# Investment Adviser Marketing > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-28868 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** March 5, 2021 - **Citation:** 86 FR 13024 ## Text 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. 1 Unless 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. 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 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. 2 Advertisements by Investment Advisers, Release No. IA-121 (Nov. 1, 1961) [26 FR 10548 (Nov. 9, 1961)] (“Advertising Rule Adopting Release”). 3 See 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”). 4 The 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. 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. 5 The 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.” 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. 6 While 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. 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 ever-changing 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 third-party ratings; and (iv) include tailored requirements for the presentation of performance results, based on an advertisement's intended audience. 7 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. 7 See Investment Adviser Advertisements; Compensation for Solicitations, Release No. IA-5407 (Nov. 4, 2019) [84 FR 67518 (Dec. 10, 2019)] (“2019 Proposing Release”). 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 8 The 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. 9 The feedback forms are available in the comment file at https://www.sec.gov/comments/s7-21-19/s72119.htm. 10 See, 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”); 11 See, 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”). 12 See, 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”). 13 See, 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”). 14 See, 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”). 15 See, e.g., Comment Letter of Credit Suisse Securities (USA) LLC (Feb. 10, 2020) (“Credit Suisse Comment Letter”); SIFMA AMG Comment Letter I. 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 16 See, 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”). 17 See, 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”). 18 See e.g., FSI Comment Letter; SIFMA AMG Comment Letter II. 19 See, 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. 20 See 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. 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. 21 The 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. • 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. 22 Hypothetical performance information that is provided in response to an unsolicited investor request or to a private fund investor in a one-on-one communication is excluded from the first prong of the definition of advertisement. • 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 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 23 See final rule 206(4)-1(e)(1)(i) and (ii). 24 See final rule 206(4)-1(e)(1)(i). 25 See final rule 206(4)-1(e)(1)(i)(A) and (B). 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 one-on-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 26 See 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. 27 See final rule 206(4)-1(e)(1)(ii). 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 28 See, e.g., SBIA Comment Letter; Consumer Federation Comment Letter; Comment Letter of the Institutional Limited Partners Association (Feb. 10, 2020) (“ILPA Comment Letter”). 29 See, 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”). 30 See, e.g., Fidelity Comment Letter; NSCP Comment Letter; IAA Comment Letter. 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 31 See, e.g., NYC Bar Comment Letter; Comment Letter of the Financial Planning Association (Feb. 10, 2020) (“FPA Comment Letter”). 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 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 32 See infra “Adoption and entanglement” section. 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 funds-of-funds, model providers, solicitors, and employee use of social media. 36 33 See proposed rule 206(4)-1(e)(1). 34 See, 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”). 35 See, e.g., LinkedIn Comment Letter; Comment Letter of Resolute Investment Managers (Feb. 10, 2020) (“Resolute Comment Letter”); IAA Comment Letter. 36 See, 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. 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. 37 Section 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.). 38 See infra “Adoption and entanglement” section. 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. 39 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 [the adviser's] firm.” Italicized terms are defined in the Form ADV Glossary. See Form ADV Glossary. 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. 40 However, 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. 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-of-funds (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. 41 See, 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). 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 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 43 See 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”). 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 44 See 2008 Release, supra footnote 43. 45 See, 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.). 46 See infra section II.B. 47 See 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.”). 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 pre-established, 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. 48 For example, an adviser could not have a policy to remove only negative comments about the adviser. 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. 49 We 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. 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. 50 Other 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. 51 See supra “Adoption and entanglement” section (discussing an adviser's ability to edit third-party material based on objective criteria). 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 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. 52 See, 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. 53 An 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. 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 54 See, e.g., IAA Comment Letter; AICPA Comment Letter. 55 See, 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”). 56 See, 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. 57 See, e.g., CFA Institute Comment Letter; Comment Letter of the Council of Institutional Investors (Feb. 11, 2020) (“CII Comment Letter”). 58 See, e.g., SIFMA AMG Comment Letter II. 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 59 As discussed below, we also have eliminated the element of the proposed rule that would apply to communications to retain investors. 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 60 See 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. 61 See, e.g., Wellington Comment Letter; MFA/AIMA Comment Letter I; IAA Comment Letter. 62 See final rule 206(4)-1(e)(1)(i)(A)-(C). 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 63 See Prohibited Advertisements, Release No. IA-119 (Aug. 8, 1961) [26 FR 7552, 7553 (Nov. 15, 1961)]. 64 Id. 65 See, e.g., section 206 of the Act; rule 206(4)-8 under the Act. 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-on-one exclusion. 67 66 See, 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”). 67 See, e.g., rule 30e-1(f) under the Investment Company Act. 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 exclusion from the first prong of the definition of advertisement for one-on-one 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. 68 See, 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). 69 See, e.g., FPA Comment Letter. 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. 70 See, e.g., NSCP Comment Letter. 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 71 The 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. 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. 73 See Resolute Comment Letter (seeking clarification on the treatment of “account statements and similar reports intended for Non-Retail 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. 74 See also supra section II.A.2.a.i for a discussion of an adviser's direct or indirect communications. 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 one-on-one communications that offer investment advisory services with regard to securities must be presented in accordance with the requirements discussed below. 75 See 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). 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. 76 See 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). 77 See IAA Comment Letter; ILPA Comment Letter. 78 See IAA Comment Letter; Comment Letter of Managed Funds Association and Alternative Investment Management Association (Sept. 11, 2020) (“MFA/AIMA Comment Letter III”). 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 as an advertisement subject to the rule. 80 79 Any 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. 80 The hypothetical performance information would be subject to the Advisers Act's anti-fraud provisions and rule 206(4)-8 under the Advisers Act. 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. 81 See proposed rule 206(4)-1(e)(1). 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 82 See, e.g., MFA/AIMA Comment Letter I; Comment Letter of Association for Corporate Growth (Feb. 10, 2020) (“ACG Comment Letter”). 83 Under 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. 84 See 2019 Proposing Release, supra footnote 7, at section II.A.2. 85 See SIFMA AMG Comment Letter II; FSI Comment Letter. 86 See 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].”). 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 non-securities related services. 88 87 See NYC Bar Comment Letter; ACG Comment Letter. 88 See 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 adviser-client 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.' ' ”). 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 89 As 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. 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 90 See, 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”). 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 91 See, 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). 92 See, e.g., MFA/AIMA Comment Letter I. 93 See, e.g., MMI Comment Letter. 94 See, e.g., Wellington Comment Letter; IAA Comment Letter; Pickard Djinis Comment Letter. 95 Our 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 no-action 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. 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 96 See, e.g., section 206 of the Advisers Act; rule 206(4)-8 under the Advisers Act. 97 See Fiduciary Interpretation, supra footnote 88. See also IAA Comment Letter; Pickard Djinis Comment Letter. 98 Their 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. 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. 99 See, e.g., SIFMA AMG Comment Letter II; JG Advisory Comment Letter; MMI Comment Letter; IAA Comment Letter; MFA/AIMA Comment Letter I. 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. 100 See SIFMA AMG Comment Letter II. 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. 101 See, e.g., SIFMA AMG Comment Letter II; Mercer Comment Letter; IAA Comment Letter; Wellington Comment Letter. 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. 102 See, 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). 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. 103 103 As 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) . 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. 106 104 See, 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.”). 105 See 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. 106 See, e.g., NASAA Comment Letter; CFA Comment Letter; ILPA Comment Letter. 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 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. 107 107 A 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. 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. 108 As 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. 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. 110 109 See, 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). 110 We 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). 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. 111 See, e.g., SIFMA AMG Comment Letter II; Fidelity Comment Letter. 112 See, 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). 113 See, e.g., SIFMA AMG Comment Letter II; Consumer Federation Comment Letter. 114 See, e.g., SIFMA AMG Comment Letter II; Fidelity Comment Letter. 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. 118 115 Final 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. 116 Proposed rule 206(4)-1(e)(1)(iv). 117 See, e.g., Mercer Comment Letter; NRS Comment Letter. 118 See, 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). 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. 120 119 See final rule 206(4)-1(e)(1)(i)(B). 120 See Form CRS Relationship Summary; Amendments to Form ADV, Release No. IA-5247 (June 5, 2019) [88 FR 33573 (July 12, 2019)] (“Form CRS Adopting Release”) (noting that the relationship summary is designed to serve as disclosure, rather than marketing material). 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. 121 However, 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. 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.” 122 Final rule 206(4)-1(e)(1)(ii). 123 See 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. 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. 124 Final 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). 125 Final 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. 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. 127 126 Final 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). 127 See Pickard Djinis Comment Letter. 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. 129 128 See 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”). 129 See SIFMA AMG Comment Letter II. 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. 131 130 Complete 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. 131 See 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. 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 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 broker-dealer), 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. 132 Final 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). 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 non-cash—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. 133 See 2019 Proposing Release, supra footnote 7, at section II.A.4 and II.B.2 and text accompanying n.172. 134 See 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). Some commenters agreed that non-cash 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 non-transferable 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. 139 135 See Consumer Federation Comment Letter; Mercer Comment Letter. 136 See 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). 137 See 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. 138 See SIFMA AMG Comment Letters I & III; FSI Comment Letter. 139 See infra section II.A.4. 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. 142 140 See 2019 Proposing Release, supra footnote 7, at nn.357 and 358 and accompanying text (discussing, for example, refer-a-friend programs). 141 Advisers 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. 142 Although 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. 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 non-cash compensation, provided that attendance at these meetings or trainings is not provided in exchange for solicitation activities. 144 143 See, 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 non-cash 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). 144 See 2019 Proposing Release, supra footnote 7, at n.360. 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 non-cash 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 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 broker-dealer provides a testimonial or endorsement to a person that is not a retail customer (as that term is defined in Regulation BI). 147 145 See SIFMA AMG Comment Letters I & III (requesting alignment with FINRA's 2016 non-cash compensation rule proposal); FSI Comment Letter. 146 See, 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, 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 broker-dealer'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. 147 See id. Regulation BI defines a retail customer as a “natural person, or the legal representative of such natural person.” See id., at 768. 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 non-cash 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. 151 148 See, 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. 149 See, e.g., SIFMA AMG Comment Letters I & III; FSI Comment Letter. 150 See SIFMA AMG Comment Letter III. 151 See, e.g., MFA/AIMA Comment Letter I; Mercer Comment Letter. 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. 153 152 We 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. 153 For 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. 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. 154 See, e.g., FSI Comment Letter; SIFMA AMG Comment Letter I; MFA/AIMA Comment Letter I; Fried Frank Comment Letter; IAA Comment Letter. 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. 157 155 See 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. 156 See 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). 157 See final rule 206(4)-1(e)(5)(ii) and (iii) and (17)(ii) and (iii). 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 also meet the rule's definition of testimonial or endorsement. 158 See final rule 206(4)-1(5)(i) and (17)(i). 159 See final rule 206(4)-1(e)(1)(ii). 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 non-investor 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). 160 However, such a communication would be an advertisement under the first prong of the definition of “advertisement.” See supra section II.A.2. 161 See Nesler Comment Letter. 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. 164 162 See 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. 163 We 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. 164 Though 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. d. Exclusion for Regulatory Communications; Inclusion of One-on-One 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. 165 See final rule 206(4)-1(e)(1)(ii). 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 broker-dealer provides a testimonial or endorsement to a retail customer that is a recommendation subject to Regulation BI. 168 166 See Credit Suisse Comment Letter (citing the “robust regulatory framework” already applicable to SEC-registered broker-dealers); MFA/AIMA Comment Letter I. 167 See infra section II.C.5. 168 See id. 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. 169 See 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. 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 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-28868. Public record. Not legal advice.