advertising-compliance

What this skill does

# Advertising Compliance — Investment Marketing & Communications

## Purpose
Ensure investment advertising and marketing communications comply with the SEC Marketing Rule, FINRA Rule 2210, and related regulatory requirements. This skill covers performance advertising constraints, testimonial and endorsement disclosures, social media supervision, third-party ratings, recordkeeping obligations, and current SEC enforcement priorities.

## Layer
9 — Compliance & Regulatory Guidance

## Direction
prospective

## When to Use
- Reviewing or drafting marketing materials for an investment adviser or broker-dealer
- Presenting investment performance in advertisements, pitchbooks, or websites
- Evaluating whether hypothetical, backtested, or extracted performance can be shown and under what conditions
- Using client testimonials or endorsements in marketing materials
- Posting investment-related content on social media (firm accounts or associated persons' accounts)
- Incorporating third-party ratings or rankings in advertisements
- Assessing whether predecessor or portability performance can be presented
- Designing compliance review workflows for advertising approval
- Responding to SEC or FINRA examination findings on advertising practices
- Establishing recordkeeping procedures for advertisements and marketing communications

## Core Concepts

### SEC Marketing Rule (Rule 206(4)-1)
Effective November 4, 2022, the SEC's Marketing Rule replaced both the prior Advertising Rule (old Rule 206(4)-1) and the Cash Solicitation Rule (old Rule 206(4)-3) for investment advisers registered under the Investment Advisers Act of 1940. The rule applies to any "advertisement" — defined broadly as (1) any direct or indirect communication by an adviser that offers or promotes investment advisory services, or (2) any endorsement or testimonial for which the adviser provides compensation.

**Seven general prohibitions.** An advertisement may not:

1. **Include untrue statements of material fact or omit material facts** necessary to make the statement not misleading in light of the circumstances.
2. **Include material statements of fact that the adviser does not have a reasonable basis for believing** it can substantiate upon demand by the SEC.
3. **Include information that would reasonably be likely to cause an untrue or misleading inference** to be drawn about a material fact relating to the adviser.
4. **Discuss potential benefits without providing fair and balanced treatment of associated material risks or limitations.** A one-sided presentation of returns without discussing the corresponding risks violates this prohibition.
5. **Reference specific investment advice in a misleading manner.** This prohibition targets cherry-picking — presenting only favorable past recommendations while omitting unfavorable ones.
6. **Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced.** This encompasses selective time-period presentation, choosing only the best-performing periods and ignoring others.
7. **Be otherwise materially misleading.**

These prohibitions apply to all advertisements regardless of the audience. There is no "sophisticated investor" exception — even materials shown only to institutional investors must comply.

### Performance Advertising Under the Marketing Rule
Performance presentation is the most technically demanding area of advertising compliance. The Marketing Rule imposes specific requirements depending on the type of performance shown.

**Net performance requirement.** Whenever gross performance is presented, net performance must also be shown with at least equal prominence. Net performance must reflect the deduction of all fees and expenses that a client would pay, including advisory fees, custodial fees, and any other fees the adviser charges. Model fees are permitted only if they reflect the adviser's current fee schedule and the highest fee charged to the relevant audience.

**Time period requirements.** Performance must be shown for standardized time periods of 1-year, 5-year, and 10-year periods (or since inception if the track record is shorter than the prescribed period). These periods must end on the most recent practicable date. An adviser cannot show only a favorable 3-year period while omitting the required 1-, 5-, and 10-year figures.

**Hypothetical performance.** Includes backtested performance, model performance, and targeted or projected returns. The Marketing Rule permits hypothetical performance only if the adviser:

- Adopts and implements written 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.
- Provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating the hypothetical performance.
- 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.

Hypothetical performance cannot be used in advertisements directed to a mass audience (such as a public website accessible to all visitors) unless appropriate controls are in place (e.g., requiring the viewer to enter information demonstrating that the content is relevant to their situation before accessing the hypothetical performance).

**Extracted performance.** When showing the performance of a subset of investments from a portfolio (for example, only the equity sleeve of a balanced account), the total portfolio performance must be presented alongside it. The purpose is to prevent advisers from highlighting only the best-performing segment of a portfolio in isolation.

**Related performance (predecessor performance and portability).** An adviser may present performance from a predecessor firm or from an account managed at a prior employer, but only if:

- The person or persons primarily responsible for achieving the prior performance manage accounts at the current adviser.
- The accounts managed at the prior firm are sufficiently similar to the accounts currently managed that the prior performance provides relevant information.
- All accounts managed in a substantially similar manner are included (no cherry-picking of the best-performing accounts).
- The advertisement clearly discloses that the performance was achieved at a different entity and describes any differences in personnel, investment process, or account structure.

### Testimonials and Endorsements
The Marketing Rule permits investment advisers to use testimonials (statements by current clients about their experience) and endorsements (statements by non-clients — including solicitors — recommending the adviser) in advertising, overturning the prior blanket prohibition. However, specific disclosure requirements apply.

**Required disclosures for all testimonials and endorsements:**

1. Whether the person giving the testimonial or endorsement is a current client or investor. For endorsements, whether the person is affiliated with the adviser.
2. Whether the person was compensated (cash or non-cash) for providing the testimonial or endorsement.
3. A description of any material conflicts of interest on the part of the person giving the testimonial or endorsement.

**Additional requirements when compensation is provided:**

- If the promoter (formerly "solicitor") receives cash compensation of more than $1,000 (or non-cash compensation of more than $1,000 in value) over the preceding 12 months, the adviser must enter into a written agreement with the promoter.
- The written agreement must describe the scope of the promoter's activities and the terms of compensation.
- The adviser must have a reasonable basis for believing the promoter complies with the