The SEC Marketing Rule at Three Years: Compliance Gaps Still Drawing Examination Scrutiny

The SEC's marketing rule — Rule 206(4)-1 under the Investment Advisers Act — became effective on November 4, 2022, replacing the decades-old advertising rule and no-action letter framework with a comprehensive regulatory structure governing all investment adviser advertisements. Three years into the compliance period, examination findings reveal a consistent pattern of gaps — and SEC examiners have made marketing rule compliance a standing focus of the investment adviser examination program.

Testimonials and Endorsements

The marketing rule permits testimonials and endorsements — a departure from the prior advertising rule's prohibition — but imposes disclosure requirements that many advisers have not fully implemented. Any advertisement that includes a testimonial or endorsement must disclose whether the person giving the testimonial or endorsement is a client, whether compensation was paid, and any material conflicts of interest. SEC examination findings reveal that advisers are including testimonials and endorsements — including Google Reviews, social media posts, and third-party platform ratings — without implementing the required disclosures.

Third-Party Ratings

The use of third-party ratings in adviser advertisements has been a persistent source of examination findings. The marketing rule permits the use of third-party ratings but requires that the advertisement include the name of the third party, the date on which the rating was given, and a brief statement of the criteria on which the rating was based. Advisers who include award-winning language, industry rankings, or third-party recognition without these required disclosures are in violation of the marketing rule — regardless of whether the underlying recognition was legitimately earned.

Performance Advertising Standards

The marketing rule's performance advertising standards have generated significant examination attention. The rule requires that when an advertisement presents gross performance, it must also present net performance with at least equal prominence, using the same time period and in a format designed to facilitate comparison. The prohibition on cherry-picking time periods is an absolute requirement. SEC examination findings reveal that some advisers are presenting gross performance without net performance and constructing composites in ways that are not consistent with the standards required by the rule.

Hypothetical Performance — The Most Scrutinized Area

Hypothetical performance — including model portfolio performance, back-tested performance, and targeted return information — has been identified by SEC examination staff as one of the highest-risk areas under the marketing rule. The rule permits hypothetical performance in advertisements but requires the adviser to 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. Many advisers who regularly use back-tested performance in marketing materials have not adopted the required written policies and procedures — a stand-alone violation of the rule independent of whether any individual advertisement is materially misleading.

What Examiners Are Looking For

Based on SEC examination findings and staff guidance, examiners reviewing marketing rule compliance are focusing on: whether the adviser has a written marketing rule compliance policy; whether there is a documented pre-approval process for advertisements; whether testimonials and endorsements include required disclosures; and whether performance advertising satisfies the rule's presentation standards. Advisers whose marketing rule policies were adopted at the time of the compliance date and have not been revisited since are likely to have policies that do not fully address examination priorities as they have developed.