The SEC's Division of Examinations issued a major Risk Alert highlighting widespread failures by investment advisers to comply with the modernized Marketing Rule (Rule 206(4)-1). Despite several years of adoption, examiners continue to find that firms are falling short on the rudimentary requirements for testimonials, endorsements, and third-party ratings.
1. Testimonials and Endorsements: The Disclosure Trap
The SEC defines a testimonial as a statement from a current client, while an endorsement comes from a non-client. The most frequent deficiencies involve failing to provide "clear and prominent" disclosures at the time of dissemination.
- The "Hyperlink" Failure: The SEC has explicitly warned that using a hyperlink to provide required disclosures—rather than including them within the advertisement itself—fails to meet the "clear and prominent" standard.
- Font and Placement Issues: Disclosures placed in smaller or lighter fonts or buried at the bottom of a web page away from the endorsement, are being flagged as non-compliant.
- Required Disclosure Content: Every advertisement featuring a testimonial or endorsement must clearly state:
- If the promoter is a current client or non-client.
- If cash or non-cash compensation was provided.
- Any material conflicts of interest resulting from the relationship with the adviser.
- Compensation Transparency: Advisers are failing to disclose the material terms of compensation, such as the specific dollar amount or the percentage of fees paid to a promoter.
2. Third-Party Ratings: Due Diligence Deficits
Using a third-party rating or award is permitted only if the adviser has a "reasonable basis" for believing the survey was structured fairly.
- Insufficient Diligence: Examiners found that many firms used ratings without ever reviewing the underlying questionnaires to ensure they weren't designed to produce a predetermined result.
- Date and Period Omissions: Advertisements often fail to disclose the specific date the rating was given or the period of time upon which it was based.
- Hidden Fees: Firms are being flagged for failing to disclose payments made to rating providers for the right to use their logo, for reprints, or for "priority placement" in the rankings.
3. Ineligible Persons and New 2026 Guidance
Advisers are prohibited from paying "ineligible persons” those with certain disciplinary histories—for testimonials or endorsements.
- New FAQ Update (January 2026): Fresh SEC guidance clarifies that advisers may use endorsements from individuals subject to certain Self-Regulatory Organization (SRO) orders (such as FINRA orders), provided the individual was not barred or suspended and is in compliance with all penalties.
- Ongoing Disclosure: If using such a person, the advertisement must disclose for 10 years that the individual is subject to an SRO order and provide a link to that order.
Action Steps for Advisers in 2026
- Review Policies: Update written procedures to specifically address the use of social media, influencers, and online reviews.
- Conduct Gap Analysis: Audit current advertisements to ensure disclosures are within the "four corners" of the ad and are at least as prominent as the promotional content.
- Memorialize Diligence: Document the review of third-party rating methodologies each time a rating is used.
- Formal Agreements: Ensure written agreements are in place for any promoter receiving more than $1,000 in a 12-month period.
