How SEC Marketing Rules for Investment Advisers are tested on the Series 65 and 66 exams

In this article we are going to help you understand regulations surrounding how investment advisers market services to prospective clients. 

The SEC has modernized the advertising rules for investment advisers. The new rule sets standards regarding the use of testimonials, performance-based presentations and the use of third-party rating systems. The term advertisement as defined under The Advisers Marketing Rule includes any direct or indirect communications made by the adviser that offers advisory services with regard to securities to prospective clients or to prospective private fund investors. Also included in the definition of an advertisement, is the offering of additional services to current clients or to current private fund investors. Most one-on-one communications between the adviser and clients or prospective clients are specifically excluded from the definition of an advertisement. Testimonials and endorsements are classified as advertising and are prohibited unless the adviser makes certain required disclosures. These required disclosures include:

  • The advertisement must clearly and prominently disclose if the person or promoter, is a client or has received any compensation for providing his / her testimonial or endorsement. 
  • The adviser who uses testimonials or endorsements in advertising must ensure compliance with the adviser marketing rule
  • The adviser is required to enter into a written contract or agreement with the person providing his or her testimonial or endorsement unless the promoter is an affiliate of the adviser or when compensation does not exceed $1,000 during the preceding 12 months.

It’s important to note that the compensation received by a promoter may be received in the form of cash or in other forms of non cash compensation. Reduced advisory fees, directed brokerage transactions, awards or prizes are all considered to be compensation. If the value of the non-cash compensation exceeds $1,000, the adviser must enter into a written agreement with the promoter unless the promoter is an affiliate of the adviser. 

The use of third-party rating systems and citing adviser performance is strictly regulated under the adviser marketing rule. Advisers who provide this information are required to adhere to the following guidelines:

  • Advisers are prohibited from including third-party ratings in an advertisement unless the adviser provides disclosures and has satisfied certain criteria regarding the preparation of the rating 
  • Advisers may not cite gross performance data unless the adviser also provides net performance data in its advertisements
  • Advisers may not cite past performance data unless the performance is provided for a specific time. 
  • advisers who cite performance data must provide the performance data for all portfolios with similar investment policies, objectives and strategies as those being offered in the advertisement 
  • Unless generated by an interactive analysis tool, advisers are prohibited from providing hypothetical performance data unless the adviser Implements policies and procedures designed to ensure that the hypothetical performance data is relevant to the financial situation and investment objectives of the intended audience and provides relevant data regarding the hypothetical performance 
  • An adviser who has acquired another advisory firm may not cite the performance of the predecessor unless the accounts and personnel of the advertising adviser are similar to the accounts and personnel of the predecessor adviser

In addition to the above rules and regulations the  marketing rule provides general prohibitions with regard to an adviser’s conduct, including:

  • Making any untrue, false or misleading statements
  • Omitting a material fact
  • Making any statement or including information that would cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser 
  • Making statements regarding potential returns or rewards without balancing the statements with a discussion of the potential risks and limitations of the investments
  • Including or excluding performance results or presenting performance for time periods that would make the illustration unfair or unbalanced 
  • Including any information that would make statements false or materially misleading
  • Making any representation that the SEC or any regulator endorses or approves the adviser

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Good Luck on your exam ! 

The Securities Institute of America

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