Publications

Observations Regarding Testimonials and Endorsements

Disclosures

Examinations noted that the most common reason that a testimonial or endorsement was not compliant with the Marketing Rule related to disclosure.

• Clear and Prominent Disclosures: Examinations noted that deficiencies occurred when the required clear and prominent disclosures were not provided at all or were provided outside of the testimonial or endorsement. Examinations raised concerns when required disclosures were presented in hyperlinks and in “a smaller or lighter font than the testimonials or endorsements to which they were related.”
• Disclosure of Material Terms of Compensation Arrangements and Material Conflicts: Examinations observed that some advisers had omitted all or certain material information regarding compensation and conflicts of interest from testimonials and endorsements. 

Oversight and Compliance

Examinations noted that some advisers had not updated their written compliance policies and procedures to account for the implementation of the testimonial and endorsement provisions of the Marketing Rule, while others did not adhere to their written compliance policies and procedures. The Risk Alert also noted that some advisers were not able to satisfy the requirement to have a reasonable basis for believing the testimonials and endorsements complied with the Marketing Rule. The Risk Alert provided no examples of what would (or would not) be considered best practices with regard to the form and detail of documentation expected to substantiate a reasonable-basis belief.

Other Observations by Examinations

Examinations also noted in the Risk Alert that advisers were deficient when they: (1) knew or should have known that the testimonial or endorsement was being provided by an ineligible person; and (2) used affiliated persons to provide testimonials and endorsements without the proper disclosure.

Observations Relating to Third-Party Rating Provisions

Due Diligence

Advisers must have a reasonable basis for believing that the questionnaires or surveys used in creating a third-party rating were not designed to produce predetermined results. Examinations noted that advisers that complied with this requirement “typically: (1) reviewed publicly disclosed information about third-party questionnaire or survey methodologies; (2) obtained any questionnaires or surveys used in the preparation of the rating; and/or (3) sought representations from the third-party rating agencies regarding general aspects of how the questionnaires or surveys were designed, structured, and administered.”

Clear and Prominent Disclosures

Examinations staff raised concerns related to the requirement to provide clear and prominent disclosure, including lack of identification of the rating date and period, not identifying the rating provider, and failures to disclose compensation (e.g., related to logos, priority placement and referrals). Similar to the observations related to testimonials and endorsements, Examinations claimed that “smaller text font” or “placing the disclosures at the bottom of the website pages away from the actual ratings” was deficient.

Looking Ahead

While the SEC has instituted fewer enforcement actions under the Marketing Rule since the change in administration (only one [3]), advisers should continue to anticipate a focus on the Marketing Rule in any examination. Advisers should consider this Risk Alert as notice of the issues that are likely to be raised in examinations and that have the potential for future enforcement actions.[4]

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