The SEC’s new Marketing Rule compliance date was November 4, 2022. As part of the Marketing Rule, the SEC expanded advisers’ ability to use client testimonials in marketing materials. With these new marketing powers come certain responsibilities pertaining to obtaining testimonials and disclosures which must be made alongside the testimonials.
In the Marketing Rule, testimonials are defined as: 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.
Obtaining and Advertising Testimonials
When the time comes to request testimonials from clients, there are certain steps that advisers must take to ensure compliance with the Marketing Rule. The Marketing Rule prohibits “cherry picking”. If an adviser decides to ask clients for testimonials, the adviser is required to ask all clients (or, with limitations, a specific subset of similar clients, such as all ERISA plan clients), not just those who might provide a positive review. Similarly, advisers must be fair and balanced when including testimonials in advertising material and must include any positive and negative testimonials. The adviser must document and maintain records indicating that all clients have been invited to provide a review, regardless of whether the client has had a positive or negative experience (as indicated in its written response) with the Firm.
When including testimonials in marketing materials (e.g., on the firm’s website), disclosures must be made on the same page and be as prominent as the testimonial itself. There are three disclosures: (1) whether the testimonial was given by a current client, (2) whether cash or non-cash (e.g., a fee reduction, extravagant or frequent firm paid entertainment, etc.) compensation was provided for the testimonial and the terms of the compensation agreement; and, (3) a statement of any material conflict of interest (e.g., is the person or entity providing the testimonial a compensated promoter-if yes, the promoter has an incentive to recommend the adviser, resulting in a material conflict of interest).
The clear and prominent disclosures may be part of a “layered disclosure” approach, where a succinct, tailored disclosure is included with the advertisement, and a more detailed disclosure on content such as compensation arrangements and material conflicts of interest could then be provided through hyperlinks, supplementary document, or the back of a slide deck.
Many businesses, including RIAs, have Google Business pages where the public can leave a public review of the business. While Google reviews are not specifically adviser-created advertisements, they are subject to compliance oversight. For this reason, we strongly recommend that Google review pages include general testimonial disclosure.
If an adviser requests that clients furnish a Google review, the adviser must follow the guidelines on obtaining testimonials. The adviser is not permitted to “cherry pick” client reviews and is required to ask all clients to leave a review. If the adviser shares such a review on its website, it is required to make the same disclosures, and should also ask the reviewer for permission to share the review.
Advisers are not permitted to skew the results or hide negative reviews left on Google. Specifically, the adviser should not access third party site tools to review and hide certain testimonials. The Firm may use third party website tools for analytics or internal review purposes. However, no public-facing changes can be made to client reviews. An exception to this rule exists when a review is edited for pre-established, objective criteria such as profanity, or defamatory or threatening language.
The Marketing Rule unlocks a broad range of new advertising avenues for advisers. However, there are potential compliance-related minefields.