requirement (30 hours/3 years = 10 hours/year). We 

believe that this burden will be split evenly 

between an adviser’s compliance attorney and 

compliance manager (5 hours each). 

1011See MFA/AIMA Comment Letter I. 

1012See final rule 206(4)–1(e)(16). Our estimate 

accounts for advisers that may already be familiar 

with any composites that meet the definition of 

‘‘related portfolio.’’ 

1013See final rule 206(4)–1(d)(4). 

1014We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (5 hours × 3.5 times per 

year = 17.5 hours; 17.5 hours/2 = 8.75 hours each). 

1015Accordingly, we estimate that the amortized 

initial burden will be 3.33 hours for each of the first 

3 years for each investment adviser to prepare the 

performance of the total portfolio from which the 

presentation of extracted performance is extracted 

(10 hours/3 years = 3.33 hours/year). We believe 

that this burden will be split evenly between an 

adviser’s compliance attorney and compliance 

manager (1.67 hours each). 

1016We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (2 hours × 3.5 times per 

year = 7 hours; 7 hours/2 = 3.5 hours each). 

1017Accordingly, we estimate that the amortized 

initial burden will be 2.33 hours for each of the first 

3 years for each investment adviser to comply with 

thus will be subject to this collection of 

information burden. 

We expect that the calculation of net 

performance may be modified every 

time an adviser chooses to update the 

advertised performance. We estimate 

that after initially preparing net 

performance for each portfolio, 

investment advisers will incur a burden 

of 3 hours to update the net 

performance for each subsequent 

presentation. Again, we adjusted this 

estimate upwards from the proposal to 

reflect one commenter’s claim that we 

underestimated this burden in the 

analysis.1006 For purposes of this 

analysis, we estimate that advisers will 

update the relevant performance of each 

portfolio 3.5 times each year.1007

b. Time Period Requirement in 

Advertisements 

We estimate that an investment 

adviser that elects to present 

performance results in an advertisement 

will incur an initial burden of 35 hours 

in preparing performance results of the 

same portfolio for one-, five-, and tenyear periods (excluding private funds), 

taking into account that these results 

must be prepared on a net basis (and 

may also be prepared and presented on 

a gross basis).1008 We estimate that after 

initially preparing one-, five-, and tenyear performance for each portfolio, 

investment advisers will incur a burden 

of 8 hours to update the performance for 

these time periods for each subsequent 

presentation. For purposes of this 

analysis, we estimate that advisers will 

update the relevant performance 3.5 

times each year.1009 We received no 

comments on these estimates and 

continue to believe they are appropriate. 

c. Related Performance 

We estimate that an investment 

adviser that elects to present related 

performance in an advertisement will 

incur an initial burden of 30 hours, with 

respect to each advertised portfolio or 

composite aggregation of portfolios, in 

preparing the relevant performance of 

all related portfolios.1010 We have 

revised this estimate upwards to address 

one commenter’s claim that we 

underestimated this time burden in the 

proposal.1011 This time burden will 

include the adviser’s time spent 

classifying which portfolios meet the 

rule’s definition of ‘‘related portfolio’’— 

i.e., which portfolios have 

‘‘substantially similar investment 

policies, objectives, and strategies as 

those of the services offered in the 

advertisement.’’ 1012 This burden also 

will include time spent determining 

whether to exclude any related 

portfolios in accordance with the rule’s 

provision allowing exclusion of one or 

more related portfolios if ‘‘the 

advertised performance results are not 

materially higher than if all related 

portfolios had been included’’ and ‘‘the 

exclusion of any related portfolio does 

not alter the presentation of the time 

periods prescribed by paragraph 

(d)(2).’’ 1013 Finally, this time burden 

will include the adviser’s time 

calculating and presenting the net 

performance of any related performance 

presented. 

We continue to estimate that 80 

percent of advisers (or 10,979 advisers) 

will have other portfolios with 

substantially similar investment 

policies, objectives, and strategies as 

those offered in the advertisement and 

choose to include related performance. 

We estimate that after initially preparing 

related performance for each portfolio or 

composite aggregation of portfolios, 

investment advisers will incur a burden 

of 5 hours to update the performance for 

each subsequent presentation. Although 

we expect that advisers might update 

their performance fewer times per year 

than we had proposed because the final 

rule permits performance to be shown 

as of the most recent calendar year end, 

we continue to estimate that advisers 

will update the relevant related 

performance 3.5 times each year.1014 We 

received no comments on these 

estimates and continue to believe they 

are appropriate. 

d. Extracted Performance 

As in the advertising rule proposal, 

we estimate that an investment adviser 

that elects to present extracted 

performance in an advertisement will 

incur an initial burden of 10 hours in 

preparing the performance results of the 

total portfolio from which the 

performance is extracted in order to 

provide or offer to provide such 

performance results to investors.1015 For 

purposes of this analysis, we continue 

to assume 5 percent of advisers will 

include extracted performance. We 

estimate that after initially preparing the 

performance of the total portfolio from 

which extracted performance is 

extracted, investment advisers will 

incur a burden of 2 hours to update the 

performance for each subsequent 

presentation. For purposes of this 

analysis, we estimate that advisers will 

update the relevant total portfolio 

performance 3.5 times each year.1016 We 

also estimate that registered investment 

advisers may incur external costs in 

connection with the requirement to 

provide performance results of a total 

portfolio from which extracted 

hypothetical performance is extracted. 

We estimate that the average annual 

costs associated with printing and 

mailing this information upon request 

will be collectively $500 for all 

documents associated with a single 

registered investment adviser. We 

received no comments on these 

estimates and continue to believe they 

are appropriate. 

e. Hypothetical Performance 

We estimate that an investment 

adviser that elects to present 

hypothetical performance in an 

advertisement will incur an initial 

burden of 7 hours in preparing and 

adopting policies and procedures 

reasonably designed to ensure that the 

hypothetical performance is relevant to 

the likely financial situation and 

investment objectives of the intended 

audience of the advertisement.1017 We 


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this requirement (7 hours/3 years = 2.33 hours/ 

year). We believe that an adviser’s chief compliance 

officer will complete this task. 

1018See MFA/AIMA Comment Letter I. 

1019We believe that an adviser’s chief compliance 

officer will complete this task (20 presentations per 

year × 0.25 hours each = 5 hours per year). 

1020Accordingly, we estimate that the amortized 

initial burden will be 6.67 hours for each of the first 

3 years for each investment adviser to comply with 

this requirement (20 hours/3 years = 6.67 hours/ 

year). We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (3.33 hours each). This 

estimate includes the time spent by an adviser in 

preparing the information. The time spent 

calculating the hypothetical performance that is 

based on such information is not accounted for in 

this estimate, as the rule does not require that an 

advertisement present hypothetical performance. 

1021See MFA/AIMA Comment Letter I. 

1022We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (3 hours × 3.5 times per 

year = 10.5 hours; 10.5 hours/2 = 5.25 hours each). 

1023See supra footnote 992 for a discussion of 

estimated mailing costs. 

1024Accordingly, we estimate that the amortized 

initial burden will be 3.33 hours for each of the first 

3 years for each investment adviser to prepare 

predecessor performance in connection with this 

requirement (10 hours/3 years = 3.33 hours/year). 

We believe that this burden will be split evenly 

between an adviser’s compliance attorney and 

compliance manager (1.67 hours each). 

1025Final rule 206(4)–1(d)(7)(i)–(ii). 

1026We believe that this burden will be split 

evenly between an adviser’s compliance attorney 

and compliance manager (1 hour × 3.5 times per 

year = 3.5 hours; 3.5 hours/2 = 1.75 hours each). 

have revised this estimate upwards from 

the advertising rule proposal to address 

one commenter’s claim that we 

underestimated this time burden.1018

For purposes of this analysis, we 

continue to estimate that 50 percent of 

advisers will include hypothetical 

performance in advertisements. 

We continue to estimate that advisers 

that use hypothetical performance will 

disseminate advertisements containing 

hypothetical performance 20 times each 

year, including in certain one-on-one 

communications that meet the final 

rule’s definition of advertisement. We 

estimate that after adopting appropriate 

policies and procedures, an adviser will 

incur a burden of 0.25 hours to 

categorize investors according to their 

likely financial situation and investment 

objectives pursuant to the adviser’s 

policies and procedures.1019

Additionally, we estimate that an 

investment adviser that elects to present 

hypothetical performance in an 

advertisement will incur an initial 

burden of 20 hours in preparing the 

information sufficient to understand the 

criteria used and assumptions made in 

calculating, as well as risks and 

limitations in using, the hypothetical 

performance, in order to provide such 

information, which may in certain 

circumstances be upon request.1020 We 

have also revised this estimate upwards 

from the proposal to address one 

commenter’s claim that we 

underestimated this time burden.1021

We estimate that after initially preparing 

the underlying information, investment 

advisers will incur a burden of 3 hours 

to update the information for each 

subsequent presentation. For purposes 

of this analysis, we estimate that 

advisers will update their hypothetical 

performance, and thus the underlying 

information, 3.5 times each year.1022

We estimate that registered 

investment advisers may incur external 

costs in connection with the 

requirement to provide this underlying 

information upon the request of an 

investor or prospective investor in a 

private fund. We estimate that the 

average annual costs associated with 

printing and mailing this underlying 

information upon request will be 

collectively $500 for all documents 

associated with a single registered 

investment adviser.1023

f. Predecessor Performance 

The final rule will impose conditions 

on an adviser’s use of predecessor 

performance. We estimate that an 

investment adviser that elects to present 

predecessor performance in an 

advertisement will incur an initial 

burden of 10 hours in preparing the 

relevant performance results and 

associated disclosures.1024 This time 

burden will include the adviser’s time 

spent classifying which performance 

results are eligible to be ported—i.e., to 

determine whether accounts at a 

predecessor adviser are ‘‘sufficiently 

similar’’ and the persons are ‘‘primarily 

responsible’’ for the performance, or 

that the relevant algorithm was 

responsible for achieving the prior 

performance results.1025 This burden 

also will include time spent 

determining whether to exclude any 

account in accordance with the rule’s 

provision allowing exclusion of one or 

more accounts if the advertised 

performance results ‘‘would not result 

in materially higher performance.’’ 

Finally, this time burden will include 

the adviser’s time calculating and 

presenting the net performance and 

appropriate time periods of any 

predecessor performance presented. 

We estimate that 2% of advisers (or 

275 advisers) will include predecessor 

performance in an advertisement. We 

estimate that after initially preparing 

predecessor performance, investment 

advisers will incur a burden of 1 hour 

to update the relevant disclosures and 

performance information for each 

subsequent presentation. For purposes 

of this analysis, we estimate that 

advisers will update the relevant 

disclosures 3.5 times each year.1026

Table 4 summarizes the final PRA 

estimates for the internal and external 

burdens associated with these 

requirements. 

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BILLING CODE 8011–01–C 

5. Total Hour Burden Associated With 

Rule 206(4)–1 

Accordingly, we estimate the total 

annual hour burden for investment 

advisers registered or required to be 

registered with the Commission under 

proposed rule 206(4)-1 to prepare 

testimonials and endorsements, thirdparty ratings, and performance results 

disclosures will be 1,414,291 hours, at 

a time cost of $468,287,816. The total 

external burden costs would be 

$4,460,200. The following chart 

summarizes the various components of 

the total annual burden for investment 

advisers. 

Internal hour 

burden 

Internal burden 

time cost 

External cost 

burden 

General Prohibitions ........................................................................................................ 82,344 hours $9,016,668 ............................

Testimonials and Endorsements ..................................................................................... 121,252 hours $41,749,094 $686,200 

Third-Party Ratings .......................................................................................................... 12,009 hours 4,046,933 ............................

Performance .................................................................................................................... 1,198,686 hours 413,475,121 3,774,000 

Total annual burden ................................................................................................. 1,414,291 hours 468,287,121 4,460,200 


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1027See final rule 204–2(a)(11); see also supra 

section II.I (discussing the amendments to the books 

and records rule). 

1028Rule 204–2(a)(11). 

1029See final rule 204–2(a)(11)(i)(A)(1). 

1030See id. 

1031See final rule 204–2(a)(15)(i)–(ii). 

1032 Id. 

1033See section 210(b) of the Advisers Act (15 

U.S.C. 80b–10(b)). 

1034See 2016 Form ADV Amendments Release, 

supra footnote 249 at 149. 

C. Rule 206(4)–3 

Rule 206(4)–3 (OMB number 3235– 

0242) currently prohibits investment 

advisers from paying cash fees to 

solicitors for client referrals unless 

certain conditions are met. As discussed 

above, we are rescinding rule 206(4)–3 

and merging some of its components 

into the combined marketing rule. The 

collection of information burden 

associated with the requirements of rule 

206(4)–3 has been incorporated into the 

collection of information burden for rule 

206(4)–1. There will no longer be a 

collection of information burden 

associated with rule 206(4)–3. 

D. Rule 204–2 

Under section 204 of the Advisers 

Act, investment advisers registered or 

required to register with the 

Commission under section 203 of the 

Advisers Act must make and keep for 

prescribed periods such records (as 

defined in section 3(a)(37) of the 

Exchange Act), furnish copies thereof, 

and make and disseminate such reports 

as the Commission, by rule, may 

prescribe as necessary or appropriate in 

the public interest or for the protection 

of investors. Rule 204–2 sets forth the 

requirements for maintaining and 

preserving specified books and records. 

This collection of information is found 

at 17 CFR 275.204–2 and is mandatory. 

The Commission staff uses the 

collection of information in its 

examination and oversight program. As 

noted above, responses provided to the 

Commission in the context of its 

examination and oversight program 

concerning the amendments to rule 

204–2 will be kept confidential subject 

to the provisions of applicable law. 

We are amending rule 204–2 to 

require investment advisers to retain 

copies of all advertisements.1027 The 

current rule requires investment 

advisers to retain copies of 

advertisements to 10 or more 

persons.1028 For oral advertisements, 

amended rule 204–2 provides that an 

adviser may instead retain a copy of any 

written or recorded materials used by 

the adviser in connection with the oral 

advertisement.1029 For compensated 

oral testimonials and endorsements, the 

adviser may instead make and keep a 

record of the disclosures provided to 

clients or investors required by the final 

rule.1030 We are also amending the rule 

to require investment advisers to retain: 

(i) Documentation of communications 

relating to predecessor performance; (ii) 

copies of all information provided or 

offered pursuant to the marketing rule’s 

conditions on advertising hypothetical 

performance; and (iii) records of who 

the ‘‘intended audience’’ relating to the 

conditions of hypothetical performance. 

The amendments will not require an 

adviser to maintain copies of written 

approvals of advertisements, since we 

are not adopting the proposed 

requirement that an adviser review and 

approve advertisements before 

dissemination. 

Amended rule 204–2 will require 

registered investment advisers to 

maintain a copy of any questionnaire or 

survey used in preparation of the thirdparty rating. Advisers must also make 

and retain: (i) A record of the 

disclosures provided to clients or 

investors pursuant to the marketing 

rule, if not included in the 

advertisement, (ii) documentation 

related to the adviser’s determination 

that it has a reasonable basis for 

believing that a testimonial, 

endorsement, or third-party rating 

complies with the applicable conditions 

of the marketing rule, and (iii) a record 

of all affiliated personnel of the 

adviser.1031 Each of these records will 

be required to be maintained in the 

same manner, and for the same period 

of time, as other books and records 

required to be maintained under rule 

204–2(a). Specifically, investment 

advisers will be required to maintain 

and preserve these records in an easily 

accessible place for not less than 5 years 

from the end of the fiscal year during 

which the last entry was made on such 

record, the first 2 years in an 

appropriate office of the investment 

adviser. Requiring maintenance of these 

records will facilitate the Commission’s 

ability to inspect and enforce 

compliance with the marketing rule.1032

The information generally is kept 

confidential subject to the applicable 

law.1033

The respondents to this collection of 

information are investment advisers 

registered or required to be registered 

with the Commission. The use of 

advertisements is not mandatory, but as 

discussed above, we estimate that 100 

percent of investment advisers will 

disseminate at least one communication 

meeting the rule’s definition of 

‘‘advertisement’’ (including oral 

advertisements) and therefore be subject 

to the requirements of the rule. The 

Commission therefore estimates that, 

based on Form ADV filings as of August 

1, 2020, approximately 13,724 

investment advisers will be subject to 

the proposed amendments to rule 204– 

2 under the Advisers Act. 

Based on staff experience, we estimate 

that 95 percent of advisers (or 13,038 

advisers) provide, or seek to provide, 

performance information to their 

clients.1034 The amendments to the 

recordkeeping rule will require advisers 

to maintain communications to clients 

or investors that contain performance 

calculations of portfolios, in addition to 

those that reference performance of 

managed accounts and securities 

recommendations as currently required. 

We believe based on staff experience 

that advisers already have 

recordkeeping processes in place to 

maintain client communications; 

however, this amendment will expand 

the types of communications subject to 

the recordkeeping rule and thus 

increase this collection of information 

burden. 

The amendments will require advisers 

to maintain copies of any documents 

provided or offered to clients or 

investors explaining the assumptions 

and criteria underlying the hypothetical 

performance calculation and the risks 

and limitations in using hypothetical 

performance. In addition, the 

amendments will require advisers to 

create and maintain a record of who the 

‘‘intended audience’’ is in connection 

with its advertisements that include 

hypothetical performance. We estimate 

that approximately 50 percent of 

advisers (or 6,862 advisers) will use 

hypothetical performance in an 

advertisement and therefore be subject 

to the expanded recordkeeping 

obligations relating to the retention of 

documents that support those 

performance calculations. The 

recordkeeping rule will also require 

advisers that present predecessor 

performance to maintain sufficient 

records to support the performance 

results provided. As discussed above, 

we estimate that 2% of advisers (or 275 

advisers) will present predecessor 

performance thus be subject to this 

collection of information burden. 

The rule will require advisers that use 

a testimonial or endorsement to create 

and maintain a record of the names of 

all affiliated personnel of the adviser 

and documentation substantiating the 

adviser’s reasonable basis for believing 

that the testimonial or endorsement 

complies with the specific conditions of 

the marketing rule. As discussed above, 


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1035See supra section III.B.2. 

we estimate that 50 percent of advisers 

(or 6,862 advisers) will use a testimonial 

or endorsement. 

In addition, we estimate that 

approximately 50 percent of advisers (or 

6,862 advisers) will use third-party 

ratings in advertisements, and will 

therefore also be subject to the 

recordkeeping amendments 

corresponding to the rule’s conditions 

relating to the use of third-party ratings. 

These amendments require that an 

adviser: (i) Retain a copy of any 

questionnaire or survey used in the 

preparation of a third-party rating 

included or appearing in any 

advertisement, and (ii) make and retain 

documentation substantiating the 

investment adviser’s reasonable basis 

for believing that the third-party rating 

complies with the specific conditions of 

the marketing rule.1035 In a change from 

the proposal, the marketing rule does 

not require advisers to obtain the 

questionnaire or survey to satisfy the 

specific conditions for third-party 

ratings; instead, advisers can comply 

with the conditions for third-party 

ratings by other means (which will not 

trigger a recordkeeping obligation). 

Accordingly, we estimate that 

approximately 50 percent of the 

investment advisers that will use a 

third-party rating, or 3,431 advisers, will 

comply with the third-party ratings 

conditions of the rule by obtaining the 

underlying questionnaire or survey. 

For the recordkeeping amendments 

relating to testimonials and 

endorsements, we estimate that the 

amendments will result in a collection 

of information burden estimate of 5 

hours for each of the estimated 6,862 

advisers that will use a testimonial or 

endorsement. We are revising this 

estimate upwards versus the proposal to 

reflect the additional recordkeeping 

obligations we are adopting, such as the 

requirement to create documentation of 

the adviser’s reasonable belief that the 

testimonial or endorsement complies 

with the specific conditions of the 

marketing rule. 

We also estimate the amendments 

will result in a collection of information 

burden of 3 hours for the 50 percent of 

advisers (or 6,862 advisers) that we 

estimate will use third-party ratings. 

Again, we have revised this estimate 

upwards from the proposal to reflect the 

additional obligations imposed by the 

amended recordkeeping rule, such as 

the requirement to create 

documentation of the adviser’s 

reasonable belief that the third-party 

rating complies with the specific 

conditions of the marketing rule. Table 

5 summarizes the final PRA estimates 

for the internal and external burdens 

associated with these requirements. 

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1036 2,435,364 hours/13,299 registered advisers = 

183 hours per adviser. 

1037 10 hours (advertising retention) + 3 hours 

(performance retention) × 95% + 3 hours 

(hypothetical performance) × 50% + 3 hours 

(predecessor performance) × 2% + 5 hours 

(testimonials and endorsements) x 50% + 3 hours 

(third-party ratings) × 50% = 18.44 hours. 1038 13,724 registered investment advisers × 

201.44 hours = 2,764,563 hours. 

1039 $16,636,198/252,661 hours = $65.84/hour for 

these amendments; $65.84/hour × 329,199 hours = 

$21,675,762. $21,675,762 + $154,304,664 = 

$175,980,426. 

1040 2,764,563 hours¥2,435,364 hours = 329,199 

hours. 

1041 $175,980,426¥$154,304,664 = $21,675,762. 

BILLING CODE 8011–01–C 

As noted above, the approved annual 

aggregate burden for rule 204–2 is 

currently 2,435,364 hours, based on an 

estimate of 13,299 registered advisers, or 

183 hours per registered adviser, with a 

total monetized costs of 

$154,304,664.1036 We therefore estimate 

that the amendments to the 

recordkeeping rule will result in an 

aggregate increase in the collection of 

information burden estimate by 18.44 

hours for each of the estimated 13,724 

registered advisers, resulting in a total of 

201.44 hours per adviser.1037 This 

would yield an annual estimated 

aggregate burden of 2,764,563 hours 

under amended rule 204–2 for all 

registered advisers,1038 for a monetized 

cost of $175,980,426.1039 This 

represents in an increase of 329,199 1040

annual aggregate hours in the hour 

burden and an annual increase of 

$21,675,762 from the currently 

approved total aggregate monetized cost 

for rule 204–2.1041 These increases are 

attributable to a larger registered 

investment adviser population since the 

most recent approval and adjustments 

for inflation, as well as the rule 204–2 

amendments relating to the new 

marketing rule. The following chart 

shows the differences from the 

approved annual hourly burden for the 

current books and records rule. 

Requirement Estimated burden increase 

or decrease Brief explanation 

All collections of information under 

rule 204–2 (including new requirements).

18.44 hour increase. ......................

The overall hour burden per adviser would increase from 183 

hours to 201.44 hours.

The currently approved burden reflects the current rule’s requirement 

that investment advisers retain copies of advertisements to 10 or 

more persons. The amended rule will require that they retain copies of all advertisements, as well as copies of any questionnaires 

or surveys obtained in connection with third-party ratings in advertisements. The amended rule will also require that advisers that 

use testimonials, endorsements, or third-party ratings make and retain a record documenting that the adviser has a reasonable belief 

that these items comply with the applicable conditions of the marketing rule. 

E. Form ADV 

Form ADV (OMB Control No. 3235– 

0049) is the investment adviser 

registration form under the Advisers 

Act. Rule 203–1 under the Advisers Act 

requires every person applying for 

investment adviser registration with the 

Commission to file Form ADV. Rule 

204–4 under the Advisers Act requires 

certain investment advisers exempt 

from registration with the Commission 

(‘‘exempt reporting advisers’’) to file 

reports with the Commission by 

completing a limited number of items 

on Form ADV. Rule 204–1 under the 

Advisers Act requires each registered 

and exempt reporting adviser to file 

amendments to Form ADV at least 

annually, and requires advisers to 

submit electronic filings through IARD. 

On June 5, 2019, the Commission 

adopted amendments to Form ADV and 

related rules under the Act to add new 

Form ADV Part 3: Form CRS 

(relationship summary) requiring 

certain registered investment advisers to 

prepare and file a relationship summary 

for retail investors. 

The paperwork burdens associated 

with rules 203–1, 204–1, and 204–4 are 

included in the approved annual burden 

associated with Form ADV and thus do 

not entail separate collections of 

information. These collections of 

information are found at 17 CFR 

275.203–1, 275.204–1, 275.204–4 and 

279.1 (Form ADV itself) and are 

mandatory. Responses are not kept 

confidential. We are adopting 

amendments to Form ADV to add a 


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1042An exempt reporting adviser is an investment 

adviser that relies on the exemption from 

investment adviser registration provided in either 

section 203(l) of the Advisers Act because it is an 

adviser solely to one or more venture capital funds 

or 203(m) of the Advisers Act because it is an 

adviser solely to private funds and has assets under 

management in the United States of less than $150 

million. 

1043An exempt reporting adviser is not a 

registered investment adviser and therefore will not 

be subject to the amendments to Item 5 of Form 

ADV Part 1A. Exempt reporting advisers are 

required to complete a limited number of items in 

Form ADV Part 1A (consisting of Items 1, 2.B., 3, 

6, 7, 10, 11 and corresponding schedules), and are 

not required to complete Part 2. 

1044See Form CRS Relationship Summary; 

Amendments to Form ADV, Release No. IA–5247 

(June 5, 2019) [84 FR 33492 (Jul. 12, 2019)]. 

1045See Updated Supporting Statement for PRA 

Submission for Amendments to Form ADV Under 

the Investment Advisers Act of 1940 (the 

‘‘Approved Form ADV PRA’’). 

1046The information in the following table is from 

the Approved Form ADV PRA, id. 

1047As of August 1, 2020, there are 13,724 

registered investment advisers, 8,218 of which file 

a Form CRS. See also Approved Form ADV PRA, 

id., at text accompanying nn.55–56 (‘‘[W]e estimate 

that 1,227 new advisers will register with us 

annually, 656 of which will be required to prepare 

a relationship summary.’’) 

1048See id. 

1049 Id., at n.42. 

subsection L to Item 5 of Part 1A 

(‘‘Marketing Activities’’) to require 

information about an adviser’s use in its 

advertisements of testimonials, 

endorsements, third-party ratings, and 

previous investment advice. 

Specifically, we will require an adviser 

to state whether any of its 

advertisements include performance 

results, hypothetical performance, or 

predecessor performance. We will also 

require an adviser to state whether any 

of its advertisements includes 

testimonials, endorsements, or a thirdparty rating, and if so, whether the 

adviser pays or otherwise provides cash 

or non-cash compensation, directly or 

indirectly, in connection with their use. 

Finally, we will require an adviser to 

state whether any of its advertisements 

includes a reference to specific 

investment advice provided by the 

adviser. 

The collection of information is 

necessary to improve information 

available to us and to the general public 

about advisers’ advertising practices. 

Our staff will use this information to 

help prepare for examinations of 

investment advisers. This information 

will be particularly useful for staff in 

reviewing an adviser’s compliance with 

the marketing rule, including the 

restrictions and conditions on advisers’ 

use in advertisements of performance 

presentations and third-party 

statements. We are not proposing 

amendments to Form ADV Parts 2 or 3. 

1. Respondents 

The respondents to current Form ADV 

are investment advisers registered with 

the Commission or applying for 

registration with the Commission and 

exempt reporting advisers.1042 Based on 

the IARD system data as of August 1, 

2020, approximately 13,724 investment 

advisers were registered with the 

Commission, and 4,455 exempt 

reporting advisers file reports with the 

Commission. The amendments to Form 

ADV will increase the information 

requested in Form ADV Part 1A for 

registered investment advisers. Because 

exempt reporting advisers are required 

to complete a limited number of items 

in Part 1A of Form ADV, which 

excludes Item 5, they will not be subject 

to these amendments and will therefore 

not be subject to this collection of 

information.1043 However, these exempt 

reporting advisers are included in the 

PRA for purposes of updating the 

overall Form ADV information 

collection. In addition, as noted above, 

in 2019 the Commission adopted 

amendments to Form ADV to add a new 

Part 3, requiring registered investment 

advisers that offer services to retail 

investors to prepare and file with the 

Commission, post to the adviser’s 

website (if it has one), and deliver to 

retail investors a relationship 

summary.1044 The burdens associated 

with completing Part 3 are included in 

the PRA for purposes of updating the 

overall Form ADV information 

collection.1045

The currently approved burdens for 

Form ADV are set forth below:1046

RIAs not obligated 

to prepare and file 

relationship summaries 

RIAs obligated to 

prepare and file 

relationship summaries 

Exempt reporting 

advisers All advisers 

Number of advisers included in the currently 

approved burden.

5,064 + 571 expected 

newly registered RIAs 

annually.

8,235 + 656 expected 

newly registered RIAs 

annually.

4,280 + 441 expected new 

ERAs annually.

17,597 advisers + 1,740 

expected new RIAs and 

ERAs annually. 

Currently approved total 

annual hour estimate per 

adviser.

29.22 hours ....................... 37.47 hours ....................... 3.60 hours ......................... 29.28 annual blended average hours per adviser. 

Currently approved aggregate annual hour burden.164,655 hours ................... 333,146 hours ................... 16,996 hours ..................... 514,797 hours. 

Currently approved aggregate monetized cost.$44,950,816 ...................... $90,978,858 ...................... $4,639,908 ........................ $140,569,582. 

Based on updated IARD system data 

as of August 1, 2020, we estimate that 

the number of registered investment 

advisers that are required to complete, 

amend, and file Form ADV (Part 1 and 

Part 2) with the Commission, but who 

are not obligated to prepare and file 

relationship summaries as of the 

applicable compliance date for Form 

ADV Part 3, is 5,506, and we also 

continue to believe, based on IARD 

system data, that that 1,227 new 

advisers will register with us annually, 

571 of which will not be required to 

prepare a relationship summary.1047

Based on updated IARD system data as 

of August 1, 2020, we estimate that the 

number of registered investment 

advisers that are required to complete, 

amend, and file Form ADV (Part 1 and 

Part 2) and prepare and file relationship 

summaries is 8,218, and we continue to 

believe, based on IARD system data, that 

that 1,227 new advisers will register 

with us annually, 656 of which will be 

required to prepare a relationship 

summary.1048 Based on updated IARD 

system data as of August 1, 2020, we 

estimate that the number of exempt 

reporting advisers is 4,455; however, we 

continue to believe that, based on IARD 

system data, there would be 441 new 

exempt reporting advisers annually.1049

2. Estimated New Annual Hour Burden 

for Advisers 

As a result of the proposed 

amendments to Form ADV Part 1A 

discussed above, we estimate that the 

average total annual collection of 

information burden for registered 

investment advisers that are not 

obligated to prepare and file 

relationship summaries will increase 0.5 

hours to 29.72 hours per registered 


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1050 In the proposal, we estimated that the 

amendments would not change the burden for 

exempt reporting advisers because they will not be 

required to complete the new portion of Form ADV. 1051 Id., at nn.44–45 and accompanying text, 1052 Id., at nn.46–47 and accompanying text. 1053 544,053.4 aggregate annual hour burden is 

the sum of: ((i) 29.72 hours × (5,506 RIAs + 571 

expected newly registered RIAs annually) = 180,608 

total aggregate annual hour burden for RIAs not 

obligated to prepare and file relationship 

summaries; (ii) 38.97 hours × (8,218 + 656 expected 

newly registered RIAs annually) = 345,819.8 total 

aggregate annual hour burden for RIAs not obligated 

to prepare and file relationship summaries; (iii) 3.60 

hours × (4,455 + 441 expected new ERAs annually) 

= 17,625.6 total aggregate annual hour burden for 

ERAs). We believe that performance of this function 

will most likely be equally allocated between a 

senior compliance examiner and a compliance 

manager. Data from the SIFMA Management and 

Professional Earnings Report suggest that costs for 

these positions are $237 and $309 per hour, 

respectively, with a blended rate of $273. Therefore: 

544,053.4 hours × $273 = $148,526,578. 

1054 5 U.S.C. 603(a). 

investment adviser per year for Form 

ADV. We estimate that the average total 

annual collection of information burden 

for registered investment advisers who 

are obligated to prepare and file 

relationship summaries will increase 0.5 

hour to 38.97 hours per registered 

investment adviser per year for Form 

ADV. We do not expect that the 

amendments will increase or decrease 

the currently approved total burden 

estimate of 3.60 per exempt reporting 

adviser completing Form ADV. We are 

not modifying our estimates from the 

proposal. Although one commenter 

claimed that we underestimated the 

Form ADV burden, this commenter 

mischaracterized our statements in the 

proposal.1050 We stated in the proposal 

that the Form ADV amendments would 

not increase the time required to 

complete the form for exempt reporting 

advisers (not registered investment 

advisers), which we continue to believe 

is the case. 

The currently approved annual 

aggregate burden for Form ADV for all 

registered advisers and exempt 

reporting advisers is 514,797 hours, for 

a monetized cost of $140,569,582.1051

This is an annual blended average per 

adviser burden for Form ADV of 29.28 

hours, and $7,996 per adviser.1052

Factoring in the new questions on Part 

1 of Form ADV that will be required for 

all registered investment advisers (but 

not for exempt reporting advisers), and 

increases due to increased number in 

RIAs since the burden estimate was last 

approved (but a decreased number in 

ERAs), the revised annual aggregate 

burden hours for Form ADV (Parts 1, 2 

and 3) for all registered advisers and 

exempt reporting advisers will be 

544,053 hours per year, with a 

monetized value of $148,526,578.1053

This will be an aggregate increase of 

29,256 hours, or $7,956,996 in the 

monetized value of the hour burden, 

from the currently approved annual 

aggregate burden estimates, increases 

which are attributed to the factors 

described above. 

Estimated new annual hour burden 

for advisers: 

RIAs not obligated 

to prepare and file 

relationship summaries 

RIAs obligated to 

prepare and file 

relationship summaries 

Exempt reporting 

advisers All advisers 

Number of advisers to be 

included in the final burden.

5,506 + 571 expected 

newly registered RIAs 

annually.

8,218 + 656 expected 

newly registered RIAs 

annually.

4,455 + 441 expected new 

ERAs annually.

Final total annual hour estimate per adviser.29.72 ................................. 38.97 ................................. 3.60 hours .........................

Final aggregate burden 

hours.

180,608 hours ................... 345,819.8 hours ................ 17,625.6 hours .................. 544,053.4 hours. 

Final aggregate monetized 

cost.

$49,306,104 ...................... $94,408,800 ...................... $4,811,789 ........................ $148,526,578. 

V. Final Regulatory Flexibility Analysis 

The Commission has prepared the 

following Final Regulatory Flexibility 

Analysis (‘‘FRFA’’) in accordance with 

section 4(a) of the Regulatory Flexibility 

Act (‘‘RFA’’).1054 It relates to: (i) Final 

amendments to rule 206(4)–1 under the 

Investment Advisers Act; (ii) final 

amendments to rule 204–2, and (iii) 

final amendments to Form ADV Part 1A. 

A. Reason for and Objectives of the 

Final Amendments 

1. Final Rule 206(4)–1 

We are adopting amendments to rule 

206(4)–1 (now known as the ‘‘marketing 

rule’’), which we adopted in 1961 to 

target advertising practices that the 

Commission believed were likely to be 

misleading. We are also incorporating 

into rule 206(4)–1 certain aspects of rule 

206(4)–3 (previously referred to as the 

‘‘cash solicitation rule’’), which we 

adopted in 1979 to help ensure clients 

are aware that paid solicitors who refer 

them to advisers have a conflict of 

interest. We are accordingly eliminating 

rule 206(4)–3. 

As discussed above, we are adopting 

amendments to rule 206(4)–1 to impose: 

(i) General prohibitions of certain 

advertising practices applicable to all 

advertisements; (ii) tailored restrictions 

or conditions on specific practices 

applicable to testimonials, 

endorsements, and third-party ratings; 

and (iii) tailored requirements for the 

presentation of performance results, 

including predecessor performance. The 

final rule is designed to restrict or place 

conditions on specific practices we 

believe may cause investors to be misled 

without appropriate conditions or 

limitations. The final rule will also 

include a new definition of 

‘‘advertisement’’ that is intended to be 

flexible enough to remain relevant and 

effective in the face of advances in 

technology and evolving industry 

practices. The reasons for, and 

objectives of, the final amendments are 

discussed in more detail in sections I 

and II, above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in 

sections III and IV, which discuss the 

burdens on all advisers. The 

professional skills required to meet 

these specific burdens are also 

discussed in section IV. 

We believe that our final amendments 

are appropriate and in the public 

interest and will improve investor 

protection. We are adopting 

amendments to the current rule because 

while we believe that the concerns that 

motivated the Commission to adopt rule 

206(4)–1 and 206(4)–3 still exist today, 

we also believe that we can achieve our 

regulatory goals in a more tailored 

manner. We believe that our final 

amendments will update the rule’s 

coverage to reflect regulatory changes 

and evolution of industry practices, 

improve the quality of disclosures to 

investors, and streamline elements of 

the rules our 40 years of experience has 


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suggested may no longer be necessary 

for investor protection. 

2. Final Rule 204–2 

We are also adopting related 

amendments to rule 204–2, the books 

and records rule, which sets forth 

requirements for maintaining, making, 

and retaining advertisements. We are 

amending the rule to require investment 

advisers to make and keep records of all 

advertisements they disseminate. In 

addition, we are adopting the provisions 

to the books and records rule that will 

explicitly require investment advisers: 

(i) That use third-party ratings in an 

advertisement to record and keep a copy 

of any questionnaire or survey used in 

the preparation of the third-party rating; 

and (ii) to maintain documentation of 

communications relating to predecessor 

performance and to support 

performance calculations. We are also 

adopting the recordkeeping requirement 

that corresponds to the amendments 

related to testimonials, endorsements, 

and third-party ratings under the final 

rule such that advisers must retain: (i) 

If not included in the advertisement, a 

record of the disclosures provided to 

clients or investors pursuant to final 

rule 206(4)–1; (ii) documentation 

substantiating the adviser’s reasonable 

basis for believing that the testimonial 

or endorsement complies with the final 

rule and that the third-party rating 

complies with the final rule 206(4)– 

1(c)(1); and (iii) a record of the names 

of all persons who are an investment 

adviser’s partners, officers, directors, or 

employees, or a person that controls, is 

controlled by, or is under common 

control with the investment adviser, or 

is a partner, officer, director or 

employee of such a person. 

As discussed above, we are adopting 

these amendments to rule 204–2 to: (i) 

Conform the books and records rule to 

the final rule; (ii) help ensure that an 

investment adviser retains records of all 

its advertisements; and (iii) facilitate the 

Commission’s inspection and 

enforcement capabilities. The reasons 

for and objectives of, the final 

amendments to the books and records 

rule are discussed in more detail in 

section II.I above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in our 

Economic Analysis and Paperwork 

Reduction Act Analysis, which discuss 

the burdens on all advisers. The 

professional skills required to meet 

these specific burdens are also 

discussed in Section IV. 

3. Final Amendments to Form ADV 

We are also adopting amendments to 

Item 5 of Part 1A of Form ADV to 

improve information available to us and 

to the general public about advisers’ 

advertising practices. We will be adding 

a subsection L (‘‘Marketing Activities’’) 

to require information about an 

adviser’s use in its advertisements of 

performance results, its previous 

investment advice, testimonials, 

endorsements, and third-party ratings. 

Specifically, we will require an 

adviser to state whether any of its 

advertisements includes testimonials, 

endorsements, or a third-party rating, 

and if so, whether the adviser pays cash 

or non-cash compensation, directly or 

indirectly, in connection with their use. 

We will also require an adviser to state 

whether any of its advertisements 

includes performance results or a 

reference to specific investment advice 

provided by the adviser. Finally, we 

will require an adviser to state whether 

any of its advertisements include 

hypothetical or predecessor 

performance. Our staff will use this 

information to help prepare for 

examinations of investment advisers. 

This information will be particularly 

useful for staff in reviewing an adviser’s 

compliance with the final rule, 

including the restrictions and 

conditions on advisers’ use in 

advertisements of performance 

presentations, testimonials and 

endorsements, and third-party ratings. 

The reasons for and objectives of, the 

final amendments to Form ADV are 

discussed in more detail in section 

II.A.8 above. The burdens of these 

requirements on small advisers are 

discussed below as well as above in our 

Economic Analysis and Paperwork 

Reduction Act Analysis, which discuss 

the burdens on all advisers. The 

professional skills required to meet 

these specific burdens are also 

discussed in Section IV. 

B. Significant Issues Raised by Public 

Comments 

In the 2019 Proposing Release, we 

requested comment on the matters 

discussed in the IRFA, including the 

number of small entities subject to the 

proposed amendments to rules 206(4)– 

1, 206(4)–3, and 204–2, and Form ADV, 

as well as the potential impacts 

discussed in this analysis; and whether 

the proposal could have an effect on 

small entities that has not been 

considered. We requested that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

such impact. In addition, we included 

in the proposal a ‘‘Feedback Flyer’’ as 

Appendix C thereto. The ‘‘Feedback 

Flyer’’ solicited feedback from smaller 

advisers on the effects on small entities 

subject to our proposal, and the 

estimated compliance burdens of our 

proposal and how they would affect 

small entities. 

After consideration of the comments 

we received on the proposed rules and 

amendments, we are adopting the 

amendments with several modifications 

that are designed to reduce certain 

operational challenges that commenters 

identified, while maintaining 

protections for investors and providing 

investors with useful and important 

disclosures. However, none of the 

modifications was significant to the 

small-entity cost burden estimates 

discussed below. Revisions to the 

estimates are instead based on updated 

figures regarding the number of small 

entities affected by the new rule and 

amendments and updated estimated 

wage rates. 

C. Legal Basis 

The Commission is adopting 

amendments to rule 206(4)–1 under the 

Advisers Act under the authority set 

forth in sections 203(d), 206(4), 211(a) 

and 211(h) of the Investment Advisers 

Act of 1940 [15 U.S.C. 80b–3(d), 10b– 

6(4) and 80b–11(a) and (h)]. The 

Commission is adopting amendments to 

rule 204–2 under the Advisers Act 

under the authority set forth in sections 

204 and 211 of the Investment Advisers 

Act of 1940 [15 U.S.C. 80b–4 and 80b– 

11]. The Commission is adopting 

amendments to Form ADV under 

section 19(a) of the Securities Act of 

1933 [15 U.S.C. 77s(a)], sections 23(a) 

and 28(e)(2) of the Securities Exchange 

Act of 1934 [15 U.S.C. 78w(a) and 

78bb(e)(2)], section 319(a) of the Trust 

Indenture Act of 1939 [15 U.S.C. 

7sss(a)], section 38(a) of the Investment 

Company Act of 1940 [15 U.S.C. 80a– 

37(a)], and sections 203(c)(1), 204, and 

211(a) of the Investment Advisers Act of 

1940 [15 U.S.C. 80b–3(c)(1), 80b–4, and 

80b–11(a)]. 

D. Small Entities Subject to the Rule and 

Rule Amendments 

In developing these amendments, we 

have considered their potential impact 

on small entities that would be subject 

to the final amendments. The final 

amendments will affect many, but not 

all, investment advisers registered with 

the Commission, including some small 

entities. 

Under Commission rules, for the 

purposes of the Advisers Act and the 

RFA, an investment adviser generally is 

a small entity if it: (1) Has assets under 

management having a total value of less 

than $25 million; (2) did not have total 

assets of $5 million or more on the last 

day of the most recent fiscal year; and 


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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations 13135 

1055Advisers Act rule 0–7(a). 1056Based on SEC-registered investment adviser 

responses to Items 5.F. and 12 of Form ADV. Only 

SEC- registered investment advisers with RAUM of 

less than $25 million, as indicated in Form ADV 

Item 5.F.(2)(c) are required to respond to Form ADV 

Item 12. For purposes of this analysis, a registered 

investment adviser is classified as a ‘‘small 

business’’ or ‘‘small organization’’ if they respond 

‘‘No’’ to Form ADV Item 12.A., 12.B.(1), 12.B.(2), 

12.C.(1), and 12.C.(2). These responses indicate that 

the registered investment adviser had RAUM of less 

than $25 million, did not have total assets of $5 

million or more on the last day of the most recent 

fiscal year; and does not control, is not controlled 

by, and is not under common control with another 

investment adviser that has RAUM of $25 million 

or more, or any person (other than a natural person) 

that had total assets of $5 million or more on the 

last day of the most recent fiscal year, consistent 

with the definition of a small entity under the 

Advisers Act for purposes of the RFA. 

1057See supra footnote 1038 and accompanying 

text. 

1058See PRA discussion, above, at sections IV.A 

and B. 

1059As discussed above, the use of testimonials, 

endorsements, and third-party ratings in 

advertisements is voluntary but we estimate that 

approximately 50% of registered investment 

advisers would use testimonials or endorsements in 

advertisements, and approximately 50% of 

registered investment advisers would use thirdparty ratings in advertisements. See PRA 

discussion, above, at sections IV.A and B. 

1060 1,414,291 hours/13,724 advisers = 103 hours 

per adviser. 103 hours × 545 small advisers = 56,135 

hours. 

1061 $468,287,816 total cost × (545 small advisers/ 

13,724 advisers) = $18,596,390. 

1062See final rule 204–2(a)(11)(i)(A). 

1063See final rule 204–2(a)(7)(iv), (11)(ii), and 

(16). 

(3) does not control, is not controlled 

by, and is not under common control 

with another investment adviser that 

has assets under management of $25 

million or more, or any person (other 

than a natural person) that had total 

assets of $5 million or more on the last 

day of its most recent fiscal year.1055

Our final amendments will not affect 

most investment advisers that are small 

entities (‘‘small advisers’’) because they 

are generally registered with one or 

more state securities authorities and not 

with the Commission. Under section 

203A of the Advisers Act, most small 

advisers are prohibited from registering 

with the Commission and are regulated 

by state regulators. Based on IARD data, 

we estimate that as of August 1, 2020, 

approximately 545 SEC-registered 

advisers are small entities under the 

RFA.1056

1. Small Entities Subject to 

Amendments to Marketing Rule 

As discussed above in section III. (the 

Economic Analysis), the Commission 

estimates that based on IARD data as of 

August 1, 2020, approximately 13,724 

investment advisers would be subject to 

the final amendments to rule 206(4)–1 

under the Advisers Act and the related 

final amendments to rule 204–2 under 

the Advisers Act.1057

All of the approximately 545 SECregistered advisers that are small 

entities under the RFA will be subject 

to the amended rule 206(4)–1 and 

corresponding amendments to rule 204– 

2. This is because, as discussed above in 

the PRA, we estimate that all investment 

advisers will disseminate at least one 

communication meeting the final rule’s 

definition of ‘‘advertisement’’ and 

therefore be subject to the requirements 

of the final rule.1058 Furthermore, the 

rule’s additional conditions and 

restrictions on testimonials, 

endorsements, and third-party ratings, 

as well as certain presentations of 

performance, will apply to many 

advertisements under the rule.1059

2. Small Entities Subject to 

Amendments to the Books and Records 

Rule 204–2 

As discussed above, there are 

approximately 545 small advisers 

currently registered with us, and we 

estimate that 100 percent of advisers 

registered with us will be subject to 

amendments to the books and records 

rule. 

3. Small Entities Subject to 

Amendments to Form ADV 

As discussed above, there are 

approximately 545 small advisers 

currently registered with us, and we 

estimate that 100 percent of advisers 

registered with us will be subject to 

amendments to Form ADV. 

E. Projected Reporting, Recordkeeping 

and Other Compliance Requirements 

1. Final Rule 206(4)–1 

Final rule 206(4)–1 will impose 

certain reporting and compliance 

requirements on certain investment 

advisers, including those that are small 

entities. All registered investment 

advisers that distribute advertisements 

under the rule, which we estimate to be 

all advisers, will be required to comply 

with the final rule’s general prohibition 

of fraudulent or misleading 

advertisements. In addition, all advisers 

that use testimonials, endorsements, 

and third-party ratings will be required 

to include disclosures and comply with 

other conditions. Small entity advisers 

will be required to comply with 

restrictions and other conditions related 

to the presentation of certain 

performance results in advertisements. 

The final amendments, including 

compliance and recordkeeping 

requirements, are summarized in this 

FRFA (section V.A., above). All of these 

final requirements are also discussed in 

detail, above, in sections I and II, and 

these requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections III and IV (the Economic 

Analysis and Paperwork Reduction Act 

Analysis, respectively) and below. The 

professional skills required to meet 

these specific burdens are also 

discussed in section IV. 

As discussed above, there are 

approximately 545 small advisers 

currently registered with us, and we 

estimate that 100 percent of advisers 

registered with us will be subject to 

amendments to the marketing rule. As 

discussed above in our Paperwork 

Reduction Act Analysis in section III 

above, we estimate that the final 

amendments to rule 206(4)–1 under the 

Advisers Act, which will require 

advisers to prepare disclosures for 

testimonials and endorsements, thirdparty ratings, and performance results, 

will create a new annual burden of 

approximately 98 hours per adviser, or 

56,135 hours in aggregate for small 

advisers.1060 We therefore expect the 

annual monetized aggregate cost to 

small advisers associated with our final 

amendments to be $18,596,390.1061

2. Final Amendments to Rule 204–2 

The final amendments to rule 204–2 

will require investment advisers to 

retain records of all advertisements they 

disseminate. 1062 We are also requiring 

investment advisers that use a thirdparty rating in an advertisement to 

retain a copy of any questionnaire or 

survey used in preparation of the thirdparty rating, as well as documentation 

of communications relating to 

predecessor performance and 

supporting performance 

calculations.1063 To correspond to the 

provisions with respect to testimonials, 

endorsements, and third-party ratings, 

we are amending the books and records 

rule to require investment advisers to 

make and keep records of: (i) If not 

included in the advertisement, a record 

of the disclosures provided to clients or 

investors pursuant to the final rule 

206(4)–1; (ii) documentation 

substantiating the adviser’s reasonable 

basis for believing that the testimonial 

or endorsement complies with the final 

rule and that the third-party rating 

complies with rule 206(4)–1(c)(1); and 

(iii) a record of the names of all persons 

who are an investment adviser’s 

partners, officers, directors, or 

employees, or a person that controls, is 

controlled by, or is under common 

control with the investment adviser, or 

is a partner, officer, director or 

employee of such a person, pursuant to 


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1064See final rule 204–2(a)(15)(i) through (ii). 

1065 18.44 hour × 545 small advisers = 10,049.8 

hours. 

1066 545 registered investment advisers × 201.44 

hours = 109,784.8 hours. (17% × 109,784.8 hours 

× $70) + (83% × 109,784.8 hours × $62) = 

$6,960,596. 

1067 38.97 hour × 545 small advisers = 21,238.6 

hours. 

1068 272.5 hours × $273 = $74,392.50. See supra 

footnote 1053 for a discussion of who we believe 

would perform this function, and the applicable 

blended rate. 

1069There may be other legal protections of 

investors from fraud. See, e.g., section 17(a) of the 

Securities Act, as well as section 10(b) of the 

Exchange Act and rule 10b–5 thereunder. 

1070See supra footnote 371 and accompanying 

text. The compliance rule contains principles based 

requirements for advisers to adopt compliance 

policies and procedures that are tailored to their 

businesses. Id. 

the final rule 206(4)–1(b)(4)(ii).1064 Each 

of these records will be required to be 

maintained in the same manner, and for 

the same period of time, as other books 

and records required to be maintained 

under rule 204–2(a). 

As discussed above, there are 

approximately 545 small advisers 

currently registered with us, and we 

estimate that 100 percent of advisers 

registered with us will be subject to 

amendments to the books and records 

rule. As discussed above in our 

Paperwork Reduction Act Analysis in 

section IV.D above, the amendments to 

rule 204–2 under the Advisers Act will 

increase the annual burden by 

approximately 18.44 hours per adviser, 

or 10,049.8 hours in aggregate for small 

advisers.1065 We therefore believe the 

annual monetized aggregate cost to 

small advisers associated with our 

amendments will be $6,960,596.1066

3. Final Amendments to Form ADV 

Final amendments to Form ADV will 

impose certain reporting and 

compliance requirements on certain 

investment advisers, including those 

that are small entities, requiring them to 

provide information about their use in 

its advertisements of performance 

results, previous investment advice, 

testimonials, endorsements, and thirdparty ratings. The final amendments, 

including recordkeeping requirements, 

are summarized above in this FRFA 

(section V.A). All of these final 

requirements are also discussed in 

detail, above, in section II.I, and these 

requirements and the burdens on 

respondents, including those that are 

small entities, are discussed above in 

sections III and IV (the Economic 

Analysis and Paperwork Reduction Act 

Analysis) and below. The professional 

skills required to meet these specific 

burdens are also discussed in section IV. 

Our Economic Analysis, discussed in 

section III above, discusses these costs 

and burdens for respondents, which 

include small advisers. As discussed 

above in our Paperwork Reduction Act 

Analysis in section IV.E above, the final 

amendments to Form ADV will increase 

the annual burden for advisers (other 

than exempt reporting advisers, who 

will not be required to respond to the 

new Form ADV questions) by 

approximately 0.5 hours per adviser, or 

272.5 hours in aggregate for small 

advisers (other than exempt reporting 

advisers).1067 We therefore expect the 

annual monetized aggregate cost to 

small advisers (other than exempt 

reporting advisers, for whom there will 

be no additional cost) associated with 

our final amendments will be 

$74,392.50.1068

F. Duplicative, Overlapping, or 

Conflicting Federal Rules 

1. Final Rule 206(4)–1 

Other than existing rule 206(4)–1 and 

the prohibitions contained in section 

208(a)–(c) of the Act, investment 

advisers do not have obligations under 

the Act specifically for adviser 

advertisements. As discussed above in 

section II.A.4., we recognize that 

advisers to private funds, who would be 

included in the scope of the final rule 

206(4)–1, are prohibited from making 

misstatements or materially misleading 

statements to investors under rule 

206(4)–8.1069 Although the final 

marketing rule may overlap with the 

prohibitions in rule 206(4)–8 in certain 

circumstances, just as it overlaps with 

section 206 with respect to an adviser’s 

clients and prospective clients, we 

believe it is important from an investor 

protection standpoint to delineate these 

obligations to all investors in the 

advertising context and provide a 

framework for an adviser’s 

advertisements to comply with these 

obligations. We also understand that 

many private fund advisers already 

consider the current staff positions 

related to the current advertising rule 

when preparing their marketing 

communications. As a result, we believe 

that our application of the final rule to 

advertisements to private fund investors 

would result in limited additional 

regulatory or compliance costs for many 

of these advisers. 

We also recognize that advisers have 

other compliance oversight obligations 

under the Federal securities laws, 

including the Act. For example, advisers 

are subject to the Act’s compliance rule, 

which we adopted in 2003.1070

Therefore, when an adviser utilizes a 

promoter as part of its business, the 

adviser must have in place under the 

Act’s compliance rule policies and 

procedures that address this 

relationship and are reasonably 

designed to ensure that the adviser is in 

compliance with the final rule. We 

believe the final rule’s adviser oversight 

and compliance provision applicable to 

testimonials and endorsements will 

work well with the Act’s compliance 

rule, as both are principles-based and 

will allow advisers to tailor their 

compliance with the final rule as 

appropriate for each adviser. There are 

no duplicative, overlapping, or 

conflicting Federal rules with respect to 

the final amendments to rule 204–2. 

With respect to testimonials and 

endorsements, our amendments to rule 

206(4)–1 will eliminate some regulatory 

duplication. For example, rule 206(4)–3 

has had a duplicative requirement that 

a solicitor deliver to clients the adviser’s 

Form ADV brochure, even though 

advisers are already required to deliver 

their ADV brochures to their clients 

under rule 204–3. To the extent that 

both advisers and solicitors currently 

deliver the adviser’s Form ADV 

brochure, the final rule will reduce the 

redundancy of disclosures. In addition, 

as discussed above, the final rule’s 

disqualification provisions will apply to 

situations in which an adviser 

compensates a person, directly or 

indirectly, for a testimonial or 

endorsement. This includes persons 

who provide testimonials or 

endorsements to private fund investors 

such as broker-dealers. Such brokerdealers may also be subject to the 

statutory disqualification provisions 

under the Exchange Act. To the extent 

that a person is subject to both 

disqualification provisions, there would 

be some overlapping categories of 

disqualifying events (i.e., certain bad 

acts would disqualify a person under 

both provisions). For instance, certain 

types of final orders of certain Federal 

and foreign regulators would be 

disqualifying events under both 

provisions. Accordingly, as discussed 

above, we are providing an exemption 

from the disqualification provisions for 

registered broker-dealers that are subject 

to and complying with the statutory 

disqualification provisions under the 

Exchange Act. 

We understand that some promoters 

will also be subject to the ‘‘bad actor’’ 

disqualification requirements, which 

disqualify securities offerings from 

reliance on exemptions if the issuer or 

other relevant persons (such as 

underwriters, placement agents and the 

directors, officers and significant 

shareholders of the issuer) have been 

convicted of, or are subject to court or 

administrative sanctions for, securities 


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1071See Disqualification of Felons and Other 

‘‘Bad Actors’’ from Rule 506 Offerings, Release No. 

33–9414 (July 10, 2013) [78 FR 44729 (July 24, 

2013). 

1072See Regulation Best Interest Release, supra 

footnote 146, at 14. 

1073See final rule 206(4)–1(b)(1)(iii). 

1074For example, one commenter stated that 

smaller advisers would face challenges under the 

proposed rule in demonstrating that the 

performance of a representative account is no 

higher than if all related portfolios had been 

included. See IAA Comment Letter. See also 

proposed rule 206(4)–1(c)(1)(iii)(A). However, we 

do not believe that providing smaller advisers with 

the benefit of presenting a single representative 

account that is not subject to prescribed conditions 

would justify the risks of cherry-picking related 

portfolios with higher-than-usual returns. As a 

result, we are not adopting different compliance 

requirements or exemptions for smaller advisers. 

Instead, we have modified our final rule to allow 

all advisers to include performance returns of a 

single portfolio if they can demonstrate that the 

performance is not materially higher than if all 

related portfolios had been included, and the 

performance meets the rule’s general prohibitions. 

See final rule 206(4)–1(d)(4)(i). See also section 

II.E.4. (discussing related performance). 

1075Specifically, the disqualification provisions 

of the rule related to testimonials and endorsements 

will not apply if the person has provided 

testimonials or endorsements for the investment 

adviser during the preceding twelve months and the 

investment adviser’s compensation payable to such 

person for those testimonials or endorsements is 

$1,000 or less (or the equivalent value in non-cash 

compensation). 

fraud or other violations of specified 

laws.1071 Some types of bad acts could 

disqualify a person from engaging in 

certain capacities in a securities offering 

under Rule 506 of Regulation D under 

the Securities Act, as well as from 

engaging as a promoter under the final 

rule. Accordingly, as discussed above, 

we are providing an exemption from the 

disqualification provisions for covered 

persons that are subject to and not 

disqualified under Rule 506 of 

Regulation D under the Securities Act. 

As discussed above, the final rule’s 

required disclosures provisions will 

apply to all testimonials and 

endorsements, including those that are 

provided by registered broker-dealers in 

certain circumstances. Such brokerdealers may also be subject to other 

regulatory disclosure provisions such as 

under Regulation Best Interest. To the 

extent that a broker-dealer’s testimonial 

or endorsement is a recommendation 

subject to Regulation BI, then there 

would be some overlapping 

requirements with our final rule (i.e., 

disclosing compensation arrangements 

and material conflicts of interest under 

both provisions). For instance, under 

the Regulation BI disclosure obligations, 

when making a recommendation to a 

retail customer, a broker-dealer must 

disclose all material facts about the 

scope and terms of its relationship with 

a retail customer, such as the material 

fees and costs the customer will incur 

as well as all material facts relating to 

its conflicts of interest associated with 

the recommendation, including thirdparty payments and compensation 

arrangements.1072 Similarly, under the 

final rule, when soliciting for an 

adviser, the broker-dealer would have to 

disclose any material conflicts of 

interest on his or her part resulting from 

their relationship and/or any 

compensation arrangement with the 

adviser.1073 Accordingly, as discussed 

above, we are providing an exemption 

from the final rule’s required 

disclosures provisions for testimonials 

and endorsements that are disseminated 

by registered broker-dealers to the 

extent that such testimonials or 

endorsements are recommendations 

subject to Regulation BI in order to help 

eliminate regulatory duplication. 

In addition to testimonials and 

endorsements that are recommendations 

subject to Regulation BI, we are 

providing a partial exemption from 

certain disclosure requirements where a 

broker-dealer provides a testimonial or 

endorsement to an investor that is not 

a retail customer as defined in 

Regulation BI. As discussed above in 

section II.C.5.c., we believe that the 

clear and prominent disclosures such a 

broker-dealer will be required to 

provide under our final rule are 

sufficient to alert an investor that is not 

a retail customer that a testimonial or 

endorsement is a paid solicitation. In 

addition, we believe that these investors 

will be able to request from the brokerdealer other information about the 

solicitation. 

2. Final Amendments to Form ADV 

Our new subsection L (‘‘Marketing 

Activities’’) to Item 5 of Part 1A of Form 

ADV will require information about an 

adviser’s use in its advertisements of 

performance results, testimonials, 

endorsements, third-party ratings and 

its previous investment advice. These 

final requirements will not be 

duplicative of, or overlap with, other 

information advisers are required to 

provide on Form ADV. 

G. Significant Alternatives 

1. Final Rule 206(4)–1 

The RFA directs the Commission to 

consider significant alternatives that 

would accomplish our stated objectives, 

while minimizing any significant 

adverse impact on small entities. We 

considered the following alternatives for 

small entities in relation to the final rule 

and the corresponding amendments to 

rule 204–2 under the Advisers Act and 

to Form ADV: (i) Differing compliance 

or reporting requirements that take into 

account the resources available to small 

entities; (ii) the clarification, 

consolidation, or simplification of 

compliance and reporting requirements 

under the final rule for such small 

entities; (iii) the use of performance 

rather than design standards; and (iv) an 

exemption from coverage of the final 

rule, or any part thereof, for such small 

entities. 

Regarding the first and fourth 

alternatives, the Commission believes 

that establishing different compliance or 

reporting requirements for small 

advisers, or exempting small advisers 

from the final rule, or any part thereof, 

would be inappropriate under these 

circumstances.1074 Because the 

protections of the Advisers Act are 

intended to apply equally to clients of 

both large and small firms, it would be 

inconsistent with the purposes of the 

Advisers Act to specify differences for 

small entities under the final rule and 

corresponding changes to rule 204–2 

and Form ADV. However, we are 

adopting an exemption for de minimis 

compensation with respect to the use of 

testimonials and endorsements, which 

we expect will apply to some small 

entities that offer de minimis 

compensation to promoters.1075

Although, as discussed above, we 

believe heightened safeguards would 

generally be appropriate for an adviser’s 

use of testimonials or endorsements, a 

promoter’s incentives are significantly 

reduced when receiving de minimis 

compensation. We believe the need for 

heightened safeguards for de minimis 

compensation is likewise reduced. 

As discussed above, we believe that 

the final rule will result in multiple 

benefits to clients. For example, the 

final rule’s disclosure requirements and 

other conditions applicable to the use of 

advertisements will provide investors 

with information they need to assess the 

adviser’s advertising claims (for 

performance results) and third-party 

claims about the adviser (for 

testimonials, endorsements, and thirdparty ratings). In particular, the 

disclosures related to testimonials and 

endorsements will: (i) Help to ensure 

that investors are aware that promoters 

have a conflict of interest in referring 

them to advisers that compensate them 

for the referral; (ii) extend the current 

solicitation rule’s investor protection to 

investors whose advisers compensate 

their promoters with non-cash 

compensation; (iii) extend the rule to 

private fund investors; and (iv) 

eliminate duplicative disclosures. We 

believe that these benefits should apply 


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to clients of smaller firms as well as 

larger firms. 

We also believe that the rule’s 

disqualification provisions with respect 

to testimonials and endorsements will 

result in transparency and consistency 

for advisory clients, promoters, and 

advisers, as the provisions will 

generally eliminate the need for advisers 

to seek separate relief from the rule. In 

addition, as discussed above, we believe 

that our final rule’s placing guardrails 

on displays of performance will increase 

investor protection and the utility of the 

information provided and decrease the 

likelihood that it is misleading. 

Establishing different promoter 

disqualification provisions or 

performance provisions for large and 

small advisers would negate these 

benefits. Also, as discussed above, our 

staff will use the corresponding 

information that advisers report on the 

amended Form ADV to help prepare for 

examinations of investment advisers. 

Establishing different conditions for 

large and small advisers that advertise 

their services to investors would negate 

these benefits. 

Regarding the second alternative, we 

believe the final rule is clear and that 

further clarification, consolidation, or 

simplification of the compliance 

requirements is not necessary. As 

discussed above, the final rule will 

provide general anti-fraud principles 

applicable to all advertisements under 

the rule; will provide further restrictions 

and conditions on certain specific types 

of presentations, such as testimonials 

and endorsements; and will provide 

additional conditions for advertisements 

containing certain performance 

information. These provisions will 

address a number of common 

advertising practices that have not been 

explicitly addressed or broadly 

restricted (e.g., the current advertising 

rule prohibits testimonials concerning 

the investment adviser or its services, 

and direct or indirect references to 

specific profitable recommendations 

that the investment adviser has made in 

the past). The proposed provisions will 

clarify and modernize the advertising 

regime, which has come to depend on 

a large number of no-action letters over 

the years to fill the gaps. 

Regarding the third alternative, we 

determined to use a combination of 

performance and design standards. The 

general prohibitions will be principlesbased and will give advisers a broad 

framework within which to determine 

how best to present advertisements so 

they are not false or misleading. There 

will also be the principles-based 

requirement that an adviser must have 

a reasonable basis for believing that a 

person providing a testimonial or 

endorsement has complied with the 

final rule. We believe that providing 

advisers with the flexibility to 

determine how to implement the 

requirements of the rule allows them the 

opportunity to tailor these obligations to 

the facts and circumstances of their 

particular arrangements. The final rule 

will also contain design standards, as it 

contains additional conditions for 

certain third-party statements, and 

certain restrictions and conditions on 

performance claims. These restrictions 

and conditions are narrowly tailored to 

prevent certain types of advertisements 

that are not a fraudulent, deceptive, or 

manipulative act, practice, or course of 

business within the meaning of section 

206(4) of the Act from misleading 

investors. The corresponding changes to 

rule 204–2 and Form ADV are also 

narrowly tailored to reflect the final 

rule. 

We also considered an alternative that 

would not have included design 

standards, and that would have relied 

entirely on performance standards. In 

this alternative, as discussed in the 

Economic Analysis at section III above, 

we would reduce the limitations on 

investment adviser advertising, and rely 

on the general prohibitions to achieve 

the programmatic costs and benefits of 

the rule. As discussed in the Economic 

Analysis, we believe that many of the 

types of advertisements that would be 

prohibited by the final rule’s limitations 

have the potential to be fraudulent or 

misleading. We do not believe that 

removal of the limitations on 

advertisements we are adopting would, 

in comparison with the final rule, 

permit advertisements that would not be 

inherently fraudulent or misleading. In 

addition, we believe that the removal of 

limitations may create uncertainty about 

what types of advertisements would fall 

under the general prohibitions. 

Statutory Authority 

The Commission is adopting 

amendments to rule 206(4)–1 under the 

Advisers Act under the authority set 

forth in sections 203(d), 206(4), 211(a), 

and 211(h) of the Investment Advisers 

Act of 1940 [15 U.S.C. 80b–3(d), 10b– 

6(4) and 80b–11(a) and (h)]. The 

Commission is rescinding rule 206(4)–3 

under the Advisers Act under the 

authority set forth in sections 203(d), 

206(4), 211(a), and 211(h) of the 

Investment Advisers Act of 1940 [15 

U.S.C. 80b–2(d), 80b–6(4), and 80b– 

11(a) and (h)]. The Commission is 

adopting amendments to rule 204–2 

under the Advisers Act under the 

authority set forth in sections 204 and 

211 of the Investment Advisers Act of 

1940 [15 U.S.C. 80b–4 and 80b–11]. The 

Commission is adopting amendments to 

Form ADV under section 19(a) of the 

Securities Act of 1933 [15 U.S.C. 77s(a)], 

sections 23(a) and 28(e)(2) of the 

Securities Exchange Act of 1934 [15 

U.S.C. 78w(a) and 78bb(e)(2)], section 

319(a) of the Trust Indenture Act of 

1939 [15 U.S.C. 7sss(a)], section 38(a) of 

the Investment Company Act of 1940 

[15 U.S.C. 80a–37(a)], and sections 

203(c)(1), 204, and 211(a) of the 

Investment Advisers Act of 1940 [15 

U.S.C. 80b–3(c)(1), 80b–4, and 80b– 

11(a)]. 

List of Subjects in 17 CFR Parts 275 and 

279 

Reporting and recordkeeping 

requirements; Securities. 

Text of Amendments 

For the reasons set out in the 

preamble, title 17, chapter II of the Code 

of Federal Regulations is amended as 

follows: 

PART 275—RULES AND 

REGULATIONS, INVESTMENT 

ADVISERS ACT OF 1940 

■ 1. The authority citation for part 275 

continues to read in part as follows: 

Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– 

2(a)(11)(H), 80b–2(a)(17), 80b–3, 80b–4, 80b– 

4a, 80b–6(4), 80b–6a, and 80b–11, unless 

otherwise noted. 

* * * * * 

Section 275.204–2 is also issued under 15 

U.S.C 80b–6. 

* * * * * 

■ 2. Amend § 275.204–2 by 

■ a. Revising paragraphs (a)(7)(iv), 

(a)(11), (15), and (16); and 

■ b. Adding paragraph (a)(19). 

The revisions and addition read as 

follows: 

§ 275.204–2 Books and records to be 

maintained by investment advisers. 

(a) * * * 

(7) * * * 

(iv) Predecessor performance (as 

defined in § 275.206(4)–1(e)(12) of this 

chapter) and the performance or rate of 

return of any or all managed accounts, 

portfolios (as defined in § 275.206(4)– 

1(e)(11) of this chapter), or securities 

recommendations; Provided, however: 

(A) That the investment adviser shall 

not be required to keep any unsolicited 

market letters and other similar 

communications of general public 

distribution not prepared by or for the 

investment adviser; and 

(B) That if the investment adviser 

sends any notice, circular, or other 

advertisement (as defined in 

§ 275.206(4)–1(e)(1) of this chapter) 


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offering any report, analysis, publication 

or other investment advisory service to 

more than ten persons, the investment 

adviser shall not be required to keep a 

record of the names and addresses of the 

persons to whom it was sent; except that 

if such notice, circular, or advertisement 

is distributed to persons named on any 

list, the investment adviser shall retain 

with the copy of such notice, circular, 

or advertisement a memorandum 

describing the list and the source 

thereof. 

* * * * * 

(11) (i) A copy of each 

(A) Advertisement (as defined in 

§ 275.206(4)–1(e)(1) of this chapter) that 

the investment adviser disseminates, 

directly or indirectly, except: 

(1) For oral advertisements, the 

adviser may instead retain a copy of any 

written or recorded materials used by 

the adviser in connection with the oral 

advertisement; and 

(2) For compensated oral testimonials 

and endorsements (as defined in 

§ 275.206(4)–1(e)(17) and (5) of this 

chapter), the adviser may instead make 

and keep a record of the disclosures 

provided to clients or investors 

pursuant to § 275.206(4)–1(b)(1) of this 

chapter; and 

(B) Notice, circular, newspaper 

article, investment letter, bulletin, or 

other communication that the 

investment adviser disseminates, 

directly or indirectly, to ten or more 

persons (other than persons associated 

with such investment adviser); and 

(C) If such notice, circular, 

advertisement, newspaper article, 

investment letter, bulletin, or other 

communication recommends the 

purchase or sale of a specific security 

and does not state the reasons for such 

recommendation, a memorandum of the 

investment adviser indicating the 

reasons therefor; and 

(ii) A copy of any questionnaire or 

survey used in the preparation of a 

third-party rating included or appearing 

in any advertisement in the event the 

adviser obtains a copy of the 

questionnaire or survey. 

* * * * * 

(15) (i) If not included in the 

advertisement, a record of the 

disclosures provided to clients or 

investors pursuant to § 275.206(4)– 

1(b)(1)(ii) and (iii) of this chapter; 

(ii) Documentation substantiating the 

adviser’s reasonable basis for believing 

that a testimonial or endorsement (as 

defined in § 275.206(4)–1(e)(17) and (5) 

of this chapter) complies with 

§ 275.206(4)–1 and that the third-party 

rating (as defined in § 275.206(4)– 

1(e)(18) of this chapter) complies with 

§ 275.206(4)–1(c)(1) of this chapter. 

(iii) A record of the names of all 

persons who are an investment adviser’s 

partners, officers, directors, or 

employees, or a person that controls, is 

controlled by, or is under common 

control with the investment adviser, or 

is a partner, officer, director or 

employee of such a person pursuant to 

§ 275.206(4)–1(b)(4)(ii) of this chapter. 

(16) All accounts, books, internal 

working papers, and any other records 

or documents that are necessary to form 

the basis for or demonstrate the 

calculation of any performance or rate of 

return of any or all managed accounts, 

portfolios (as defined in § 275.206(4)– 

1(e)(11) of this chapter), or securities 

recommendations presented in any 

notice, circular, advertisement (as 

defined in § 275.206(4)–1(e)(1) of this 

chapter), newspaper article, investment 

letter, bulletin, or other communication 

that the investment adviser 

disseminates, directly or indirectly, to 

any person (other than persons 

associated with such investment 

adviser), including copies of all 

information provided or offered 

pursuant to § 275.206(4)–1(d)(6) of this 

chapter; provided, however, that, with 

respect to the performance of managed 

accounts, the retention of all account 

statements, if they reflect all debits, 

credits, and other transactions in a 

client’s or investor’s account for the 

period of the statement, and all 

worksheets necessary to demonstrate 

the calculation of the performance or 

rate of return of all managed accounts 

shall be deemed to satisfy the 

requirements of this paragraph. 

* * * * * 

(19) A record of who the ‘‘intended 

audience’’ is pursuant to § 275.206(4)– 

1(d)(6) and(e)(10)(ii)(B) of this chapter. 

* * * * * 

■ 3. Revise § 275.206(4)–1 to read as 

follows: 

§ 275.206(4)–1 Investment Adviser 

Marketing. 

As a means reasonably designed to 

prevent fraudulent, deceptive, or 

manipulative acts, practices, or courses 

of business within the meaning of 

section 206(4) of the Act (15 U.S.C. 80b– 

6(4)), it is unlawful for any investment 

adviser registered or required to be 

registered under section 203 of the Act 

(15 U.S.C. 80b–3), directly or indirectly, 

to disseminate any advertisement that 

violates any of paragraphs (a) through 

(d) of this section. 

(a) General prohibitions. An 

advertisement may not: 

(1) Include any untrue statement of a 

material fact, or omit to state a material 

fact necessary in order to make the 

statement made, in the light of the 

circumstances under which it was 

made, not misleading; 

(2) Include a material 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; 

(3) Include 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 investment adviser; 

(4) Discuss any potential benefits to 

clients or investors connected with or 

resulting from the investment adviser’s 

services or methods of operation 

without providing fair and balanced 

treatment of any material risks or 

material limitations associated with the 

potential benefits; 

(5) Include a reference to specific 

investment advice provided by the 

investment adviser where such 

investment advice is not presented in a 

manner that is fair and balanced; 

(6) Include or exclude performance 

results, or present performance time 

periods, in a manner that is not fair and 

balanced; or 

(7) Otherwise be materially 

misleading. 

(b) Testimonials and endorsements. 

An advertisement may not include any 

testimonial or endorsement, and an 

adviser may not provide compensation, 

directly or indirectly, for a testimonial 

or endorsement, unless the investment 

adviser complies with the conditions in 

paragraphs (b)(1) through (3) of this 

section, subject to the exemptions in 

paragraph (b)(4) of this section. 

(1) Required disclosures. The 

investment adviser discloses, or 

reasonably believes that the person 

giving the testimonial or endorsement 

discloses, the following at the time the 

testimonial or endorsement is 

disseminated: 

(i) Clearly and prominently: 

(A) That the testimonial was given by 

a current client or investor, and the 

endorsement was given by a person 

other than a current client or investor, 

as applicable; 

(B) That cash or non-cash 

compensation was provided for the 

testimonial or endorsement, if 

applicable; and 

(C) A brief statement of any material 

conflicts of interest on the part of the 

person giving the testimonial or 

endorsement resulting from the 

investment adviser’s relationship with 

such person; 

(ii) The material terms of any 

compensation arrangement, including a 

description of the compensation 

provided or to be provided, directly or 


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indirectly, to the person for the 

testimonial or endorsement; and 

(iii) A description of any material 

conflicts of interest on the part of the 

person giving the testimonial or 

endorsement resulting from the 

investment adviser’s relationship with 

such person and/or any compensation 

arrangement. 

(2) Adviser oversight and compliance. 

The investment adviser must have: 

(i) A reasonable basis for believing 

that the testimonial or endorsement 

complies with the requirements of this 

section, and 

(ii) A written agreement with any 

person giving a testimonial or 

endorsement that describes the scope of 

the agreed-upon activities and the terms 

of compensation for those activities. 

(3) Disqualification. An investment 

adviser may not compensate a person, 

directly or indirectly, for a testimonial 

or endorsement if the adviser knows, or 

in the exercise of reasonable care should 

know, that the person giving the 

testimonial or endorsement is an 

ineligible person at the time the 

testimonial or endorsement is 

disseminated. This paragraph shall not 

disqualify any person for any matter(s) 

that occurred prior to May 4, 2021, if 

such matter(s) would not have 

disqualified such person under 

§ 275.206(4)–3(a)(1)(ii) of this chapter, 

as in effect prior to May 4, 2021. 

(4) Exemptions. (i) A testimonial or 

endorsement disseminated for no 

compensation or de minimis 

compensation is not required to comply 

with paragraphs (b)(2)(ii) and (3) of this 

section; 

(ii) A testimonial or endorsement by 

the investment adviser’s partners, 

officers, directors, or employees, or a 

person that controls, is controlled by, or 

is under common control with the 

investment adviser, or is a partner, 

officer, director or employee of such a 

person is not required to comply with 

paragraphs (b)(1) and (2)(ii) of this 

section, provided that the affiliation 

between the investment adviser and 

such person is readily apparent to or is 

disclosed to the client or investor at the 

time the testimonial or endorsement is 

disseminated and the investment 

adviser documents such person’s status 

at the time the testimonial or 

endorsement is disseminated; 

(iii) A testimonial or endorsement by 

a broker or dealer registered with the 

Commission under section 15(b) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78o(a)) is not required to comply 

with: 

(A) Paragraph (b)(1) of this section if 

the testimonial or endorsement is a 

recommendation subject to § 240.15l–1 

of this chapter (Regulation Best Interest) 

under that Act; 

(B) Paragraphs (b)(1)(ii) and (iii) of 

this section if the testimonial or 

endorsement is provided to a person 

that is not a retail customer (as that term 

is defined in § 240.15l–1 of this chapter 

(Regulation Best Interest) under the 

Securities Exchange Act of 1934 (15 

U.S.C. 78o(a)); and 

(C) Paragraph (b)(3) of this section if 

the broker or dealer is not subject to 

statutory disqualification, as defined 

under section 3(a)(39) of that Act; and 

(iv) A testimonial or endorsement by 

a person that is covered by rule 506(d) 

of Regulation D under the Securities Act 

of 1933 (§ 230.506(d) of this chapter) 

with respect to a rule 506 securities 

offering under the Securities Act of 1933 

(§ 230.506 of this chapter) and whose 

involvement would not disqualify the 

offering under that rule is not required 

to comply with paragraph (b)(3) of this 

section. 

(c) Third-party ratings. An 

advertisement may not include any 

third-party rating, unless the investment 

adviser: 

(1) Has a reasonable basis for 

believing that any questionnaire or 

survey used in the preparation of the 

third-party rating is structured to make 

it equally easy for a participant to 

provide favorable and unfavorable 

responses, and is not designed or 

prepared to produce any predetermined 

result; and 

(2) Clearly and prominently discloses, 

or the investment adviser reasonably 

believes that the third-party rating 

clearly and prominently discloses: 

(i) The date on which the rating was 

given and the period of time upon 

which the rating was based; 

(ii) The identity of the third party that 

created and tabulated the rating; and 

(iii) If applicable, that compensation 

has been provided directly or indirectly 

by the adviser in connection with 

obtaining or using the third-party rating. 

(d) Performance. An investment 

adviser may not include in any 

advertisement: 

(1) Any presentation of gross 

performance, unless the advertisement 

also presents net performance: 

(i) With at least equal prominence to, 

and in a format designed to facilitate 

comparison with, the gross 

performance; and 

(ii) Calculated over the same time 

period, and using the same type of 

return and methodology, as the gross 

performance. 

(2) Any performance results, of any 

portfolio or any composite aggregation 

of related portfolios, in each case other 

than any private fund, unless the 

advertisement includes performance 

results of the same portfolio or 

composite aggregation for one-, five-, 

and ten-year periods, each presented 

with equal prominence and ending on a 

date that is no less recent than the most 

recent calendar year-end; except that if 

the relevant portfolio did not exist for a 

particular prescribed period, then the 

life of the portfolio must be substituted 

for that period. 

(3) Any statement, express or implied, 

that the calculation or presentation of 

performance results in the 

advertisement has been approved or 

reviewed by the Commission. 

(4) Any related performance, unless it 

includes all related portfolios; provided 

that related performance may exclude 

any related portfolios if: 

(i) The advertised performance results 

are not materially higher than if all 

related portfolios had been included; 

and 

(ii) The exclusion of any related 

portfolio does not alter the presentation 

of any applicable time periods 

prescribed by paragraph (d)(2) of this 

section. 

(5) Any extracted performance, unless 

the advertisement provides, or offers to 

provide promptly, the performance 

results of the total portfolio from which 

the performance was extracted. 

(6) Any hypothetical performance 

unless the investment adviser: 

(i) Adopts and implements policies 

and procedures reasonably designed to 

ensure that the hypothetical 

performance is relevant to the likely 

financial situation and investment 

objectives of the intended audience of 

the advertisement; 

(ii) Provides sufficient information to 

enable the intended audience to 

understand the criteria used and 

assumptions made in calculating such 

hypothetical performance; and 

(iii) Provides (or, if the intended 

audience is an investor in a private 

fund, provides, or offers to provide 

promptly) sufficient information to 

enable the intended audience to 

understand the risks and limitations of 

using such hypothetical performance in 

making investment decisions; Provided 

that the investment adviser need not 

comply with the other conditions on 

performance in paragraphs (d)(2), (4), 

and (5) of this section. 

(7) Any predecessor performance 

unless: 

(i) The person or persons who were 

primarily responsible for achieving the 

prior performance results manage 

accounts at the advertising adviser; 

(ii) The accounts managed at the 

predecessor investment adviser are 

sufficiently similar to the accounts 


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managed at the advertising investment 

adviser that the performance results 

would provide relevant information to 

clients or investors; 

(iii) All accounts that were managed 

in a substantially similar manner are 

advertised unless the exclusion of any 

such account would not result in 

materially higher performance and the 

exclusion of any account does not alter 

the presentation of any applicable time 

periods prescribed in paragraph (d)(2) of 

this section; and 

(iv) The advertisement clearly and 

prominently includes all relevant 

disclosures, including that the 

performance results were from accounts 

managed at another entity. 

(e) Definitions. For purposes of this 

section: 

(1) Advertisement means: 

(i) Any direct or indirect 

communication an investment adviser 

makes to more than one person, or to 

one or more persons if the 

communication includes hypothetical 

performance, that offers the investment 

adviser’s investment advisory services 

with regard to securities to prospective 

clients or investors in a private fund 

advised by the investment adviser or 

offers new investment advisory services 

with regard to securities to current 

clients or investors in a private fund 

advised by the investment adviser, but 

does not include: 

(A) Extemporaneous, live, oral 

communications; 

(B) Information contained in a 

statutory or regulatory notice, filing, or 

other required communication, 

provided that such information is 

reasonably designed to satisfy the 

requirements of such notice, filing, or 

other required communication; or 

(C) A communication that includes 

hypothetical performance that is 

provided: 

(1) In response to an unsolicited 

request for such information from a 

prospective or current client or investor 

in a private fund advised by the 

investment adviser; or 

(2) To a prospective or current 

investor in a private fund advised by the 

investment adviser in a one-on-one 

communication; and 

(ii) Any endorsement or testimonial 

for which an investment adviser 

provides compensation, directly or 

indirectly, but does not include any 

information contained in a statutory or 

regulatory notice, filing, or other 

required communication, provided that 

such information is reasonably designed 

to satisfy the requirements of such 

notice, filing, or other required 

communication. 

(2) De minimis compensation means 

compensation paid to a person for 

providing a testimonial or endorsement 

of a total of $1,000 or less (or the 

equivalent value in non-cash 

compensation) during the preceding 12 

months. 

(3) A disqualifying Commission action 

means a Commission opinion or order 

barring, suspending, or prohibiting the 

person from acting in any capacity 

under the Federal securities laws. 

(4) A disqualifying event is any of the 

following events that occurred within 

ten years prior to the person 

disseminating an endorsement or 

testimonial: 

(i) A conviction by a court of 

competent jurisdiction within the 

United States of any felony or 

misdemeanor involving conduct 

described in paragraph (2)(A) through 

(D) of section 203(e) of the Act; 

(ii) A conviction by a court of 

competent jurisdiction within the 

United States of engaging in, any of the 

conduct specified in paragraphs (1), (5), 

or (6) of section 203(e) of the Act; 

(iii) The entry of any final order by 

any entity described in paragraph (9) of 

section 203(e) of the Act, or by the U.S. 

Commodity Futures Trading 

Commission or a self-regulatory 

organization (as defined in the Form 

ADV Glossary of Terms)), of the type 

described in paragraph (9) of section 

203(e) of the Act; 

(iv) The entry of an order, judgment 

or decree described in paragraph (4) of 

section 203(e) of the Act, and still in 

effect, by any court of competent 

jurisdiction within the United States; 

and 

(v) A Commission order that a person 

cease and desist from committing or 

causing a violation or future violation 

of: 

(A) Any scienter-based anti-fraud 

provision of the Federal securities laws, 

including without limitation section 

17(a)(1) of the Securities Act of 1933 (15 

U.S.C. 77q(a)(1)), section 10(b) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78j(b)) and § 240.10b–5 of this 

chapter, section 15(c)(1) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78o(c)(1)), and section 206(1) of 

the Investment Advisers Act of 1940 (15 

U.S.C. 80b–6(1)), or any other rule or 

regulation thereunder; or 

(B) Section 5 of the Securities Act of 

1933 (15 U.S.C. 77e); 

(vi) A disqualifying event does not 

include an event described in 

paragraphs (e)(4)(i) through (v) of this 

section with respect to a person that is 

also subject to: 

(A) An order pursuant to section 9(c) 

of the Investment Company Act of 1940 

(15 U.S.C. 80a–9) with respect to such 

event; or 

(B) A Commission opinion or order 

with respect to such event that is not a 

disqualifying Commission action; 

provided that for each applicable type of 

order or opinion described in 

paragraphs (e)(4)(vi)(A) and (B) of this 

section: 

(1) The person is in compliance with 

the terms of the order or opinion, 

including, but not limited to, the 

payment of disgorgement, prejudgment 

interest, civil or administrative 

penalties, and fines; and 

(2) For a period of ten years following 

the date of each order or opinion, the 

advertisement containing the 

testimonial or endorsement must 

include a statement that the person 

providing the testimonial or 

endorsement is subject to a Commission 

order or opinion regarding one or more 

disciplinary action(s), and include the 

order or opinion or a link to the order 

or opinion on the Commission’s 

website. 

(5) Endorsement means any statement 

by a person other than a current client 

or investor in a private fund advised by 

the investment adviser that: 

(i) Indicates approval, support, or 

recommendation of the investment 

adviser or its supervised persons or 

describes that person’s experience with 

the investment adviser or its supervised 

persons; 

(ii) Directly or indirectly solicits any 

current or prospective client or investor 

to be a client of, or an investor in a 

private fund advised by, the investment 

adviser; or 

(iii) Refers any current or prospective 

client or investor to be a client of, or an 

investor in a private fund advised by, 

the investment adviser. 

(6) Extracted performance means the 

performance results of a subset of 

investments extracted from a portfolio. 

(7) Gross performance means the 

performance results of a portfolio (or 

portions of a portfolio that are included 

in extracted performance, if applicable) 

before the deduction of all fees and 

expenses that a client or investor has 

paid or would have paid in connection 

with the investment adviser’s 

investment advisory services to the 

relevant portfolio. 

(8) Hypothetical performance means 

performance results that were not 

actually achieved by any portfolio of the 

investment adviser. 

(i) Hypothetical performance 

includes, but is not limited to; 

(A) Performance derived from model 

portfolios; 

(B) Performance that is backtested by 

the application of a strategy to data from 


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prior time periods when the strategy 

was not actually used during those time 

periods; and 

(C) Targeted or projected performance 

returns with respect to any portfolio or 

to the investment advisory services with 

regard to securities offered in the 

advertisement, however: 

(ii) Hypothetical performance does 

not include: 

(A) An interactive analysis tool where 

a client or investor, or prospective 

client, or investor, uses the tool to 

produce simulations and statistical 

analyses that present the likelihood of 

various investment outcomes if certain 

investments are made or certain 

investment strategies or styles are 

undertaken, thereby serving as an 

additional resource to investors in the 

evaluation of the potential risks and 

returns of investment choices; provided 

that the investment adviser: 

(1) Provides a description of the 

criteria and methodology used, 

including the investment analysis tool’s 

limitations and key assumptions; 

(2) Explains that the results may vary 

with each use and over time; 

(3) If applicable, describes the 

universe of investments considered in 

the analysis, explains how the tool 

determines which investments to select, 

discloses if the tool favors certain 

investments and, if so, explains the 

reason for the selectivity, and states that 

other investments not considered may 

have characteristics similar or superior 

to those being analyzed; and 

(4) Discloses that the tool generates 

outcomes that are hypothetical in 

nature; or 

(B) Predecessor performance that is 

displayed in compliance with paragraph 

(d)(7) of this section. 

(9) Ineligible person means a person 

who is subject to a disqualifying 

Commission action or is subject to any 

disqualifying event, and the following 

persons with respect to the ineligible 

person: 

(i) Any employee, officer, or director 

of the ineligible person and any other 

individuals with similar status or 

functions within the scope of 

association with the ineligible person; 

(ii) If the ineligible person is a 

partnership, all general partners; and 

(iii) If the ineligible person is a 

limited liability company managed by 

elected managers, all elected managers. 

(10) Net performance means the 

performance results of a portfolio (or 

portions of a portfolio that are included 

in extracted performance, if applicable) 

after the deduction of all fees and 

expenses that a client or investor has 

paid or would have paid in connection 

with the investment adviser’s 

investment advisory services to the 

relevant portfolio, including, if 

applicable, advisory fees, advisory fees 

paid to underlying investment vehicles, 

and payments by the investment adviser 

for which the client or investor 

reimburses the investment adviser. For 

purposes of this rule, net performance: 

(i) May reflect the exclusion of 

custodian fees paid to a bank or other 

third-party organization for safekeeping 

funds and securities; and/or 

(ii) If using a model fee, must reflect 

one of the following: 

(A) The deduction of a model fee 

when doing so would result in 

performance figures that are no higher 

than if the actual fee had been deducted; 

or 

(B) The deduction of a model fee that 

is equal to the highest fee charged to the 

intended audience to whom the 

advertisement is disseminated. 

(11) Portfolio means a group of 

investments managed by the investment 

adviser. A portfolio may be an account 

or a private fund and includes, but is 

not limited to, a portfolio for the 

account of the investment adviser or its 

advisory affiliate (as defined in the 

Form ADV Glossary of Terms). 

(12) Predecessor performance means 

investment performance achieved by a 

group of investments consisting of an 

account or a private fund that was not 

advised at all times during the period 

shown by the investment adviser 

advertising the performance. 

(13) Private fund has the same 

meaning as in section 202(a)(29) of the 

Act. 

(14) Related performance means the 

performance results of one or more 

related portfolios, either on a portfolioby-portfolio basis or as a composite 

aggregation of all portfolios falling 

within stated criteria. 

(15) Related portfolio means a 

portfolio with substantially similar 

investment policies, objectives, and 

strategies as those of the services being 

offered in the advertisement. 

(16) Supervised person has the same 

meaning as in section 202(a)(25) of the 

Act. 

(17) Testimonial means any statement 

by a current client or investor in a 

private fund advised by the investment 

adviser: 

(i) About the client or investor’s 

experience with the investment adviser 

or its supervised persons; 

(ii) That directly or indirectly solicits 

any current or prospective client or 

investor to be a client of, or an investor 

in a private fund advised by, the 

investment adviser; or 

(iii) That refers any current or 

prospective client or investor to be a 

client of, or an investor in a private fund 

advised by, the investment adviser. 

(18) Third-party rating means a rating 

or ranking of an investment adviser 

provided by a person who is not a 

related person (as defined in the Form 

ADV Glossary of Terms), and such 

person provides such ratings or rankings 

in the ordinary course of its business. 

§ 275.206(4)–3 [Removed and reserved] 

■ 4. Remove and reserve § 275.206(4)–3. 

PART 279—FORMS PRESCRIBED 

UNDER THE INVESTMENT ADVISERS 

ACT OF 1940 

■ 5. The authority citation for part 279 

continues to read as follows: 

Authority: The Investment Advisers Act of 

1940, 15 U.S.C. 80b–1, et seq., Pub. L.111– 

203, 124 Stat. 1376. 

■ 6. Amend Form ADV (referenced in 

§ 279.1) by: 

■ a. Adding Item 5.L to Part 1A; 

■ b. Revising the instructions to the 

form, in the section entitled ‘‘Form 

ADV: Glossary of Terms;’’ 

■ c. Revising the instructions to the 

form, in the section entitled ‘‘Part 2A of 

Form ADV: Firm Brochure,’’ by 

removing the phrase ‘‘SEC rule 206(4)– 

3’’ in the Note in Item 14.B. and adding, 

in its place, ‘‘SEC rule 206(4)–1.’’ 

The addition and revision read as 

follows: 

Note: The text of Form ADV does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

FORM ADV (Paper Version) 

• UNIFORM APPLICATION FOR 

INVESTMENT ADVISER 

REGISTRATION AND 

• REPORT BY EXEMPT REPORTING 

ADVISERS PART lA 

* * * * * 

Item 5: Information About Your 

Advisory Business 

ADVISORY ACTIVITIES 

L. Marketing Activities 

(1) Do any of your advertisements 

include: 

a. Performance results? 

Y N 

b. A reference to specific investment 

advice provided by you (as that phrase 

is used in rule 206(4)–1(a)(5))? 

Y N 

c. Testimonials (other than those that 

satisfy rule 206(4)–1(b)(4)(ii))? 

Y N 

d. Endorsements (other than those 

that satisfy rule 206(4)–1(b)(4)(ii))? 

Y N 

e. Third-party ratings? 


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Y N 

(2) If you answer ‘‘yes’’ to L(1)(c), (d), 

or (e) above, do you pay or otherwise 

provide cash or non-cash compensation, 

directly or indirectly, in connection 

with the use of testimonials, 

endorsements, or third-party ratings? 

Y N 

(3) Do any of your advertisements 

include hypothetical performance? 

Y N 

(4) Do any of your advertisements 

include predecessor performance? 

Y N 

* * * * * 

FORM ADV: GLOSSARY OF TERMS 

1. Advertisement: (i) Any direct or 

indirect communication an investment 

adviser makes to more than one person, 

or to one or more persons if the 

communication includes hypothetical 

performance, that offers the investment 

adviser’s investment advisory services 

with regard to securities to prospective 

clients or investors in a private fund 

advised by the investment adviser or 

offers new investment advisory services 

with regard to securities to current 

clients or investors in a private fund 

advised by the investment adviser, but 

does not include: (A) Extemporaneous, 

live, oral communications; (B) 

information contained in a statutory or 

regulatory Notice, filing, or other 

required communication, provided that 

such information is reasonably designed 

to satisfy the requirements of such 

notice, filing, or other required 

communication; or (C) a communication 

that includes hypothetical performance 

that is provided: (1) In response to an 

unsolicited request for such information 

from a prospective or current client or 

investor in a private fund advised by the 

investment adviser; or (2) to a 

prospective or current investor in a 

private fund advised by the investment 

adviser in a one-on-one communication; 

and (ii) any endorsement or testimonial 

for which an investment adviser 

provides compensation, directly or 

indirectly, but does not include any 

information contained in a statutory or 

regulatory notice, filing, or other 

required communication, provided that 

such information is reasonably designed 

to satisfy the requirements of such 

notice, filing, or other required 

communication. [Used in: Part 1A, Item 

5] 

2. Advisory Affiliate: Your advisory 

affiliates are (1) all of your officers, 

partners, or directors (or any person 

performing similar functions); (2) all 

persons directly or indirectly controlling 

or controlled by you; and (3) all of your 

current employees (other than 

employees performing only clerical, 

administrative, support or similar 

functions). 

If you are a ‘‘separately identifiable 

department or division’’ (SID) of a bank, 

your advisory affiliates are: (1) All of 

your bank’s employees who perform 

your investment advisory activities 

(other than clerical or administrative 

employees); (2) all persons designated 

by your bank’s board of directors as 

responsible for the day-to-day conduct 

of your investment advisory activities 

(including supervising the employees 

who perform investment advisory 

activities); (3) all persons who directly 

or indirectly control your bank, and all 

persons whom you control in 

connection with your investment 

advisory activities; and (4) all other 

persons who directly manage any of 

your investment advisory activities 

(including directing, supervising or 

performing your advisory activities), all 

persons who directly or indirectly 

control those management functions, 

and all persons whom you control in 

connection with those management 

functions. [Used in: Part 1A, Items 7, 11, 

DRPs; Part 1B, Item 2] 

3. Annual Updating Amendment: 

Within 90 days after your firm’s fiscal 

year end, your firm must file an ‘‘annual 

updating amendment,’’ which is an 

amendment to your firm’s Form ADV 

that reaffirms the eligibility information 

contained in Item 2 of Part 1A and 

updates the responses to any other item 

for which the information is no longer 

accurate. [Used in: General Instructions; 

Part 1A, Instructions, Introductory Text, 

Item 2; Part 2A, Instructions, Appendix 

1 Instructions; Part 2B, Instructions] 

4. Borrowings: Borrowings include 

secured borrowings and unsecured 

borrowings, collectively. Secured 

borrowings are obligations for borrowed 

money in respect of which the borrower 

has posted collateral or other credit 

support and should include any reverse 

repos (i.e., any sale of securities coupled 

with an agreement to repurchase the 

same (or similar) securities at a later 

date at an agreed price). Unsecured 

borrowings are obligations for borrowed 

money in respect of which the borrower 

has not posted collateral or other credit 

support. [Used in: Part 1A, Instructions, 

Item 5, Schedule D] 

5. Brochure: A written disclosure 

statement that you must provide to 

clients and prospective clients. See SEC 

rule 204–3; Form ADV, Part 2A. [Used 

in: General Instructions; Used 

throughout Part 2] 

6. Brochure Supplement: A written 

disclosure statement containing 

information about certain of your 

supervised persons that your firm is 

required by Part 2B of Form ADV to 

provide to clients and prospective 

clients. See SEC rule 204–3; Form ADV, 

Part 2B. [Used in: General Instructions; 

Used throughout Part 2] 

7. Charged: Being accused of a crime 

in a formal complaint, information, or 

indictment (or equivalent formal 

charge). [Used in: Part 1A, Item 11; 

DRPs] 

8. Client: Any of your firm’s 

investment advisory clients. This term 

includes clients from which your firm 

receives no compensation, such as 

family members of your supervised 

persons. If your firm also provides other 

services (e.g., accounting services), this 

term does not include clients that are 

not investment advisory clients. [Used 

throughout Form ADV and Form ADV– 

W] 

9. Commodity Derivative: Exposures 

to commodities that you do not hold 

physically, whether held synthetically 

or through derivatives (whether cash or 

physically settled). [Used in: Part 1A, 

Schedule D] 

10. Control: The power, directly or 

indirectly, to direct the management or 

policies of a person, whether through 

ownership of securities, by contract, or 

otherwise. 

• Each of your firm’s officers, 

partners, or directors exercising 

executive responsibility (or persons 

having similar status or functions) is 

presumed to control your firm. 

• A person is presumed to control a 

corporation if the person: (i) Directly or 

indirectly has the right to vote 25 

percent or more of a class of the 

corporation’s voting securities; or (ii) 

has the power to sell or direct the sale 

of 25 percent or more of a class of the 

corporation’s voting securities. 

• A person is presumed to control a 

partnership if the person has the right 

to receive upon dissolution, or has 

contributed, 25 percent or more of the 

capital of the partnership. 

• A person is presumed to control a 

limited liability company (‘‘LLC’’) if the 

person: (i) Directly or indirectly has the 

right to vote 25 percent or more of a 

class of the interests of the LLC; (ii) has 

the right to receive upon dissolution, or 

has contributed, 25 percent or more of 

the capital of the LLC; or (iii) is an 

elected manager of the LLC. 

• A person is presumed to control a 

trust if the person is a trustee or 

managing agent of the trust. 

[Used in: General Instructions; Part 1A, 

Instructions, Items 2, 7, 10, 11, 12, 

Schedules A, B, C, D, R; DRPs] 

11. Credit Derivative: Single name 

credit default swap, including loan 

credit default swap, credit default swap 

referencing a standardized basket of 


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credit entities, including credit default 

swap indices and indices referencing 

leveraged loans, and credit default swap 

referencing bespoke basket or tranche of 

collateralized debt obligations and 

collateralized loan obligations 

(including cash flow and synthetic) 

other than mortgage backed securities. 

[Used in: Part 1A, Schedule D] 

12. Custody: Holding, directly or 

indirectly, client funds or securities, or 

having any authority to obtain 

possession of them. You have custody if 

a related person holds, directly or 

indirectly, client funds or securities, or 

has any authority to obtain possession 

of them, in connection with advisory 

services you provide to clients. Custody 

includes: 

• Possession of client funds or 

securities (but not of checks drawn by 

clients and made payable to third 

parties) unless you receive them 

inadvertently and you return them to 

the sender promptly, but in any case 

within three business days of receiving 

them; 

• Any arrangement (including a 

general power of attorney) under which 

you are authorized or permitted to 

withdraw client funds or securities 

maintained with a custodian upon your 

instruction to the custodian; and 

• Any capacity (such as general 

partner of a limited partnership, 

managing member of a limited liability 

company or a comparable position for 

another type of pooled investment 

vehicle, or trustee of a trust) that gives 

you or your supervised person legal 

ownership of or access to client funds or 

securities. 

[Used in: Part 1A, Item 9; Part 1B, 

Instructions, Item 2; Part 2A, Items 15, 

18] 

13. Discretionary Authority or 

Discretionary Basis: Your firm has 

discretionary authority or manages 

assets on a discretionary basis if it has 

the authority to decide which securities 

to purchase and sell for the client. Your 

firm also has discretionary authority if 

it has the authority to decide which 

investment advisers to retain on behalf 

of the client. [Used in: Part 1A, 

Instructions, Item 8; Part 1B, 

Instructions; Part 2A, Items 4, 16, 18; 

Part 2B, Instructions] 

14. Employee: This term includes an 

independent contractor who performs 

advisory functions on your behalf. 

[Used in: Part 1A, Instructions, Items 1, 

5, 11; Part 2B, Instructions] 

15. Endorsement: Any statement by a 

person other than a current client or 

investor in a private fund advised by the 

investment adviser that: (i) Indicates 

approval, support, or recommendation 

of the investment adviser or its 

supervised persons or describes that 

person’s experience with the investment 

adviser or its supervised persons; (ii) 

directly or indirectly solicits any current 

or prospective client or investor to be a 

client of, or an investor in a private fund 

advised by, the investment adviser; or 

(iii) refers any current or prospective 

client of, or an investor in a private fund 

advised by, the investment adviser. 

[Used in: Part 1A, Item 5] 

16. Enjoined: This term includes 

being subject to a mandatory injunction, 

prohibitory injunction, preliminary 

injunction, or a temporary restraining 

order. [Used in: Part 1A, Item 11; DRPs] 

17. Equity Derivative: Includes both 

listed equity derivative and derivative 

exposure to unlisted securities. Listed 

equity derivative includes all synthetic 

or derivative exposure to equities, 

including preferred equities, listed on a 

regulated exchange. Listed equity 

derivative also includes a single stock 

future, equity index future, dividend 

swap, total return swap (contract for 

difference), warrant and right. 

Derivative exposure to unlisted equities 

includes all synthetic or derivative 

exposure to equities, including 

preferred equities, that are not listed on 

a regulated exchange. Derivative 

exposure to unlisted securities also 

includes a single stock future, equity 

index future, dividend swap, total 

return swap (contract for difference), 

warrant and right. [Used in: Part 1A, 

Schedule D] 

18. Exempt Reporting Adviser: An 

investment adviser that qualifies for the 

exemption from registration under 

section 203(l) of the Advisers Act 

because it is an adviser solely to one or 

more venture capital funds, or under 

rule 203(m)–1 of the Advisers Act 

because it is an adviser solely to private 

funds and has assets under management 

in the United States of less than $150 

million. [Used in: Throughout Part 1A; 

General Instructions; Form ADV–H; 

Form ADV–NR] 

19. Felony: For jurisdictions that do 

not differentiate between a felony and a 

misdemeanor, a felony is an offense 

punishable by a sentence of at least one 

year imprisonment and/or a fine of at 

least $1,000. The term also includes a 

general court martial. [Used in: Part 1A, 

Item 11; DRPs; Part 2A, Item 9; Part 2B, 

Item 3] 

20. Filing Adviser: An investment 

adviser eligible to register with the SEC 

that files (and amends) a single umbrella 

registration on behalf of itself and each 

of its relying advisers. [Used in: General 

Instructions; Part 1A, Items 1, 2, 3, 10 

and 11; Schedule R] 

21. FINRA CRD or CRD: The Web 

Central Registration Depository (‘‘CRD’’) 

system operated by FINRA for the 

registration of broker-dealers and 

broker-dealer representatives. [Used in: 

General Instructions; Part 1A, Item 1, 

Schedules A, B, C, D, R, DRPs; Form 

ADV–W, Item 1] 

22. Foreign Exchange Derivative: Any 

derivative whose underlying asset is a 

currency other than U.S. dollars or is an 

exchange rate. Cross-currency interest 

rate swaps should be included in 

foreign exchange derivatives and 

excluded from interest rate derivatives. 

[Used in: Part 1A, Schedule D] 

23. Foreign Financial Regulatory 

Authority: This term includes (1) a 

foreign securities authority; (2) another 

governmental body or foreign equivalent 

of a self-regulatory organization 

empowered by a foreign government to 

administer or enforce its laws relating to 

the regulation of investment-related 

activities; and (3) a foreign membership 

organization, a function of which is to 

regulate the participation of its members 

in the activities listed above. [Used in: 

Part 1A, Items 1, 11, DRPs; Part 2A, Item 

9; Part 2B, Item 3] 

24. Found: This term includes adverse 

final actions, including consent decrees 

in which the respondent has neither 

admitted nor denied the findings, but 

does not include agreements, deficiency 

letters, examination reports, memoranda 

of understanding, letters of caution, 

admonishments, and similar informal 

resolutions of matters. [Used in: Part 1A, 

Item 11; Part 1B, Item 2; Part 2A, Item 

9; Part 2B, Item 3] 

25. Government Entity: Any state or 

political subdivision of a state, 

including (i) any agency, authority, or 

instrumentality of the state or political 

subdivision; (ii) a plan or pool of assets 

controlled by the state or political 

subdivision or any agency, authority, or 

instrumentality thereof; and (iii) any 

officer, agent, or employee of the state 

or political subdivision or any agency, 

authority, or instrumentality thereof, 

acting in their official capacity. [Used 

in: Part 1A, Item 5] 

26. Gross Notional Value: The gross 

nominal or notional value of all 

transactions that have been entered into 

but not yet settled as of the reporting 

date. For contracts with variable 

nominal or notional principal amounts, 

the basis for reporting is the nominal or 

notional principal amounts as of the 

reporting date. For options, use delta 

adjusted notional value. [Used in: Part 

1A, Schedule D] 

27. High Net Worth Individual: An 

individual who is a qualified client or 

who is a ‘‘qualified purchaser’’ as 

defined in section 2(a)(51)(A) of the 


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Investment Company Act of 1940. [Used 

in: Part 1A, Item 5] 

28. Home State: If your firm is 

registered with a state securities 

authority, your firm’s ‘‘home state’’ is 

the state where it maintains its principal 

office and place of business. [Used in: 

Part 1B, Instructions] 

29. Hypothetical Performance: 

Performance results that were not 

actually achieved by any portfolio of the 

investment adviser. (i) Hypothetical 

performance includes, but is not limited 

to: (A) Performance derived from model 

portfolios; (B) performance that is 

backtested by the application of a 

strategy to data from prior time periods 

when the strategy was not actually used 

during those time periods; and (C) 

targeted or projected performance 

returns with respect to any portfolio or 

to the investment services offered in the 

advertisement; however: (ii) 

Hypothetical performance does not 

include: (A) An interactive analysis tool 

where a client or investor, or 

prospective client, or investor, uses the 

tool to produce simulations and 

statistical analyses that present the 

likelihood of various investment 

outcomes if certain investments are 

made or certain investment strategies or 

styles are undertaken, thereby serving as 

an additional resource to investors in 

the evaluation of the potential risks and 

returns of investment choices; provided 

that the investment adviser: (1) Provides 

a description of the criteria and 

methodology used, including the 

investment analysis tool’s limitations 

and key assumptions; (2) explains that 

the results may vary with each use and 

over time; (3) if applicable, describes the 

universe of investments considered in 

the analysis, explains how the tool 

determines which investments to select, 

discloses if the tool favors certain 

investments and, if so, explains the 

reason for the selectivity, and states that 

other investments not considered may 

have characteristics similar or superior 

to those being analyzed; and (4) 

discloses that the tool generates 

outcomes that are hypothetical in 

nature; or (B) predecessor performance 

that is displayed in compliance with 

rule 206(4)–1(d)(7). [Used in: Part 1A, 

Item 5] 

30. Impersonal Investment Advice: 

Investment advisory services that do not 

purport to meet the objectives or needs 

of specific individuals or accounts. 

[Used in: Part 1A, Instructions; Part 2A, 

Instructions; Part 2B, Instructions] 

31. Independent Public Accountant: A 

public accountant that meets the 

standards of independence described in 

rule 2–01(b) and (c) of Regulation S–X 

(17 CFR 210.2–01(b) and (c)). [Used in: 

Part 1A, Item 9; Schedule D] 

32. Interest Rate Derivative: Any 

derivative whose underlying asset is the 

obligation to pay or the right to receive 

a given amount of money accruing 

interest at a given rate. Cross-currency 

interest rate swaps should be included 

in foreign exchange derivatives and 

excluded from interest rate derivatives. 

This information must be presented in 

terms of 10-year bond equivalents. 

[Used in: Part 1A, Schedule D] 

33. Investment Adviser 

Representative: Any of your firm’s 

supervised persons (except those that 

provide only impersonal investment 

advice) is an investment adviser 

representative, if — 

• the supervised person regularly 

solicits, meets with, or otherwise 

communicates with your firm’s clients, 

• the supervised person has more 

than five clients who are natural persons 

and not high net worth individuals, and 

• more than ten percent of the 

supervised person’s clients are natural 

persons and not high net worth 

individuals. 

Note: If your firm is registered with 

the state securities authorities and not 

the SEC, your firm may be subject to a 

different state definition of ‘‘investment 

adviser representative.’’ Investment 

adviser representatives of SECregistered advisers may be required to 

register in each state in which they have 

a place of business. 

[Used in: General Instructions; Part 1A, 

Item 5; Part 2B, Item 1] 

34. Investment-Related: Activities that 

pertain to securities, commodities, 

banking, insurance, or real estate 

(including, but not limited to, acting as 

or being associated with an investment 

adviser, broker-dealer, municipal 

securities dealer, government securities 

broker or dealer, issuer, investment 

company, futures sponsor, bank, or 

savings association). 

[Used in: Part 1A, Items 7, 11, Schedule 

D, DRPs; Part 1B, Item 2; Part 2A, Items 

9 and 19; Part 2B, Items 3, 4 and 7] 

35. Involved: Engaging in any act or 

omission, aiding, abetting, counseling, 

commanding, inducing, conspiring with 

or failing reasonably to supervise 

another in doing an act. [Used in: Part 

1A, Item 11; Part 2A, Items 9 and 10; 

Part 2B, Items 3 and 7] 

36. Legal Entity Identifier: A ‘‘legal 

entity identifier’’ assigned by a utility 

endorsed by the Global LEI Regulatory 

Oversight Committee (ROC) or 

accredited by the Global LEI Foundation 

(GLEIF). [Used in: Part 1A, Item 1, 

Schedules D and R] 

37. Management Persons: Anyone 

with the power to exercise, directly or 

indirectly, a controlling influence over 

your firm’s management or policies, or 

to determine the general investment 

advice given to the clients of your firm. 

Generally, all of the following are 

management persons: 

• Your firm’s principal executive 

officers, such as your chief executive 

officer, chief financial officer, chief 

operations officer, chief legal officer, 

and chief compliance officer; your 

directors, general partners, or trustees; 

and other individuals with similar 

status or performing similar functions; 

• The members of your firm’s 

investment committee or group that 

determines general investment advice to 

be given to clients; and 

• If your firm does not have an 

investment committee or group, the 

individuals who determine general 

investment advice provided to clients (if 

there are more than five people, you 

may limit your firm’s response to their 

supervisors). 

[Used in: Part 1B, Item 2; Part 2A, Items 

9, 10 and 19] 

38. Managing Agent: A managing 

agent of an investment adviser is any 

person, including a trustee, who directs 

or manages (or who participates in 

directing or managing) the affairs of any 

unincorporated organization or 

association that is not a partnership. 

[Used in: General Instructions; Form 

ADV–NR; Form ADV–W, Item 8] 

39. Minor Rule Violation: A violation 

of a self-regulatory organization rule 

that has been designated as ‘‘minor’’ 

pursuant to a plan approved by the SEC. 

A rule violation may be designated as 

‘‘minor’’ under a plan if the sanction 

imposed consists of a fine of $2,500 or 

less, and if the sanctioned person does 

not contest the fine. (Check with the 

appropriate self- regulatory organization 

to determine if a particular rule 

violation has been designated as 

‘‘minor’’ for these purposes.) [Used in: 

Part 1A, Item 11] 

40. Misdemeanor: For jurisdictions 

that do not differentiate between a 

felony and a misdemeanor, a 

misdemeanor is an offense punishable 

by a sentence of less than one year 

imprisonment and/or a fine of less than 

$1,000. The term also includes a special 

court martial. [Used in: Part 1A, Item 11; 

DRPs; Part 2A, Item 9; Part 2B, Item 3] 

41. Non-Resident: (a) An individual 

who resides in any place not subject to 

the jurisdiction of the United States; (b) 

a corporation incorporated in or that has 

its principal office and place of business 

in any place not subject to the 

jurisdiction of the United States; and (c) 

a partnership or other unincorporated 


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organization or association that is 

formed in or has its principal office and 

place of business in any place not 

subject to the jurisdiction of the United 

States. [Used in: General Instructions; 

Form ADV–NR] 

42. Notice Filing: SEC-registered 

advisers may have to provide state 

securities authorities with copies of 

documents that are filed with the SEC. 

These filings are referred to as ‘‘notice 

filings.’’ [Used in: General Instructions; 

Part 1A, Item 2; Execution Page(s); Form 

ADV–W] 

43. Order: A written directive issued 

pursuant to statutory authority and 

procedures, including an order of 

denial, exemption, suspension, or 

revocation. Unless included in an order, 

this term does not include special 

stipulations, undertakings, or 

agreements relating to payments, 

limitations on activity or other 

restrictions. [Used in: Part 1A, Items 2 

and 11, Schedules D and R; DRPs; Part 

2A, Item 9; Part 2B, Item 3] 

44. Other Derivative: Any derivative 

that is not a commodity derivative, 

credit derivative, equity derivative, 

foreign exchange derivative or interest 

rate derivative. [Used in: Part 1A, 

Schedule D] 

45. Parallel Managed Account: With 

respect to any registered investment 

company or series thereof or business 

development company, a parallel 

managed account is any managed 

account or other pool of assets that you 

advise and that pursues substantially 

the same investment objective and 

strategy and invests side by side in 

substantially the same positions as the 

identified investment company or series 

thereof or business development 

company that you advise. [Used in: Part 

1A, Schedule D] 

46. Performance-Based Fee: An 

investment advisory fee based on a 

share of capital gains on, or capital 

appreciation of, client assets. A fee that 

is based upon a percentage of assets that 

you manage is not a performance-based 

fee. [Used in: Part 1A, Item 5; Part 2A, 

Items 6 and 19] 

47. Person: A natural person (an 

individual) or a company. A company 

includes any partnership, corporation, 

trust, limited liability company (‘‘LLC’’), 

limited liability partnership (‘‘LLP’’), 

sole proprietorship, or other 

organization. [Used throughout Form 

ADV and Form ADV–W] 

48. Predecessor Performance: 

Investment performance achieved by a 

group of investments consisting of an 

account or a private fund that was not 

advised at all times during the period 

shown by the investment adviser 

advertising the performance. [Used in: 

Part 1A, Item 5] 

49. Principal Office and Place of 

Business: Your firm’s executive office 

from which your firm’s officers, 

partners, or managers direct, control, 

and coordinate the activities of your 

firm. [Used in: Part 1A, Instructions, 

Items 1 and 2; Schedules D and R; Form 

ADV–W, Item 1] 

50. Private Fund: An issuer that 

would be an investment company as 

defined in section 3 of the Investment 

Company Act of 1940 but for section 

3(c)(1) or 3(c)(7) of that Act. [Used in: 

General Instructions; Part 1A, 

Instructions, Items 2, 5, 7, and 9; Part 

1A, Schedule D] 

51. Proceeding: This term includes a 

formal administrative or civil action 

initiated by a governmental agency, selfregulatory organization or foreign 

financial regulatory authority; a felony 

criminal indictment or information (or 

equivalent formal charge); or a 

misdemeanor criminal information (or 

equivalent formal charge). This term 

does not include other civil litigation, 

investigations, or arrests or similar 

charges effected in the absence of a 

formal criminal indictment or 

information (or equivalent formal 

charge). [Used in: Part 1A, Item 11, 

DRPs; Part 1B, Item 2; Part 2A, Item 9; 

Part 2B, Item 3] 

52. Qualified Client: A client that 

satisfies the definition of qualified client 

in SEC rule 205–3. [Used in: General 

Instructions; Part 1A, Schedule D] 

53. Related Person: Any advisory 

affiliate and any person that is under 

common control with your firm. [Used 

in: Part 1A, Items 7, 8 and 9; Schedule 

D; Form ADV–W, Item 3; Part 2A, Items 

10, 11, 12 and 14; Part 2A, Appendix 1, 

Item 6] 

54. Relying Adviser: An investment 

adviser eligible to register with the SEC 

that relies on a filing adviser to file (and 

amend) a single umbrella registration on 

its behalf. [Used in: General 

Instructions; Part 1A, Items 1, 7 and 11; 

Schedules D and R] 

55. Self-Regulatory Organization or 

SRO: Any national securities or 

commodities exchange, registered 

securities association, or registered 

clearing agency. For example, the 

Chicago Board of Trade (‘‘CBOT’’), 

FINRA and New York Stock Exchange 

(‘‘NYSE’’) are self-regulatory 

organizations. [Used in: Part 1A, Item 

11; DRPs; Part 1B, Item 2; Part 2A, Items 

9 and 19; Part 2B, Items 3 and 7] 

56. Sovereign Bonds: Any notes, 

bonds and debentures issued by a 

national government (including central 

government, other governments and 

central banks but excluding U.S. state 

and local governments), whether 

denominated in a local or foreign 

currency. [Used in: Part 1A, Schedule D] 

57. Sponsor: A sponsor of a wrap fee 

program sponsors, organizes, or 

administers the program or selects, or 

provides advice to clients regarding the 

selection of, other investment advisers 

in the program. [Used in: Part 1A, Item 

5, Schedule D; Part 2A, Instructions, 

Appendix 1 Instructions] 

58. State Securities Authority: The 

securities commissioner or commission 

(or any agency, office or officer 

performing like functions) of any state 

of the United States, the District of 

Columbia, Puerto Rico, the Virgin 

Islands, or any other possession of the 

United States. [Used throughout Form 

ADV] 

59. Supervised Person: Any of your 

officers, partners, directors (or other 

persons occupying a similar status or 

performing similar functions), or 

employees, or any other person who 

provides investment advice on your 

behalf and is subject to your supervision 

or control. [Used throughout Part 2] 

60. Testimonial: Any statement by a 

current client or investor in a private 

fund advised by the investment adviser: 

(i) About the client or investor’s 

experience with the investment adviser 

or its supervised persons (ii) that 

directly or indirectly solicits any current 

or prospective client or investor to be a 

client of, or an investor in a private fund 

advised by, the investment adviser; or 

(iii) that refers any current or 

prospective client or investor to be a 

client of, or an investor in a private fund 

advised by, the investment adviser. 

[Used in: Part 1A, Item 5] 

61. Third-party Rating: A rating or 

ranking of an investment adviser 

provided by a person who is not a 

related person and such person 

provides such ratings or rankings in the 

ordinary course of its business. [Used 

in: Part 1A, Item 5] 

62. Umbrella Registration: A single 

registration by a filing adviser and one 

or more relying advisers who 

collectively conduct a single advisory 

business and that meet the conditions 

set forth in General Instruction 5. [Used 

in: General Instructions; Part 1A, Items 

1, 2, 3, 7, 10 and 11, Schedules D and 

R] 

63. United States Person: This term 

has the same meaning as in rule 

203(m)–1 under the Advisers Act, 

which includes any natural person that 

is resident in the United States. [Used 

in: Part 1A, Instructions, Item 5; 

Schedule D] 

64. Wrap Brochure or Wrap Fee 

Program Brochure: The written 

disclosure statement that sponsors of 


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wrap fee programs must provide to each 

of their wrap fee program clients. [Used 

in: Part 2, General Instructions; Used 

throughout Part 2A, Appendix 1] 

65. Wrap Fee Program: Any advisory 

program under which a specified fee or 

fees not based directly upon 

transactions in a client’s account is 

charged for investment advisory 

services (which may include portfolio 

management or advice concerning the 

selection of other investment advisers) 

and the execution of client transactions. 

[Used in: Part 1, Item 5; Schedule D; 

Part 2A, Instructions, Item 4, used 

throughout Appendix 1; Part 2B, 

Instructions] 

By the Commission. 

Dated: December 22, 2020. 

Vanessa A. Countryman, 

Secretary. 

[FR Doc. 2020–28868 Filed 3–4–21; 8:45 am] 

BILLING CODE 8011–01–P 


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