SEC-registered investment advisers that directly or indirectly spread an “advertisement” operate under the SEC’s Marketing Rule, and regulators are enforcing it with growing intensity. Firms have already been cited for hypothetical performance issues, unsubstantiated claims, and testimonial missteps. If you share performance results, publish client feedback, or make statements about your services, you’re expected to back those claims with records that stand up during an exam. Modern compliance review systems can help advisers catch issues before regulators do, but understanding the core rule remains necessary.
TLDR:
- The SEC Marketing Rule replaced 60+ years of fragmented guidance with seven prohibitions governing adviser advertisements across channels.
- Performance ads require net-of-fee presentation, a documented reasonable basis for hypotheticals, and full portfolio context for extracted returns.
- Testimonials and endorsements are now permitted but require proximity disclosures about client status and any compensation paid.
- Since September 2023, the SEC has announced Marketing Rule sweep settlements totaling at least $2.29 million in combined civil penalties.
- Marketing compliance review systems help support Marketing Rule compliance checks across web, email, and social content with AI trained on SEC/FINRA rules plus expert review.
What Is the SEC Marketing Rule?
The SEC Marketing Rule, formally known as Rule 206(4)-1 under the Investment Advisers Act of 1940, represents the most important update to investment adviser advertising regulations in over six decades.
The Seven General Prohibitions under the Marketing Rule
The Marketing Rule sets seven baseline prohibitions that apply to all advertisements. Violating any one of these prohibitions may result in non-compliance.
- Untrue Statements of Material Fact: Advertisements may not include false statements, or technically accurate statements that create a misleading overall impression, about material facts that could influence an investor’s decision.
- Material Omissions: Leaving out information necessary to make a statement not misleading violates the rule, even if the statement itself is factually correct.
- Unsubstantiated Claims: Advisers may not make claims implying specific results or outcomes without a documented reasonable basis supporting the representation.
- Unbalanced Benefit Discussions: Discussions of potential benefits must be balanced with material risks or limitations; presenting upside without fair risk disclosure is prohibited.
- Cherry-Picked Performance: References to specific profitable recommendations require prescribed context about all recommendations in the same category over a defined period.
- Improper Testimonials or Endorsements: These are restricted unless you meet specific disclosure and other conditions outlined in the rule.
- Improper Use of Third-Party Ratings: You cannot use ratings without required disclosures about methodology and compensation arrangements.
Defining Advertisement under the Marketing Rule
The Marketing Rule captures far more content than the 1961 rule through two distinct prongs.
- Direct and Indirect Communications: Any direct or indirect communication that offers an adviser’s investment advisory services to prospective clients or investors, or promotes new advisory services to existing clients (subject to limited exclusions, including a general one-on-one communications carve-out).
- Compensated Endorsements and Testimonials: Any endorsement or testimonial for which an adviser provides cash or non-cash compensation, directly or indirectly.
Performance Advertising Requirements and Restrictions
Performance advertising often receives heightened regulatory attention because returns influence investor decisions more than any other factor.
- Net Performance Presentation: Present performance net of fees, or give investors the data to calculate net returns when showing gross figures. Gross-only presentations misrepresent what clients actually earn. When an advertisement presents “net performance,” it must reflect the deduction of advisory fees and any other fees and expenses a client or investor paid or would have paid in connection with the adviser’s services (as applicable to the performance being shown).
- Extracted Performance: You may use it only if you provide or offer the full portfolio performance from which you extracted the subset, covering the same time period.
- Hypothetical Performance: Hypothetical performance shows results that never occurred. Required steps include adopting written policies covering criteria for use, documenting a reasonable basis for the projections, and disclosing information that helps investors understand limitations and key assumptions.
Testimonials, Endorsements, and Third-Party Ratings
The Marketing Rule permits testimonials, endorsements, and third-party ratings for the first time since 1961. Permission requires mandatory disclosure and oversight.
Required Disclosures
Disclose whether the promoter is a current client. When you compensate the promoter (cash or non-cash), disclose that fact and describe material conflicts created by the compensation arrangement. For third-party ratings, disclose the period covered, methodology criteria, and any compensation paid.
Disclosures must appear in proximity to the testimonial or rating itself.
Oversight and Documentation
Written agreements with compensated promoters are generally required, unless the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (generally $1,000 or less, or equivalent non-cash value, during the preceding 12 months). You must have a reasonable basis to believe the promoter complies with the rule's requirements.
Books and Records Requirements for Marketing Materials
Rule 204-2 requires advisers to keep specific records for all marketing materials. The SEC uses these records during exams to verify compliance claims.
- Materials Subject to Retention: Document all material factual statements in each advertisement. Claims about assets under management, client numbers, team credentials, or investment approaches require supporting evidence.
- Performance and Third-Party Rating Records: Retain data and calculations used for performance presentations (such as account records, composite construction materials, fee schedules, and methodology documentation). For third-party ratings, keep questionnaires and supporting information provided to the rating organization.
- Retention Period and Accessibility: Keep records for five years from the advertisement’s last use, with the first two years maintained in an easily accessible location so records can be produced promptly during exams.
SEC Enforcement Actions and Sweep Examination Findings
The SEC’s Marketing Rule enforcement sweep began with settled charges announced on September 11, 2023, and continued with additional sweep settlements in 2024.
Violations identified during sweeps include:
- Misrepresenting Third-Party Ratings: Advisers cited ratings from organizations that never assessed them or mischaracterized ranking methodologies to prospects.
- Failing to Disclose Testimonial Arrangements: Firms published client endorsements without disclosing compensation or failed to clarify whether endorsers were current clients. Others shared ratings without explaining the evaluation period or criteria.
Common Compliance Deficiencies Found During SEC Examinations
The SEC Division of Examinations issued an April 2024 Risk Alert sharing preliminary observations from recent examinations of advisers’ compliance with the Marketing Rule, the Compliance Rule, the Books and Records Rule, and related Form ADV disclosures.
Cherry-Picked Performance Data
Firms presented selective performance data without required context:
- Showing only top-performing accounts while excluding similar accounts with lower returns
- Showing gross returns without providing information investors need to calculate net results
Social Media Violations
Posts focused on investment benefits without tackling associated risks. Brief formats like tweets do not excuse firms from balanced presentation requirements.
Documentation Requirements
Examiners routinely request complete copies of all advertisements spread during the examination period, Form ADV Part 2A disclosures explaining marketing practices, and source documents substantiating every factual claim. Firms unable to produce contemporaneous records face findings. Maintain organized, immediately accessible proof for every statement you publish.
Form ADV Disclosure Updates for Marketing Practices
Form ADV Item 5.L requires advisers to disclose whether they use performance advertising. Check yes if you present gross or net returns, time-weighted or dollar-weighted performance, extracted performance, hypothetical performance, or related performance to current or prospective clients.
Part 2A disclosures require plain-language descriptions of your marketing practices. Describe when and how you use performance presentations. Explain testimonial or endorsement arrangements, including who provides them and whether you pay cash or non-cash compensation. If you reference third-party ratings, identify the organizations that provide them and disclose any payments made for ratings or promotional use.
Update Form ADV responses so they are accurate, but note that Form ADV does not require advisers to promptly update Item 5 (including Item 5.L “Marketing Activities”) via an other-than-annual amendment; advisers typically update these responses in the annual updating amendment, even though exam staff may inspect whether the answers reflect current practices.
Policies and Procedures Requirements for Marketing Rule Compliance
Rule 206(4)-7 requires written policies and procedures reasonably designed to prevent Marketing Rule violations. The SEC assesses whether your policies exist and whether you follow them. Documentation provides no defense when advertisements violate the rules your policies prohibit.
Develop performance calculation methodologies that comply with net presentation, extracted performance conditions, and hypothetical performance criteria.
Include oversight procedures for testimonials, endorsements, and third-party ratings. Detail how you screen promoters, execute written agreements, verify disclosures appear, and monitor ongoing compliance. Policies should cover recordkeeping responsibilities and retention schedules.
Building an Audit-Ready Marketing Compliance Program with Luthor
Maintaining Marketing Rule compliance isn’t about periodic cleanups anymore, it requires continuous oversight, documentation, and version control across every channel an adviser uses. Luthor is built for exactly that reality.
Luthor’s AI-powered marketing review engine scans web pages, emails, PDFs, decks, and social posts for issues tied to performance claims, testimonials, endorsements, unbalanced language, and missing disclosures. It monitors live sites and advisor pages so approved materials don’t drift out of compliance over time. When something changes, Luthor flags the update, explains the rule at issue, and suggests compliant alternatives.
Every version, approval, disclosure, and rationale is captured automatically in a tamper-evident archive that satisfies SEC Rule 204-2 expectations, making exam response far more efficient. Firms avoid the scramble of reconstructing records because documentation is created as content is produced.
For small and mid-sized advisers, Luthor functions like an outsourced CCO augmented with AI, keeping marketing teams fast, compliance teams informed, and public content aligned with the SEC Marketing Rule year-round.
FAQs
What is the difference between a testimonial and an endorsement under the SEC Marketing Rule?
A testimonial is a statement by a current client about their experience or advice received from your firm. An endorsement is any statement by any person, client or non-client, that refers or promotes your services. All testimonials are endorsements, but endorsements can come from non-clients like industry experts or influencers.
How do I calculate net performance correctly for marketing materials?
Deduct your advisory fees plus all other account-level fees and expenses that reduce client returns. Gross-only presentations violate the rule because they misrepresent what clients actually earn. You must either show net performance directly or provide investors with the data needed to calculate net returns themselves.
When can I show extracted performance from a single investment?
You may present results from select investments only when you provide or offer the complete portfolio performance from which you extracted the subset, covering the same time period. Both data sets must receive equal or greater prominence so investors can view the subset alongside total portfolio results.
Final thoughts on Marketing Rule compliance strategies
Staying compliant with the SEC Marketing Rule goes beyond knowing the text of the regulation; it requires consistent documentation, clear review routines, and records that hold up during an exam. Sweep findings show that regulators check every statement against its source, which means firms need substantiation files created at the time content is produced, not after the fact. Regular internal checks help keep marketing practices aligned with actual disclosures, and tools like Luthor can support these efforts by reviewing content, capturing evidence, and helping firms keep their public materials in a steady exam-ready state.
