Marketing Rule Relief for Investment Advisers: SEC Staff Clarifies Flexibility on Model Fees and SRO Disqualifying Events

On January 15, Staff from the Securities and Exchange Commission (SEC) published two new frequently asked questions (FAQs) related to the Marketing Rule under Investment Advisers Act Rule 206(4)-1. The new FAQs underscore the SEC Staff's continued focus on the Marketing Rule, including during examinations. Prior Katten publications have discussed other SEC Staff Marketing Rule FAQs and Marketing Rule concerns identified in SEC examinations.

Key Takeaways

• Model Fees. The first FAQ clarifies that advisers may present net performance using actual fees even when anticipated fees for the target audience are higher, provided the differences are illustrated and adequately disclosed.
• Testimonials & Endorsements. The second FAQ confirms that the Marketing Rule's exclusion from "disqualifying event" for certain SEC orders that do not bar, suspend, or prohibit a person from acting under the federal securities laws also applies to analogous self-regulatory organization (SRO) final orders (e.g., FINRA).

Model Fees

The Marketing Rule permits advisers to present "net performance" using either actual fees or model fees. A footnote in the adopting release of the 2021 amendments to the Marketing Rule created uncertainty by stating that when anticipated fees exceed actual fees, advisers "must use a model fee" to avoid violating the rule's general prohibitions — language some interpreted as a categorical prohibition.

The SEC Staff has now clarified that this interpretation is overly restrictive. Whether using actual fees violates the Marketing Rule depends on all facts and circumstances, including relevant disclosures. Advisers may use various means to illustrate the effect of fee differences on performance.

Testimonials and Endorsements

Under Rule 206(4)-1(b)(3), advisers may not compensate persons for testimonials or endorsements if the adviser knows or should know the person is subject to a "disqualifying event" within the prior 10 years. The Marketing Rule excludes certain SEC orders that did not result in a bar, suspension or prohibition, but it was silent on SRO orders.

The Staff FAQ reasons that the same logic applies to SRO final orders: when a regulatory body has addressed a person's conduct but has determined not to bar or suspend them, that person may engage in compensated testimonial and endorsement activities, subject to appropriate conditions and disclosures.

Specifically, an adviser may compensate such a person if:

• The sole reason the person is an "ineligible person" is the SRO's final order;
• The SRO did not expel or suspend the person from membership, bar or suspend the person from association with other members, or prohibit the person from acting in any capacity;
• The person is in compliance with all terms of the SRO's final order, including payment of disgorgement, prejudgment interest, and penalties; and
• For 10 years following the order, any advertisement containing the testimonial or endorsement discloses the SRO order and includes the order or a link to it on the SRO's website or other public disclosure system, if available.