[Federal Register Volume 86, Number 42 (Friday, March 5, 2021)]
[Rules and Regulations]
[Pages 13024-13147]
[FR Doc No: 2020-28868]

Vol. 86

Friday,

No. 42

March 5, 2021

Part II

Securities and Exchange Commission

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17 CFR Part 275 and 279

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Investment Adviser Marketing; Final Rule

Federal Register / Vol. 86 , No. 42 / Friday, March 5, 2021 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275 and 279

[Release No. IA-5653; File No. S7-21-19]
RIN 3235-AM08

Investment Adviser Marketing

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or
the ``SEC'') is adopting amendments under the Investment Advisers Act
of 1940 (the ``Advisers Act'' or the ``Act'') to update rules that
govern investment adviser marketing. The amendments will create a
merged rule that will replace both the current advertising and cash
solicitation rules. These amendments reflect market developments and
regulatory changes since the advertising rule's adoption in 1961 and
the cash solicitation rule's adoption in 1979. The Commission is also
adopting amendments to Form ADV to provide the Commission with
additional information about advisers' marketing practices. Finally,
the Commission is adopting amendments to the books and records rule
under the Advisers Act.

DATES:
    Effective date: This rule is effective May 4, 2021.
    Compliance dates: The applicable compliance dates are discussed in
section II.K.

FOR FURTHER INFORMATION CONTACT: Juliet Han, Emily Rowland, Aaron Russ,
or Christine Schleppegrell, Senior Counsels; Thoreau Bartmann or
Melissa Roverts Harke, Senior Special Counsels; or Melissa Gainor,
Assistant Director, at<PHONE_NUMBER> or<EMAIL_ADDRESS>Investment
Adviser Regulation Office, Division of Investment Management,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 17
CFR 275.206(4)-1 (rule 206(4)-1) and 17 CFR 275.204-2 (rule 204-2)
under the Investment Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.],\1\
and amendments to 17 CFR 279.1 (Form ADV) under the Advisers Act. The
Commission is rescinding 17 CFR 275.206(4)-3 (rule 206(4)-3) under the
Advisers Act.
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    \1\ Unless otherwise noted, when we refer to the Advisers Act,
or any section of the Advisers Act, we are referring to 15 U.S.C.
80b, at which the Advisers Act is codified. When we refer to rules
under the Advisers Act, or any section of those rules, we are
referring to title 17, part 275 of the Code of Federal Regulations
[17 CFR part 275], in which these rules are published.
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Table of Contents

I. Introduction
    Advertising and Solicitation Rules and Proposed Amendments
    Merged Marketing Rule
II. Discussion
    A. Scope of the Rule: Definition of ``Advertisement''
    1. Overview
    2. Definition of Advertisement: Communications Other Than
Compensated Testimonials and Endorsements
    3. Definition of Advertisement: Compensated Testimonials and
Endorsements, Including Solicitations
    4. Investors in Private Funds
    B. General Prohibitions
    1. Untrue Statements and Omissions
    2. Unsubstantiated Material Statements of Fact
    3. Untrue or Misleading Implications or Inferences
    4. Failure To Provide Fair and Balanced Treatment of Material
Risks or Material Limitations
    5. Anti-Cherry Picking Provisions: References to Specific
Investment Advice and Presentation of Performance Results
    6. Otherwise Materially Misleading
    C. Conditions Applicable to Testimonials and Endorsements,
Including Solicitations
    1. Overview
    2. Required Disclosures
    3. Adviser Oversight and Compliance
    4. Disqualification for Persons Who Have Engaged in Misconduct
    5. Exemptions
    D. Third-Party Ratings
    E. Performance Advertising
    1. Net Performance Requirement; Elimination of Proposed Schedule
of Fees Requirement
    2. Prescribed Time Periods
    3. Statements About Commission Approval
    4. Related Performance
    5. Extracted Performance
    6. Hypothetical Performance
    F. Portability of Performance, Testimonials, Endorsements,
Third-Party Ratings, and Specific Investment Advice
    G. Review and Approval of Advertisements
    H. Amendments to Form ADV
    I. Recordkeeping
    J. Existing Staff No-Action Letters
    K. Transition Period and Compliance Date
    L. Other Matters
III. Economic Analysis
    A. Introduction
    B. Broad Economic Considerations
    C. Baseline
    1. Market for Investment Advisers for the Advertising Rule
    2. Market for Solicitation Activity
    3. RIA Clients
    D. Costs and Benefits of the Final Rule and Form Amendments
    1. Quantitative Estimates of Costs and Benefits
    2. Definition of Advertisement
    3. General Prohibitions
    4. Conditions Applicable to Testimonials and Endorsements,
Including Solicitations
    5. Third-Party Ratings
    6. Performance Advertising
    7. Amendments to Form ADV
    8. Recordkeeping
    E. Efficiency, Competition, Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    F. Reasonable Alternatives
    1. Reduce or Eliminate Specific Limitations on Investment
Adviser Advertisements
    2. Bifurcate Some Requirements
    3. Hypothetical Performance Alternatives
    4. Alternatives to the Combined Marketing Rule
    5. Alternatives to Disqualification Provisions
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Rule 206(4)-1
    1. General Prohibitions
    2. Testimonials and Endorsements in Advertisements
    3. Third-Party Ratings in Advertisements
    4. Performance Advertising
    5. Total Hour Burden Associated With Rule 206(4)-1
    C. Rule 206(4)-3
    D. Rule 204-2
    E. Form ADV
V. Final Regulatory Flexibility Analysis
    A. Reason for and Objectives of the Final Amendments
    1. Final Rule 206(4)-1
    2. Final Rule 204-2
    3. Final Amendments to Form ADV
    B. Significant Issues Raised by Public Comments
    C. Legal Basis
    D. Small Entities Subject to the Rule and Rule Amendments
    1. Small Entities Subject to Amendments to Marketing Rule
    2. Small Entities Subject to Amendments to the Books and Records
Rule 204-2
    3. Small Entities Subject to Amendments to Form ADV
    E. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    1. Final Rule 206(4)-1
    2. Final Amendments to Rule 204-2
    3. Final Amendments to Form ADV
    F. Duplicative, Overlapping, or Conflicting Federal Rules
    1. Final Rule 206(4)-1
    2. Final Amendments to Form ADV
    G. Significant Alternatives
    1. Final Rule 206(4)-1
Statutory Authority
Appendix A: Changes to Form ADV
Appendix B: Form ADV Glossary of Terms

I. Introduction

    We are adopting an amended rule, rule 206(4)-1, under the Advisers
Act, which addresses advisers marketing their services to clients and
investors (the ``marketing rule''). The marketing rule amends existing
rule 206(4)-1 (the ``advertising rule''), which we adopted

in 1961 to target advertising practices that the Commission believed
were likely to be misleading.\2\ The rule also replaces rule 206(4)-3
(the ``solicitation rule''), which we adopted in 1979 to help ensure
clients are aware that paid solicitors who refer them to advisers have
a conflict of interest.\3\ We have not substantively updated either
rule since adoption.\4\ In the decades since the adoption of both
rules, however, advertising and referral practices have evolved.
Simultaneously, the technology used for communications has advanced,
the expectations of investors shopping for advisory services have
changed, and the profiles of the investment advisory industry have
diversified.
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    \2\ Advertisements by Investment Advisers, Release No. IA-121
(Nov. 1, 1961) [26 FR 10548 (Nov. 9, 1961)] (``Advertising Rule
Adopting Release'').
    \3\ See Requirements Governing Payments of Cash Referral Fees by
Investment Advisers, Release No. 688 (July 12, 1979) [44 FR 42126
(Jul 18, 1979)] (``1979 Adopting Release'').
    \4\ The advertising rule has been amended once, when the
Commission revised the introductory text of paragraph (a) as part of
a broader amendment of several rules under the Advisers Act to
reflect changes made by the National Securities Market Improvement
Act of 1996. Rules Implementing Amendments to the Investment
Advisers Act of 1940, Release No. IA-1633 (May 15, 1997) [62 FR
28112, 28135 (May 22, 1997)] (``Release 1633''). We have not amended
the solicitation rule since adoption.
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    Our marketing rule recognizes these changes and our experience
administering the advertising and solicitation rules. Accordingly, the
rule contains principles-based provisions designed to accommodate the
continual evolution and interplay of technology and advice. The rule
also contains tailored restrictions and requirements for certain types
of advertisements, such as performance advertising, testimonials and
endorsements, and third-party ratings. Compensated testimonials and
endorsements, which include traditional referral and solicitation
activity, will be subject to disqualification provisions. We believe
the final marketing rule will allow advisers to provide existing and
prospective investors with useful information as they choose among
investment advisers and advisory services, subject to conditions that
are reasonably designed to prevent fraud.
    Finally, we are adopting related amendments to Form ADV that are
designed to provide the Commission with additional information about
advisers' marketing practices, and related amendments to the Advisers
Act books and records rule, rule 204-2.

Advertising and Solicitation Rules and Proposed Amendments

    Advertisements can provide existing and prospective investors with
useful information as they contemplate whether to utilize and pay for
investment advisory services, whether to approach particular investment
advisers, and how to choose among their available options. At the same
time, advertisements present risks of misleading investors because an
investment adviser's interest in attracting investors may conflict with
the investors' interests, and the adviser is in control of the design,
content, format, media, timing, and placement of its advertisements. As
a consequence, advertisements may mislead existing and prospective
investors about the advisory services they will receive, including
indirectly through the services provided to private funds.\5\ The
advertising rule was designed to address the potential harm to
investors from misleading advertisements.
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    \5\ The final rule covers marketing activities by investment
advisers to clients and prospective clients as well as investors and
prospective investors in private funds that those advisers manage.
See 15 U.S.C. 80b-2(a)(29) (defining a ``private fund'' as ``an
issuer that would be an investment company, as defined in section 3
of the Investment Company Act of 1940, but for section 3(c)(1) or
3(c)(7) of that Act''). Unless we specify otherwise, for purposes of
this release, we refer to any of these persons generally as
``investors,'' and we refer specifically to investors in private
funds managed by those advisers as ``private fund investors.''
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    Advisers also attract investors by compensating individuals or
firms to solicit new investors. Some investment advisers directly
employ individuals to solicit new investors on their behalf, and some
investment advisers arrange for related entities or third parties, such
as broker-dealers, to solicit new investors. The person or entity
compensated has a financial incentive to recommend the adviser to the
investor.\6\ Without appropriate disclosure, this compensation creates
a risk that an investor would mistakenly view the recommendation as
being an unbiased opinion about the adviser's ability to manage the
investor's assets and would rely on that recommendation more than the
investor would if the investor knew of the incentive. The solicitation
rule was designed to help expose to clients the conflicts of interest
posed by cash compensation.
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    \6\ While we traditionally referred to those who engaged in
compensated solicitation activity under the current solicitation
rule as ``solicitors,'' we use the term ``promoter'' in this release
to refer to a person providing a testimonial or endorsement, whether
compensated or uncompensated. We also use the term ``provider'' at
times when discussing a person providing an uncompensated
testimonial or endorsement.
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    The concerns that motivated the Commission to adopt the advertising
and solicitation rules still exist today, but investment adviser
marketing has evolved with advances in technology. In the decades since
the adoption of both the advertising and solicitation rules, the use of
the internet, mobile applications, and social media has become an
integral part of business communications. Consumers today often rely on
these forms of communication to obtain information, including reviews
and referrals, when considering buying goods and services. Advisers and
third parties also rely on these same types of outlets to attract and
refer potential customers.
    The nature and profiles of the investment advisory industry and
investors seeking those advisory services have also changed since the
Commission adopted the advertising and solicitation rules. Some
investors today rely on digital investment advisory programs, sometimes
referred to as ``robo-advisers,'' for investment advice, which is
provided exclusively through electronic platforms using algorithmic-
based programs. In addition, passage of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'') required many
investment advisers to private funds that were previously exempt from
registration to register with the Commission and become subject to
additional provisions of the Advisers Act and the rules thereunder.
Private funds and their advisers often hire promoters to obtain
investors in the funds. Referral practices also have expanded to
include, for example, various types of compensation, including non-cash
compensation, in referral arrangements.
    In light of these developments, we proposed amendments to the
advertising rule to: (i) Modify the definition of ``advertisement'' to
be more ``evergreen'' in light of ever-changing technology; (ii)
replace four per se prohibitions with general prohibitions of certain
advertising practices applicable to all advertisements; (iii) provide
certain restrictions and conditions on testimonials, endorsements, and
third-party ratings; and (iv) include tailored requirements for the
presentation of performance results, based on an advertisement's
intended audience.\7\

The proposed rule also would have required internal review and approval
of most advertisements. Finally, we proposed amendments requiring each
adviser to report additional information regarding its advertising
practices in its Form ADV.
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    \7\ See Investment Adviser Advertisements; Compensation for
Solicitations, Release No. IA-5407 (Nov. 4, 2019) [84 FR 67518 (Dec.
10, 2019)] (``2019 Proposing Release'').
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    Additionally, we proposed amendments to the solicitation rule to:
(i) Expand the rule to cover solicitation arrangements involving all
forms of compensation, rather than only cash compensation; (ii) expand
the rule to apply to the solicitation of current and prospective
investors in any private fund, rather than only to ``clients''
(including prospective clients) of the investment adviser; (iii)
eliminate requirements duplicative of other rules; (iv) include
exceptions for de minimis payments and certain non-profit programs; and
(v) expand the types of disciplinary events that would trigger the
rule's disqualification provisions.
    We received more than 90 comment letters on the proposal.\8\ The
Commission also received feedback flyers from individual investors on
investment adviser marketing and from smaller advisers on the
proposal's effects on small entities.\9\ Commenters generally supported
modernizing these rules and agreed with our general approach. Many
commenters, however, expressed concern that several aspects of the
proposed amendments to the advertising rule would increase an
investment adviser's compliance burden.\10\ For example, some
commenters suggested removing the proposed internal pre-use review and
approval requirement and narrowing the proposed definition of
``advertisement.'' \11\ Others requested that we provide additional
guidance on various topics, such as how the general prohibitions will
apply in certain scenarios.\12\ Commenters also expressed concern that
the proposed amendments to the solicitation rule would significantly
expand several aspects of the existing rule. For example, some
commenters argued that the proposed definition of ``solicitor'' was too
broad and suggested alternatives or limitations.\13\ Others disagreed
with the proposed expansion of the rule to include non-cash
compensation and solicitations of private fund investors.\14\
Commenters also recommended modifications to the disqualification
provisions, such as aligning them with disqualification provisions in
our other rules and limiting the scope of affiliate
disqualification.\15\
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    \8\ The comment letters on the 2019 Proposing Release (File No.
S7-21-19) are available at https://www.sec.gov/comments/s7-21-19/s72119.htm.
    \9\ The feedback forms are available in the comment file at
https://www.sec.gov/comments/s7-21-19/s72119.htm.
    \10\ See, e.g., Comment Letter of Wellington Management Company
LLP (Feb. 10, 2020) (``Wellington Comment Letter''); Comment Letter
of Fidelity Management Research Company LLC (Feb. 10, 2020)
(``Fidelity Comment Letter'');
    \11\ See, e.g., Comment Letter of Investment Adviser Association
(Feb. 10, 2020) (``IAA Comment Letter''); Comment Letter of the
National Society of Compliance Professionals (Feb. 7, 2020) (``NSCP
Comment Letter'').
    \12\ See, e.g., Comment Letter of LinkedIn Corporation (Feb. 10,
2020) (``LinkedIn Comment Letter''); Comment Letter of the North
American Securities Administrators Association (NASAA) (Feb. 10,
2020) (``NASAA Comment Letter'').
    \13\ See, e.g., Comment Letter of Financial Services Institute
(Feb. 12, 2020) (``FSI Comment Letter''); Comment Letter of SIFMA
Asset Management Group on proposed solicitation rule (Feb. 10, 2020)
(``SIFMA AMG Comment Letter I'').
    \14\ See, e.g., Comment Letter of Fried, Frank, Harris, Shriver
& Jacobson LLP (Feb. 10, 2020) (``Fried Frank Comment Letter'');
Comment Letter of Sidley Austin LLP (Feb. 10, 2020) (``Sidley Austin
Comment Letter'').
    \15\ See, e.g., Comment Letter of Credit Suisse Securities (USA)
LLC (Feb. 10, 2020) (``Credit Suisse Comment Letter''); SIFMA AMG
Comment Letter I.
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    Commenters generally supported our approach to permit testimonials
and endorsements; \16\ however, they highlighted the difficulty in
assessing when compensated testimonials and endorsements under the
proposed advertising rule would also trigger the application of the
proposed solicitation rule.\17\ Commenters argued that applying both
rules to the same conduct is duplicative and burdensome.\18\ Some
commenters suggested that we regulate endorsements and testimonials
only under the advertising rule,\19\ whereas others suggested various
ways to limit the conduct that would be subject to both rules.\20\
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    \16\ See, e.g., Comment Letter of the Small Business Investor
Alliance (Feb. 7, 2020) (``SBIA Comment Letter''); Comment Letter of
the Consumer Federation of America (Feb. 10, 2020) (``Consumer
Federation Comment Letter'').
    \17\ See, e.g., Comment Letter of SIFMA Asset Management Group
on proposed advertising rule (Feb. 10, 2020) (``SIFMA AMG Comment
Letter II''); Comment Letter of Joseph H. Nesler (Jan. 15, 2020)
(``Nesler Comment Letter'').
    \18\ See e.g., FSI Comment Letter; SIFMA AMG Comment Letter II.
    \19\ See, e.g., IAA Comment Letter; SIFMA AMG Comment Letter II;
Comment Letter of Mercer Advisors (Feb. 10, 2020) (``Mercer Comment
Letter''). See also FSI Comment Letter.
    \20\ See e.g., SIFMA AMG Comment Letter II; FSI Comment Letter;
IAA Comment Letter; Comment Letter of the Money Management Institute
(Feb. 10, 2020) (``MMI Comment Letter''); Nesler Comment Letter.
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Merged Marketing Rule

    After considering comments, we are adopting a rule with several
modifications.\21\ We believe it is appropriate to regulate investment
adviser advertising and solicitation activity through a single rule:
The marketing rule. This approach is designed to balance the
Commission's goals of protecting investors from misleading
advertisements and solicitations, while accommodating current marketing
practices and their continued evolution.
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    \21\ The final rule will apply to all investment advisers
registered, or required to be registered, with the Commission. Like
the proposal, the final rule will not apply to advisers that are not
required to register as investment advisers with the Commission,
such as exempt reporting advisers or state-registered advisers.
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     The final marketing rule will include an expanded
definition of ``advertisement,'' relative to the current advertising
rule, that will encompass an investment adviser's marketing activity
for investment advisory services with regard to securities. We have
determined not to expand the definition of advertisement to include
communications addressed to one person as proposed, and instead will
retain the current rule's exclusion of one-on-one communications from
the definition, except with regard to compensated testimonials and
endorsements and certain communications that include hypothetical
performance information.\22\ In addition, the definition will not
include communications designed to retain existing investors. The final
definition also will include exceptions for extemporaneous, live, oral
communications; and information contained in a statutory or regulatory
notice, filing, or other required communication.
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    \22\ Hypothetical performance information that is provided in
response to an unsolicited investor request or to a private fund
investor in a one-on-one communication is excluded from the first
prong of the definition of advertisement.
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     Largely as proposed, the final rule will apply to certain
communications sent to clients and private fund investors, but will not
apply to advertisements about registered investment companies or
business development companies.
     A set of seven principles-based general prohibitions will
apply to all advertisements. These are drawn from historic anti-fraud
principles under the Federal securities laws and are tailored
specifically to the type of communications that are within the scope of
the rule.
     The final rule will permit an adviser's advertisement to
include testimonials and endorsements, subject generally to the
following conditions: Required disclosures; adviser oversight and
compliance, including a written

agreement for certain promoters; and, in some cases, disqualification
provisions. We are adopting partial exemptions for de minimis
compensation, affiliated personnel, registered broker-dealers, and
certain persons to the extent they are covered by rule 506(d) of
Regulation D under the Securities Act with respect to a securities
offering.
     An adviser's advertisement may include a third-party
rating, if the adviser forms a reasonable belief that the third-party
rating clearly and prominently discloses certain information.
     The final rule will apply to performance advertising and
will require presentation of net performance information whenever gross
performance is presented, and performance data over specific periods.
In addition, the final rule will impose requirements on advisers that
display related performance, extracted performance, hypothetical
performance, and--in a change from the proposal--predecessor
performance. We are not adopting, however, the proposed separate
requirements for performance advertising for retail and non-retail
investors.
     We are amending the recordkeeping rule and Form ADV to
reflect the final rule and enhance the data available to support our
staff's enforcement and examination functions.
     In a change from the proposal, the final rule will not
require investment advisers to review and approve their advertisements
prior to dissemination.
     Finally, certain staff no-action letters will be withdrawn
in connection with the final rule as those positions are either
incorporated into the final rule or will no longer apply.

II. Discussion

A. Scope of the Rule: Definition of ``Advertisement''

1. Overview
    Under the final marketing rule, the definition of an advertisement
includes two prongs.\23\ The first prong includes any direct or
indirect communication an investment adviser makes that: (i) Offers the
investment adviser's investment advisory services with regard to
securities to prospective clients or investors in a private fund
advised by the investment adviser (``private fund investors''), or (ii)
offers new investment advisory services with regard to securities to
current clients or private fund investors.\24\ This prong will capture
traditional advertising, and will not include one-on-one
communications, unless the communication includes hypothetical
performance information that is not provided: (i) In response to an
unsolicited investor request or (ii) to a private fund investor. It
also excludes (i) extemporaneous, live, oral communications; and (ii)
information contained in a statutory or regulatory notice, filing, or
other required communication, provided that such information is
reasonably designed to satisfy the requirements of such notice, filing,
or other required communication.\25\
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    \23\ See final rule 206(4)-1(e)(1)(i) and (ii).
    \24\ See final rule 206(4)-1(e)(1)(i).
    \25\ See final rule 206(4)-1(e)(1)(i)(A) and (B).
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    The new second prong will cover compensated testimonials and
endorsements, which will include a similar scope of activity as
traditional solicitations under the current solicitation rule.\26\ This
prong will include oral communications and one-on-one communications to
capture traditional one-on-one solicitation activity, in addition to
solicitations for non-cash compensation. It will exclude certain
information contained in a statutory or regulatory notice, filing, or
other required communication.\27\
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    \26\ See final rule 206(4)-1(e)(1)(ii). As discussed below,
uncompensated testimonials and endorsements that are included in
certain adviser communications would meet the first prong of the
definition of advertisement. See infra ``Adoption and entanglement''
section.
    \27\ See final rule 206(4)-1(e)(1)(ii).
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2. Definition of Advertisement: Communications Other Than Compensated
Testimonials and Endorsements
    Proposed rule 206(4)-1(e)(1) would have defined an advertisement as
any communication, disseminated by any means, by or on behalf of an
investment adviser, that offers or promotes the investment adviser's
investment advisory services or that seeks to obtain or retain one or
more investment advisory clients or private fund investors, subject to
certain enumerated exclusions. Although some commenters supported the
proposed definition,\28\ most commenters stated that it was overly
broad.\29\ Some commenters stated that the proposed definition would
chill adviser communications to existing investors, increase compliance
burdens for advisers, and complicate communications with various third
parties.\30\
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    \28\ See, e.g., SBIA Comment Letter; Consumer Federation Comment
Letter; Comment Letter of the Institutional Limited Partners
Association (Feb. 10, 2020) (``ILPA Comment Letter'').
    \29\ See, e.g., Wellington Comment Letter; Pickard Djinis
Comment Letter; Comment Letter of Managed Funds Association and
Alternative Investment Management Association (Feb. 10, 2020)
(``MFA/AIMA Comment Letter I'').
    \30\ See, e.g., Fidelity Comment Letter; NSCP Comment Letter;
IAA Comment Letter.
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    After considering comments, we are making several modifications to
hone the scope of the rule to the communications that have a greater
risk of misleading investors, ease compliance burdens that commenters
suggested would result from the proposed rule's scope, and facilitate
communications with existing investors.
a. Specific Provisions
    In a textual (but not substantive) change from the proposal, the
final rule will not include the phrase ``disseminated by any means''
and instead will reference any direct or indirect communication the
adviser makes. We believe these two formulations carry the same
meaning, but understand from commenters that the phrase ``direct or
indirect'' is more familiar to advisers. This reference to direct or
indirect communications will replace the current advertising rule's
requirement that an advertisement be a ``written'' communication or a
notice or other announcement ``by radio or television.'' We are
deleting references in the current advertising rule to specific types
of communications to ensure that the final rule reflects modern
communication methods, rather than the methods that were most common
when the Commission adopted the current rule (e.g., newspapers,
television, and radio). Commenters generally did not oppose omitting
the current rule's references to specific methods of communication and
supported such modernization of the current rule.\31\
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    \31\ See, e.g., NYC Bar Comment Letter; Comment Letter of the
Financial Planning Association (Feb. 10, 2020) (``FPA Comment
Letter'').
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    This revision will expand the scope of the current rule to
encompass all offers of an investment adviser's investment advisory
services with regard to securities regardless of how they are
disseminated, with the limited exceptions discussed below. An adviser
may disseminate such communications through emails, text messages,
instant messages, electronic presentations, videos, films, podcasts,
digital audio or video files, blogs, billboards, and all manner of
social media, as well as by paper, including in newspapers, magazines,
and the mail. We recognize that electronic media (including social
media and other internet communications) and mobile communications play
a significant role in current advertising practices. We also believe
this revision will help the

definition remain evergreen in the face of evolving technology and
methods of communication.
i. Any Direct or Indirect Communication an Investment Adviser Makes
    The first prong of the final marketing rule's definition of
``advertisement'' includes an adviser's direct or indirect
communications. In addition to communicating directly with prospective
investors, we understand that investment advisers often provide
intermediaries, such as consultants, other advisers (e.g., in a fund-
of-funds or feeder funds structure), and promoters, with advertisements
for dissemination. Those advertisements are indirect communications
because they are statements provided by the adviser for dissemination
by a third party. This aspect of the definition also will capture
certain communications distributed by an adviser that incorporate
statements or other content prepared by a third party.\32\
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    \32\ See infra ``Adoption and entanglement'' section.
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    The final rule text reflects a change from the proposal, which
would have applied to any communications ``by or on behalf of'' an
adviser.\33\ Commenters generally suggested that we remove the ``on
behalf of'' clause from the definition, citing concerns that advisers
would not be able to collaborate with third parties to prepare and
disseminate advertising materials and that it would stifle
communications between advisers and certain third parties.\34\ Certain
commenters requested safe harbors for communications with the press and
removal of profane or illegal materials.\35\ Commenters also requested
clarification on how the rule would apply to funds-of-funds, model
providers, solicitors, and employee use of social media.\36\
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    \33\ See proposed rule 206(4)-1(e)(1).
    \34\ See, e.g., SIFMA AMG Comment Letter II; FSI Comment Letter;
Comment Letter of the CFA Institute (Feb. 24, 2020) (``CFA Institute
Comment Letter''); Comment Letter of ICE Data Pricing & Reference
Data, LLC (Feb. 10, 2020) (``ICE Comment Letter'').
    \35\ See, e.g., LinkedIn Comment Letter; Comment Letter of
Resolute Investment Managers (Feb. 10, 2020) (``Resolute Comment
Letter''); IAA Comment Letter.
    \36\ See, e.g., Comment Letter of the American Investment
Council (Feb. 10, 2020) (``AIC Comment Letter''); Nesler Comment
Letter; SIFMA AMG Comment Letter II; CFA Institute Comment Letter.
---------------------------------------------------------------------------

    We believe communications that investment advisers use to offer
their advisory services have an equal potential to mislead--and should
be subject to the rule--regardless of whether the adviser communicates
directly or indirectly through a third party, such as a consultant,
intermediary, or related person.\37\ Likewise, an adviser should not be
able to avoid application of the rule when it incorporates third-party
content into its communications.\38\ To address commenters' concerns
about the clarity of the standard, however, we replaced ``on behalf
of'' with ``directly or indirectly.'' Our view is that these phrases
largely have the same meaning, but that ``directly or indirectly'' is
more commonly used, broadly understood, and consistent with the
language in the current rule. In addition, we believe that the phrase
``direct or indirect communication an investment adviser makes'' better
focuses on an adviser's participation in making a particular
communication subject to the rule.
---------------------------------------------------------------------------

    \37\ Section 208 of the Advisers Act states that ``[i]t shall be
unlawful for any person indirectly, or through or by any other
person, to do any act or thing which it would be unlawful for such
person to do directly . . .'' See, e.g., In the Matter of Profitek,
Inc., Release No. IA-1764 (Sept. 29, 1998) (settled order) (The
Commission brought an enforcement action against an investment
adviser, asserting that it directly or indirectly distributed
materially false and misleading advertisements, including by
submitting performance information in questionnaires submitted to
online databases that were made available to subscribers nationwide
and by providing misleading performance information to a newspaper
that reported the performance in an article.).
    \38\ See infra ``Adoption and entanglement'' section.
---------------------------------------------------------------------------

    Whether a particular communication is a communication made by the
adviser is a facts and circumstances determination. Where the adviser
has participated in the creation or dissemination of an advertisement,
or where an adviser has authorized a communication, the communication
would be a communication of the adviser. For example, if an adviser
provides marketing material to a third party for dissemination to
potential investors, the communication is a communication made by the
adviser. In addition, we would generally view any advertisement about
the adviser that is distributed and/or prepared by a related person as
an indirect communication by the adviser, and thus subject to the final
rule.\39\ Although the final marketing rule will not require an adviser
to oversee all activities of a third party, the adviser is responsible
for ensuring that its advertisements comply with the rule, regardless
of who creates or disseminates them.
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    \39\ An adviser's ``related person'' is defined in Form ADV's
Glossary of Terms as ``[a]ny advisory affiliate and any person that
is under common control with [the adviser's] firm.'' Italicized
terms are defined in the Form ADV Glossary. See Form ADV Glossary.
---------------------------------------------------------------------------

    An adviser might collaborate with a third party to prepare
marketing materials in other circumstances that would not constitute
dissemination by an adviser. If an adviser provides comments on a
marketing piece, but a third party does not accept the adviser's
comments or the third party makes unauthorized modifications, the
adviser will not be responsible for the third party's subsequent
modifications that were made independently of the adviser and that the
adviser did not approve.\40\ This analysis would be based on the facts
and circumstances. Formal authorization of dissemination, or lack
thereof, by the adviser is not dispositive, although it would be
considered part of the analysis.
---------------------------------------------------------------------------

    \40\ However, the adviser will remain responsible for the
accuracy of the marketing material provided to and disseminated by
the third party even if the third party makes formatting changes
that do not affect the content of that marketing material or
prominence of particular disclosures therein.
---------------------------------------------------------------------------

    Commenters sought clarification on how the definition of
``advertisement'' would apply in the fund-of-funds and master-feeder
contexts.\41\ If an adviser to an underlying fund provides marketing
materials to the adviser of a fund-of-funds (or a feeder fund) and the
adviser to the fund-of-funds (or a feeder fund) provides those
materials to investors, the underlying fund adviser would be
responsible for the material it prepared or authorized for
distribution.\42\ The underlying fund adviser would not be responsible
for modifications the adviser of the fund-of-funds made to the
underlying fund adviser's original advertisement if the underlying fund
adviser did not approve the adviser's edits. Similarly, a third-party
model provider would not be responsible for modifications the end-user
adviser made to the third-party model used in an advertisement if done
without the model provider's involvement or authorization.
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    \41\ See, e.g., AIC Comment Letter; Comment Letter of JG
Advisory Services, LLC (Jan. 9, 2020) (``JG Advisory Comment
Letter'').
    \42\ In this discussion, the acquiring fund adviser (or the
adviser to, or sponsor of, a feeder fund in a master-feeder
structure) generally would be treated as an intermediary and not as
an investor in the underlying fund (or the master fund in a master-
feeder structure).
---------------------------------------------------------------------------

Adoption and Entanglement
    Depending on the particular facts and circumstances, third-party
information also may be attributable to an adviser under the first
prong of the final rule. For example, an adviser may distribute
information generated by a third party or a third party could include
information about an adviser's investment advisory services in the
third party's materials. In these scenarios, whether the third-party
information is attributable to the adviser

will require an analysis of the facts and circumstances to determine
(i) whether the adviser has explicitly or implicitly endorsed or
approved the information after its publication (adoption) or (ii) the
extent to which the adviser has involved itself in the preparation of
the information (entanglement).\43\
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    \43\ See Interpretive Guidance on the Use of Company websites,
Release No. IC-28351 (Aug. 1, 2008) [73 FR 45862 (Aug. 7, 2008)]
(``2008 Release'') (``[W]hether third-party information is
attributable to a company depends upon whether the company has: (1)
involved itself in the preparation of the information, or (2)
explicitly or implicitly endorsed or approved the information.'');
Use of Electronic Media, Release No. 34-42728 (Apr. 28, 2000) [65 FR
25843 (May 4, 2000)] (``2000 Release'') at nn.52, 54; Use of
Electronic Media for Delivery Purposes, Release No. 34-36345 (Oct.
6, 1995) [60 FR 53458 (Oct. 13, 1995)] (``1995 Release'').
---------------------------------------------------------------------------

    An adviser ``adopts'' third-party information when it explicitly or
implicitly endorses or approves the information.\44\ For example, if an
adviser incorporates information it receives from a third party into
its performance advertising, the adviser has adopted the third-party
content, and the third-party content will be attributed to the
adviser.\45\ An adviser is liable for such third-party content under
the marketing rule just as it would be liable for content it produced
itself.\46\ In addition, an adviser may have ``entangled'' itself in a
third-party communication if the adviser involves itself in the third
party's preparation of the information.\47\
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    \44\ See 2008 Release, supra footnote 43.
    \45\ See, e.g., In the Matter of BB&T Securities, LLC, Release
No. IA-4506 (Aug. 25, 2016) (settled order) (The Commission brought
an enforcement action against an SEC-registered investment adviser
alleging that it negligently relied on a third party's materially
inflated, and hypothetical and backtested, performance track record
in preparing advertisements that the adviser sent to advisory
clients and prospective clients.).
    \46\ See infra section II.B.
    \47\ See 2000 Release, supra footnote 43 (``[L]iability under
the `entanglement' theory would depend upon an issuer's level of
pre-publication involvement in the preparation of the
information.'').
---------------------------------------------------------------------------

    Nevertheless, we would not view an adviser's edits to an existing
third-party communication to result in attribution of that
communication to the adviser if the adviser edits a third party's
communication based on pre-established, objective criteria (i.e.,
editing to remove profanity, defamatory or offensive statements,
threatening language, materials that contain viruses or other harmful
components, spam, unlawful content, or materials that infringe on
intellectual property rights, or editing to correct a factual error)
that are documented in the adviser's policies and procedures and that
are not designed to favor or disfavor the adviser.\48\ In these
circumstances, we would not view the adviser as endorsing or approving
the remaining content by virtue of such limited editing.
---------------------------------------------------------------------------

    \48\ For example, an adviser could not have a policy to remove
only negative comments about the adviser.
---------------------------------------------------------------------------

Guidance on Social Media
    Questions about whether a communication is attributable to an
adviser may commonly arise in the context of an adviser's use of
websites or other social media. For example, an adviser might include a
hyperlink in an advertisement to an independent web page on which
third-party content sits. An adviser should consider the adoption and
entanglement concepts discussed above to determine whether the
hyperlinked third-party content would be attributed to the adviser.\49\
At the same time, an adviser's hyperlink to third-party content that
the adviser knows or has reason to know contains an untrue statement of
material fact or materially misleading information would also be
fraudulent or deceptive under section 206 of the Act and other
applicable anti-fraud provisions.
---------------------------------------------------------------------------

    \49\ We previously stated that an adviser should consider the
application of rule 206(4)-1, including the existing prohibition of
testimonials, before including hyperlinks to third-party websites on
its website or in its electronic communications. See 2008 Release,
supra footnote 43.
---------------------------------------------------------------------------

    Whether content posted by third parties on an adviser's own website
or social media page would be attributed to the investment adviser also
depends on the facts and circumstances surrounding the adviser's
involvement.\50\ For example, permitting all third parties to post
public commentary to the adviser's website or social media page would
not, by itself, render such content attributable to the adviser, so
long as the adviser does not selectively delete or alter the comments
or their presentation and is not involved in the preparation of the
content.\51\ We believe such treatment of third-party content on the
adviser's own website or social media page is appropriate even if the
adviser has the ability to influence the commentary but does not
exercise this authority. For example, if the social media platform
allows the investment adviser to sort the third-party content in such a
way that more favorable content appears more prominently, but the
investment adviser does not actually do such sorting, then the ability
to sort content would not, by itself, render such content attributable
to the adviser. In addition, if an adviser merely permits the use of
``like,'' ``share,'' or ``endorse'' features on a third-party website
or social media platform, we would not interpret the adviser's
permission as implicating the final rule.
---------------------------------------------------------------------------

    \50\ Other content that offers or promotes the adviser's
services on an adviser's own website or social media page would
likely meet the definition of ``advertisement'' under the final
rule.
    \51\ See supra ``Adoption and entanglement'' section (discussing
an adviser's ability to edit third-party material based on objective
criteria).
---------------------------------------------------------------------------

    Conversely, if the investment adviser takes affirmative steps to
involve itself in the preparation or presentation of the comments, to
endorse or approve the comments, or to edit posted comments, those
comments would be attributed to the adviser. This would apply to the
affirmative steps an adviser takes both on its own website or social
media pages, as well as on third-party websites. For example, if an
adviser substantively modifies the presentation of comments posted by
others by deleting or suppressing negative comments or prioritizing the
display of positive comments, then we would attribute the comments to
the adviser (i.e., the communication would be an indirect statement of
the adviser) because the adviser would have modified third-party
comments with the goal of marketing its advisory business. However, as
discussed above, we would not view an adviser's merely editing profane,
unlawful, or other such content according to a neutral pre-existing
policy as the adviser adopting the content.
    Some commenters sought assurances that the definition of
advertisement would not cover an adviser's associated persons' activity
on their personal social media accounts.\52\ We have concerns that,
under certain circumstances, it could be difficult for an investor to
differentiate a communication of the associated person in his/her
personal capacity from a communication the associated person made for
the adviser. With respect to social media postings to associated
persons' own accounts, it would be a facts and circumstances analysis
relating to the adviser's supervision and compliance efforts. If the
adviser adopts and implements policies and procedures reasonably
designed to prevent the use of an associated person's social media
accounts for marketing the adviser's advisory services, we generally
would not view such communication as the adviser marketing its advisory

services.\53\ To achieve effective supervision and compliance, an
adviser may consider also prohibiting such communications, conducting
periodic training, obtaining attestations, and periodically reviewing
content that is publicly available on associated persons' social media
accounts.
---------------------------------------------------------------------------

    \52\ See, e.g., SIFMA AMG Comment Letter II; LinkedIn Comment
Letter; IAA Comment Letter. We believe that our modifications to the
first prong of the definition of advertisement also will alleviate
commenters' concerns as there are now fewer scenarios in which
communications on employee social media accounts would meet the
definition of advertisement.
    \53\ An associated person who, notwithstanding these policies
and procedures, engages in communications inconsistent with the rule
may, depending on the facts and circumstances, be held responsible
for violations of the rule.
---------------------------------------------------------------------------

ii. To More Than One Person
    Consistent with the current rule's exclusion of one-on-one
communications, the first prong of the final definition of
``advertisement'' generally does not include communications to one
person. While our proposed rule would have treated communications
directed to ``one or more'' persons as advertisements, commenters
generally opposed this expansion.\54\ In particular, commenters argued
that subjecting one-on-one communications to the requirements of the
proposed rule would create untenable burdens given the proposed review
and approval obligation (including enhanced recordkeeping
requirements).\55\ Commenters also stated that it would chill adviser/
investor communications.\56\ According to commenters, scoping a one-on-
one communication into the rule would require advisers to review each
communication to determine whether it is an advertisement, which could
prevent an adviser from providing timely information to investors and
satisfying its fiduciary obligations.\57\ We received comments that
communications to existing investors are already subject to the anti-
fraud provisions of the Advisers Act, and therefore communications to
existing investors need not be subject to the final rule.\58\
---------------------------------------------------------------------------

    \54\ See, e.g., IAA Comment Letter; AICPA Comment Letter.
    \55\ See, e.g., Comment Letter of Commonwealth Financial Network
(Feb. 10, 2020) (``Commonwealth Comment Letter'') (stating that the
lack of complete overlap with FINRA rules would make compliance
especially burdensome for dual registrants); Comment Letter of the
National Regulatory Services (Feb. 10, 2020) (``NRS Comment
Letter''). Commenters also noted that advisers have adopted long-
standing practices in reliance on the existing exclusion of one-on-
one communications. See, e.g., Comment Letter of the New York City
Bar (Feb. 10, 2020) (``NYC Bar Comment Letter'').
    \56\ See, e.g., IAA Comment Letter (stating that the proposed
rule ``would blur the line between client servicing and
marketing''); Wellington Comment Letter; Fidelity Comment Letter;
MFA/AIMA Comment Letter I.
    \57\ See, e.g., CFA Institute Comment Letter; Comment Letter of
the Council of Institutional Investors (Feb. 11, 2020) (``CII
Comment Letter'').
    \58\ See, e.g., SIFMA AMG Comment Letter II.
---------------------------------------------------------------------------

    After considering the comments, we have determined to exclude one-
on-one communications from the first prong of the definition and retain
the ``more than one'' language in the current advertising rule, unless
such communications include hypothetical performance information that
is not provided: (i) In response to an unsolicited investor request or
(ii) to a private fund investor. We have made this change to avoid the
possibility that the rule would impede typical communications between
advisers and their existing and prospective investors. An adviser might
have been dis-incentivized to communicate regularly with its investors
if it believed it would have to analyze every communication for
compliance with the proposed rule.\59\
---------------------------------------------------------------------------

    \59\ As discussed below, we also have eliminated the element of
the proposed rule that would apply to communications to retain
investors.
---------------------------------------------------------------------------

    Because we are excluding one-on-one communications from the first
prong of the definition of advertisement under most circumstances, we
are modifying the proposed exclusion for an adviser's responses to
unsolicited requests.\60\ Although commenters generally supported the
exclusion and recommended expanding it,\61\ we believe excluding most
one-on-one communications addresses commenter concerns in a more
comprehensive manner than the unsolicited request exclusion would have
addressed them. The definition will exclude an adviser's responses to
an unsolicited investor request for hypothetical performance
information, as well as hypothetical performance information provided
to a private fund investor in a one-on-one communication, as discussed
below. Unless subject to this or another exclusion, the definition of
advertisement will capture communications that include hypothetical
performance information even in a one-on-one communication.\62\
---------------------------------------------------------------------------

    \60\ See proposed rule 206(4)-1(e)(1)(ii). We proposed to
exclude from the definition of ``advertisement'' any communication
by an investment adviser ``that does no more than respond to an
unsolicited request'' for ``information specified in such request
about the investment adviser or its services'' other than a
communication to a retail person that includes performance results
or a communication that includes hypothetical performance.
    \61\ See, e.g., Wellington Comment Letter; MFA/AIMA Comment
Letter I; IAA Comment Letter.
    \62\ See final rule 206(4)-1(e)(1)(i)(A)-(C).
---------------------------------------------------------------------------

    We also recognize that advisers have one-on-one interactions with
prospective investors and that prospective investors may ask questions
of an adviser or ask for additional information. In adopting the
current advertising rule, the Commission limited the definition of
``advertisement'' due to concerns that a broad definition could
encompass even ``face to face conversations between an investment
counsel and his prospective client.'' \63\ The Commission stated that
it would not include a ``personal conversation'' with a client or
prospective client.\64\ We believe that the same concerns that
influenced the Commission's prior approach continue to exist. We also
believe that the remaining provisions of the definition, as well as
other provisions of the Federal securities laws, are adequate to
satisfy our investor protection goals with respect to communications
directed only to a single individual or entity.\65\
---------------------------------------------------------------------------

    \63\ See Prohibited Advertisements, Release No. IA-119 (Aug. 8,
1961) [26 FR 7552, 7553 (Nov. 15, 1961)].
    \64\ Id.
    \65\ See, e.g., section 206 of the Act; rule 206(4)-8 under the
Act.
---------------------------------------------------------------------------

    The one-on-one exclusion in the definition's first prong applies
regardless of whether the adviser makes the communication to a natural
person with an account or multiple natural persons representing a
single entity or account.\66\ The exclusion applies to a single adviser
and a single investor. For example, if an adviser's prospective
investor is an entity, the exclusion permits the adviser to provide
communications to multiple natural persons employed by or owning the
entity without those communications being subject to the rule. For
purposes of this exclusion, we also interpret the term ``person'' to
mean one or more investors that share the same household. For example,
a communication to a married couple that shares the same household
would qualify for the one-on-one exclusion.\67\
---------------------------------------------------------------------------

    \66\ See, e.g., MFA/AIMA Comment Letter I; IAA Comment Letter
(stating that the Commission should ``make clear in the adopting
release that the same communication to multiple natural persons
representing a single institution or client/account counts as a
communication to a single person'').
    \67\ See, e.g., rule 30e-1(f) under the Investment Company Act.
---------------------------------------------------------------------------

    Some commenters advocated that we increase the ``more than one''
threshold from the current rule to communications with ``more than
ten'' or ``more than 25'' persons.\68\ They argued that such a change
would reduce compliance costs and better align with traditional
concepts of advertising.\69\ We decline to make this change. The

exclusion from the first prong of the definition of advertisement for
one-on-one communications will allow an adviser to engage in routine
investor communications and have personal conversations with
prospective investors, without subjecting those communications to the
final marketing rule's requirements. However, we continue to believe
that the final rule should cover typical marketing communications, even
if sent to a limited number of persons. Creating a higher threshold, as
suggested by commenters, may incentivize advisers to limit
communications to just below the threshold number of persons, and may
defeat the purposes of our final rule.
---------------------------------------------------------------------------

    \68\ See, e.g., IAA Comment Letter (suggesting the more than 25
person threshold because FINRA rule 2210 uses this approach and
stating that consistency would ease compliance burdens).
    \69\ See, e.g., FPA Comment Letter.
---------------------------------------------------------------------------

    While the first prong of the final rule will generally not apply to
communications to one person, changes in technology since the adoption
of the existing rule permit advisers to create communications that
appear to be personalized to single investors and are ``addressed to''
only one person, but are actually widely disseminated to multiple
persons. While communications such as bulk emails or algorithm-based
messages are nominally directed at or ``addressed to'' only one person,
they are in fact widely disseminated to numerous investors and
therefore would be subject to the final rule.\70\ Similarly,
customizing a template presentation or mass mailing by filling in the
name of an investor and/or including other basic information about the
investor would not result in a one-on-one communication.
---------------------------------------------------------------------------

    \70\ See, e.g., NSCP Comment Letter.
---------------------------------------------------------------------------

    Likewise, an adviser cannot use duplicate inserts in an otherwise
customized communication in an effort to circumvent application of the
rule.\71\ For example, if an adviser maintains a database of
performance information inserts or tables that it uses in otherwise
customized investor communications, the adviser must treat the
duplicated inserts as advertisements subject to the rule. Of course, if
the adviser provides an existing investor with performance information
pertaining to the investor's account, the rule would not apply because
this is a one-on-one communication.\72\
---------------------------------------------------------------------------

    \71\ The fact that there may be some similarities in the
information provided in one-on-one communications, however, will not
result in the application of the rule to those communications.
    \72\ In addition, the communication does not fall within the
definition of advertisement because the purpose of the communication
is not to offer services to a new investor or to provide new
services to an existing investor. See infra section II.A.2.a.iv.
---------------------------------------------------------------------------

    One commenter expressed concern that the public dissemination of a
seemingly one-on-one communication could subject the communication to
the final rule.\73\ We believe that if, for example, an adviser
responds to a request for proposal (``RFP'') from an entity and the
entity subsequently makes such responses available to the public
pursuant to a Freedom of Information Act request or other public
disclosure requirements, this would not be an advertisement merely by
virtue of the entity's disclosure.\74\ An adviser should consider
adopting compliance policies and procedures that are reasonably
designed to determine whether a communication nominally directed to a
single person is actually a communication to more than one person, or
contains duplicated inserts as part of that communication. In these
circumstances, the duplicated information is an advertisement because
it is sent to more than one person and would not qualify for the
exclusion.
---------------------------------------------------------------------------

    \73\ See Resolute Comment Letter (seeking clarification on the
treatment of ``account statements and similar reports intended for
Non-Retail Persons, such as public entities, that are required to
make such information publicly available''). If the entity is an
existing investor of the adviser, communications to the entity would
not be considered an advertisement unless the communications offer
or promote new advisory products or services of the adviser.
    \74\ See also supra section II.A.2.a.i for a discussion of an
adviser's direct or indirect communications.
---------------------------------------------------------------------------

    Because of the specific concerns raised by hypothetical
performance, hypothetical performance information would not qualify for
the one-on-one exclusion unless provided in response to an unsolicited
investor request or to a private fund investor.\75\ Hypothetical
performance included in all other one-on-one communications that offer
investment advisory services with regard to securities must be
presented in accordance with the requirements discussed below.
---------------------------------------------------------------------------

    \75\ See infra section II.E.6. These communications would be
eligible for the exclusions from the definition of advertisement for
extemporaneous, live, oral communications and regulatory notices in
final rule 206(4)-1(e)(1)(i)(A) and (B).
---------------------------------------------------------------------------

    We proposed a similar approach for hypothetical performance
provided in response to an unsolicited request under the proposed
definition of advertisement.\76\ Some commenters suggested that the
Commission permit an adviser to provide hypothetical performance in
response to unsolicited requests to eliminate the need to assess the
requirements related to hypothetical performance.\77\ These commenters
stated that the need to assess these requirements would slow down the
flow of information to investors, require investors to provide more
information earlier in the diligence process, or limit the hypothetical
performance information shared in response to such an unsolicited
request. Some commenters stated that private fund investors often seek
hypothetical performance information, particularly targets and
projections, to evaluate private fund investments.\78\ After
considering these comments, we believe that, in most circumstances, the
protections for hypothetical performance should be available to
investors receiving communications that include offers of investment
advisory services with regard to securities, to the extent such offers
include hypothetical performance information. We believe our
modifications to the first prong of the definition of advertisement and
to the requirements for presenting hypothetical performance, discussed
below, will reduce the associated compliance burdens for providing
hypothetical performance information to investors and will, therefore,
alleviate some of commenters' concerns.
---------------------------------------------------------------------------

    \76\ See 2019 Proposing Release, supra footnote 7, at section
II.A.2. (proposing that communications to any person that contain
hypothetical performance would not qualify for the unsolicited
request exclusion to the extent they contain such results); proposed
rule 206(4)-1(e)(1)(ii)(B).
    \77\ See IAA Comment Letter; ILPA Comment Letter.
    \78\ See IAA Comment Letter; Comment Letter of Managed Funds
Association and Alternative Investment Management Association (Sept.
11, 2020) (``MFA/AIMA Comment Letter III'').
---------------------------------------------------------------------------

    However, where an investor affirmatively seeks hypothetical
performance information from an investment adviser and the investment
adviser has not directly or indirectly solicited the request,
hypothetical performance information provided in response to the
request will be excluded from the definition of advertisement under the
final rule.\79\ In the case of an unsolicited request, an investor
seeks hypothetical performance information for the investor's own
purposes, rather than responding to a communication disseminated by an
adviser offering its investment advisory services with regard to
securities. Similarly, where the hypothetical performance information
is provided in a one-on-one communication to a private fund investor,
we believe a private fund investor will have the ability and
opportunity to ask questions and assess the limitations of this
information. In these limited circumstances, we do not believe it is
necessary to treat the hypothetical performance information

as an advertisement subject to the rule.\80\
---------------------------------------------------------------------------

    \79\ Any affirmative effort by the investment adviser intended
or designed to induce an investor to request hypothetical
performance information would render the request solicited and thus
not eligible for this exclusion.
    \80\ The hypothetical performance information would be subject
to the Advisers Act's anti-fraud provisions and rule 206(4)-8 under
the Advisers Act.
---------------------------------------------------------------------------

iii. Offers Investment Advisory Services With Regard to Securities to
Prospective Clients or Investors in a Private Fund Advised by the
Investment Adviser
    The marketing rule's definition of ``advertisement'' includes
communications that offer the investment adviser's investment advisory
services. As discussed in more detail below, we are implementing a
number of changes from the proposal, which would have defined
advertisements to include communications that offer or promote the
investment adviser's investment advisory services or that seek to
obtain or retain one or more investment advisory clients or investors
in any pooled investment vehicle advised by the investment adviser.\81\
First, we are limiting the application of this element of the
definition to communications directed to prospective clients or
prospective private fund investors, rather than existing clients or
private fund investors to avoid an overbroad application of the rule.
Accordingly, this aspect of the final rule will retain the current
rule's scope.
---------------------------------------------------------------------------

    \81\ See proposed rule 206(4)-1(e)(1).
---------------------------------------------------------------------------

    Second, we also are not adopting the ``or promote'' wording from
the proposed definition of advertisement. Commenters generally opposed
including the term ``promote,'' suggesting that this term could expand
the definition of ``advertisement'' to cover certain materials not
subject to the current rule,\82\ the text of which is limited to
communications that ``offer'' advisory services.\83\ As we indicated in
the proposal, the ``offer or promote'' clause reflects the current
rule's application and was designed to capture communications that are
commonly considered advertisements.\84\ We added the ``or promote''
wording to the proposed definition for clarity, but after considering
comments we realize this wording may instead cause confusion. For
example, commenters sought clarification that statements about an
advisory firm's culture, philanthropy, or community activity would not
fall within the definition of advertisement.\85\ We did not intend for
our proposed definition and the inclusion of the term ``promote'' to
include such communications. Accordingly, the final rule will not
include the term ``promote'' as it is our intent to retain the current
rule's scope in this respect.\86\
---------------------------------------------------------------------------

    \82\ See, e.g., MFA/AIMA Comment Letter I; Comment Letter of
Association for Corporate Growth (Feb. 10, 2020) (``ACG Comment
Letter'').
    \83\ Under the current advertising rule, an ``advertisement''
includes any written communication addressed to more than one
person, or any notice or other announcement in any publication or by
radio or television, which offers ``any other investment advisory
service with regard to securities.'' See current rule 206(4)-1.
    \84\ See 2019 Proposing Release, supra footnote 7, at section
II.A.2.
    \85\ See SIFMA AMG Comment Letter II; FSI Comment Letter.
    \86\ See SEC v. C.R. Richmond & Co., 565 F.2d 1101, 1105 (9th
Cir. 1977) (``Investment advisory material which promotes advisory
services for the purpose of inducing potential clients to subscribe
to those services is advertising material within [the current
rule].'').
---------------------------------------------------------------------------

    Third, consistent with the current rule, we are limiting the
application of the definition to offers about an investment adviser's
investment advisory services with regard to securities. We were
persuaded by commenters who urged us to retain the current rule's
scope, arguing that expanding the definition to cover services that are
not related to securities could result in an overbroad application of
the rule.\87\ Importantly, however, the anti-fraud provisions of the
Act and related rules continue to apply to an adviser's advertisements
and other communications about its other non-securities related
services.\88\
---------------------------------------------------------------------------

    \87\ See NYC Bar Comment Letter; ACG Comment Letter.
    \88\ See section 206 of the Act; rule 206(4)-8 under the Act.
See also Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, Release No. IA-5248 (June 5, 2019) [84 FR 33669
(July 12, 2019)] (``Fiduciary Interpretation'') (stating that
``[t]he investment adviser's fiduciary duty is broad and applies to
the entire adviser-client relationship.''), at n.17 (citing SEC v.
Lauer, 2008 WL 4372896, at 24 (S.D. Fla. Sept. 24, 2008) `` `Section
206 of the Advisers Act does not require that the activity be `in
the offer or sale of any' security or `in connection with the
purchase or sale of any security.' ' '').
---------------------------------------------------------------------------

    Finally, the definition will not include communications that seek
to obtain one or more investment advisory clients or investors in any
pooled investment vehicle advised by the investment adviser. We
determined that this clause was superfluous of the rest of the
definition; we believe these communications are captured within an
adviser's offer of investment advisory services with regard to
securities to prospective investors in a private fund advised by the
adviser.\89\
---------------------------------------------------------------------------

    \89\ As discussed below, the definition of advertisement in the
final rule also will not include communications designed to
``retain'' investors. See infra section II.A.2.a.iv.
---------------------------------------------------------------------------

iv. Offers New Investment Advisory Services With Regard to Securities
to Current Clients or Investors in a Private Fund Advised by the
Investment Adviser
    The proposed definition of ``advertisement'' included
communications that seek ``to obtain or retain'' investors. Commenters
generally stated that the ``or retain'' clause would unnecessarily
include communications made in the ordinary course of an adviser
providing services to current investors as all communications with
current investors are, at least in part, designed to both service and
retain investors.\90\
---------------------------------------------------------------------------

    \90\ See, e.g., Wellington Comment Letter; IAA Comment Letter;
JG Advisory Comment Letter (stating that ``the rule should treat
communications to existing investors differently from communications
to prospective investors'').
---------------------------------------------------------------------------

    Several commenters asked us to confirm the scope of the definition
as applied to communications with existing investors.\91\ For example,
some commenters suggested an exclusion for all communications with
existing investors,\92\ while others supported a more limited exclusion
for routine investor communications.\93\ Commenters generally agreed
that the rule should treat communications with existing investors that
offer new or additional advisory services as advertisements.\94\
Commenters that supported a complete or partial exclusion for
communications to existing investors stated that such communications
are part of the advisory service and not advertisements.\95\
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    \91\ See, e.g., SIFMA AMG Comment Letter II (discussing market
commentary, investment outlooks, performance reviews); JG Advisory
Comment Letter (seeking clarification on whether the proposed
definition would scope in monthly or quarterly letters to existing
investors where such letters discuss account performance and include
market commentary).
    \92\ See, e.g., MFA/AIMA Comment Letter I.
    \93\ See, e.g., MMI Comment Letter.
    \94\ See, e.g., Wellington Comment Letter; IAA Comment Letter;
Pickard Djinis Comment Letter.
    \95\ Our staff has indicated that it would not recommend
enforcement action under the current rule with respect to written
communications by an adviser to an existing investor about the
performance of securities in the investor's account because such
communications would not be ``offers'' of advisory services, and
instead are ``part of'' those advisory services (unless the context
in which the communication is provided suggests otherwise). See
Investment Counsel Association of America, Inc., SEC Staff No-Action
Letter (Mar. 1, 2004) (``ICAA Letter''). Any staff guidance or no-
action letters discussed in this release represent the views of the
staff of the Division of Investment Management. They are not a rule,
regulation, or statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved their content. Staff
guidance has no legal force or effect; it does not alter or amend
applicable law, and it creates no new or additional obligations for
any person.

---------------------------------------------------------------------------

    We agree that the rule should treat only those communications that
offer new or additional advisory services with regard to securities to
current investors as advertisements because they raise the same
concerns as other advertisements. Our intent is not to chill ordinary
course communications with current investors. We believe that other
protections prevent advisers from engaging in activities that mislead
or deceive existing investors.\96\ For example, existing and
prospective advisory clients receive the anti-fraud protections of the
Advisers Act and an adviser's fiduciary duty.\97\ Accordingly, under
the final rule a communication to a current investor is an
advertisement when it offers new or additional investment advisory
services with regard to securities. We believe that this modification
will allow advisers to continue to provide current investors with
timely information regarding their accounts and the market without
subjecting those communications to the marketing rule.\98\
---------------------------------------------------------------------------

    \96\ See, e.g., section 206 of the Advisers Act; rule 206(4)-8
under the Advisers Act.
    \97\ See Fiduciary Interpretation, supra footnote 88. See also
IAA Comment Letter; Pickard Djinis Comment Letter.
    \98\ Their exclusion from the definition of advertisement will
not prevent these account statements or transaction reports from
being subject to the other provisions of the Federal securities
laws, including section 17(a) of the Securities Act or section 10(b)
of the Exchange Act (and rule 10b-5 thereunder), to the extent those
provisions would otherwise apply. Likewise, regardless of whether a
communication to an existing or prospective investor is an
``advertisement'' under the marketing rule, the communication is
subject to the anti-fraud provisions of section 206 of the Act and
the aforementioned provisions of the Federal securities laws.
---------------------------------------------------------------------------

    In summary, we view an adviser seeking to offer new or additional
investment advisory services with regard to securities to current
investors as posing the same risks to investors as an adviser seeking
to offer such services to new investors and therefore we believe this
activity warrants the same treatment under the final marketing rule.
v. Brand Content, General Educational Material, and Market Commentary
    Other commenters asked us to confirm that brand content, general
educational material, and market commentary are not advertisements
under the rule.\99\ Whether a communication is an advertisement depends
on the facts and circumstances (e.g., whether the communication
``offers'' the adviser's investment advisory services with regard to
securities). Generally, generic brand content, educational material,
and market commentary would not meet the revised definition of an
advertisement.
---------------------------------------------------------------------------

    \99\ See, e.g., SIFMA AMG Comment Letter II; JG Advisory Comment
Letter; MMI Comment Letter; IAA Comment Letter; MFA/AIMA Comment
Letter I.
---------------------------------------------------------------------------

    Brand content. Determining whether a communication including
``brand'' content (e.g., displays of the advisory firm name in
connection with sponsoring sporting events, supporting community
service activities, or supporting philanthropic efforts) is an
advertisement would depend on the facts and circumstances.\100\ If such
a communication is designed to raise the profile of the adviser
generally, but does not offer any investment advisory services with
regard to securities, the communication would not fall within the
definition of an advertisement under the rule. For example, a
communication that simply notes that an event is ``brought to you by
XYZ Advisers'' would not qualify as an advertisement, as it is not
offering any advisory services with regard to securities.
---------------------------------------------------------------------------

    \100\ See SIFMA AMG Comment Letter II.
---------------------------------------------------------------------------

    General educational information and market commentary. We believe
that the same analysis applies for communications that provide only
general educational information and market commentary.\101\ Educational
communications that are limited to providing general information about
investing, such as information about types of investment vehicles,
asset classes, strategies, certain geographic regions, or commercial
sectors, do not constitute offers of an adviser's investment advisory
services with regard to securities.
---------------------------------------------------------------------------

    \101\ See, e.g., SIFMA AMG Comment Letter II; Mercer Comment
Letter; IAA Comment Letter; Wellington Comment Letter.
---------------------------------------------------------------------------

    Similarly, materials that provide an adviser's general market
commentary (including during press interviews) are unlikely to offer
advisory services with regard to securities. Market commentary aims to
inform current and prospective investors, including private fund
investors, of market and regulatory developments in the broader
financial ecosystem. These materials also help current investors
interpret market and regulatory shifts by providing context when
reviewing investments in their portfolios, and educate investors.\102\
In contrast, for example, we would view an article or white paper that
provides general market commentary and concludes with a description of
how the adviser's securities-related services can help prospective
investors invest in the market as offering the adviser's services.
Accordingly, that portion of the white paper would be an advertisement.
---------------------------------------------------------------------------

    \102\ See, e.g., MMI Comment Letter (emphasizing the importance
of allowing general market commentary to provide investors with the
tools to challenge the assumptions of those who counsel them on
financial management).
---------------------------------------------------------------------------

b. Exclusions
    The rule will generally exclude two types of communications from
the first prong of the definition of advertisement: (i) Extemporaneous,
live, oral communications; and (ii) information required by statute or
regulation.\103\
---------------------------------------------------------------------------

    \103\ As discussed above, the rule also excludes from the first
prong of the advertisement definition a communication that includes
hypothetical performance that is provided in response to an
unsolicited investor request for such information or to a private
fund investor in a one-on-one communication. See final rule 206(4)-
1(e)(1)(i)(C)(1) and (2).
---------------------------------------------------------------------------

i. Extemporaneous, Live, Oral Communications
    In a change from the proposal, the definition of advertisement will
not include extemporaneous, live, oral communications, regardless of
whether they are broadcast and regardless of whether they take place in
a one-on-one context and involve discussion of hypothetical
performance. We proposed an exclusion for live, oral communications
that are not broadcast on radio, television, the internet, or any other
similar medium. Commenters generally supported the exclusion, but had
questions about certain aspects. For example, some commenters expressed
concern about the treatment of written materials that accompany or are
used to prepare for oral presentations, stating that treating such
materials as advertisements would hamper an adviser's ability to
prepare for a presentation.\104\ Other commenters questioned the scope
of the exclusion, with some arguing that it was too narrow \105\ and
others arguing that it was too broad.\106\
---------------------------------------------------------------------------

    \104\ See, e.g., MFA/AIMA Comment Letter I; AIC Comment Letter
(stating that ``written materials prepared in conjunction with any
live oral communications should not be considered `advertisements'
and should be able to rely on the exclusion if (i) they are in draft
form, (ii) they are internal documents not created for distribution,
or (iii) all or portions of their content may not be provided to any
prospective or current investor.'').
    \105\ See SIFMA AMG Comment Letter II (arguing that it is not
clear how to define communications that are broadcast and widely
disseminated versus those that are not); AIC Comment Letter.
    \106\ See, e.g., NASAA Comment Letter; CFA Comment Letter; ILPA
Comment Letter.
---------------------------------------------------------------------------

    The goal of the exclusion for live, oral communications was to
avoid treating extemporaneous statements as advertisements, in light of
the difficulties in ensuring that they comply with the requirements of
the rule, and to avoid chilling adviser communications with investors.
If

remarks are extemporaneous, they cannot be simultaneously monitored for
regulatory compliance, and to require otherwise may simply cause
advisers to cease extemporaneous speech to the overall detriment of
investors. However, we believe that communications prepared in advance
can and should be subject to the rule. Accordingly, the final exclusion
will apply only to extemporaneous, live, oral communications.\107\
---------------------------------------------------------------------------

    \107\ A communication need not be in-person to qualify for the
exclusion so long as it is live and oral. For example, a phone call
or live video communication between an adviser and an investor could
qualify for this exclusion.
---------------------------------------------------------------------------

    Extemporaneous communications do not include prepared remarks or
speeches, such as those delivered from scripts.\108\ In addition,
slides or other written materials that are distributed or presented to
the audience would also be included as advertisements if they otherwise
meet the definition. On the other hand, live, extemporaneous, oral
discussions with a group of investors or interviews with the press that
are not based on prepared remarks will be eligible for the exclusion.
This approach aligns with the purpose of the exclusion, which is to
avoid a chilling effect on extemporaneous, oral speech that might occur
if such communications were required to comply with the requirements of
the final rule.
---------------------------------------------------------------------------

    \108\ As discussed in the recordkeeping section below, a live,
oral communication by an adviser that is not extemporaneous (but
that otherwise satisfies the definition of advertisement) would be
an advertisement and a record of the advertisement must be
maintained pursuant to rule 204-2(a)(11)(i)(A). The record of the
advertisement could be a copy of the prepared remarks, other written
preparatory materials, or a recording of the oral communication.
---------------------------------------------------------------------------

    Some commenters recommended that we further expand the exclusion to
apply to certain written communications.\109\ While we appreciate that
other modern communication methods facilitate instantaneous written
conversations (e.g., text messages, chat), this exclusion is limited to
extemporaneous, live, oral communications, because in those
circumstances a speaker often does not have sufficient time to edit and
reflect on the content of the communication.\110\
---------------------------------------------------------------------------

    \109\ See, e.g., AIC Comment Letter (stating that live written
communications (e.g., live text chats) should also qualify for the
exclusion in order to reflect modern communication methods).
    \110\ We consider a communication to still be ``oral'' even if
closed captioning is used, but not if the oral communication is
transcribed and the transcription is then directly or indirectly
redistributed by the adviser. See, e.g., Mercer Comment Letter
(seeking clarification that closed captioning would not prevent a
communication from qualifying for the exclusion).
---------------------------------------------------------------------------

    Some commenters suggested that we exclude all broadcast
communications and adopt an approach similar to FINRA.\111\ Commenters
also sought guidance on the meaning of the following terms:
``broadcast'' \112\ and ``widely disseminated.'' \113\ In response to
commenters' concerns, we are not adopting the requirement that the
live, oral communication is ``not broadcast.'' We believe the concerns
that prompted this exclusion apply equally to extemporaneous, live,
oral communications regardless of whether they are broadcast. We also
believe that the exclusion should not allow an adviser to avoid
application of the rule for a previously prepared live, oral
communication in a non-broadcast setting, such as a luncheon seminar
designed to attract new investors. In addition, commenters raised a
variety of concerns with identifying whether a communication is
broadcast in light of modern media tools, suggesting that line drawing
as to when a communication is broadcast may be challenging in
practice.\114\ As a result, the exclusion will apply to a broadcast
communication, such as a webcast, that is an extemporaneous, live, oral
communication.
---------------------------------------------------------------------------

    \111\ See, e.g., SIFMA AMG Comment Letter II; Fidelity Comment
Letter.
    \112\ See, e.g., Fidelity Comment Letter (noting that (i)
advisers may use various forms of technology to communicate with
clients, including web chats or videos and (ii) further limiting the
exclusion ``would capture routine communications between advisers
and their clients merely because of the medium in which they are
being conducted.''); SIFMA AMG Comment Letter II (arguing that it is
not clear how to define communications that are broadcast and widely
disseminated versus those that are not).
    \113\ See, e.g., SIFMA AMG Comment Letter II; Consumer
Federation Comment Letter.
    \114\ See, e.g., SIFMA AMG Comment Letter II; Fidelity Comment
Letter.
---------------------------------------------------------------------------

    The exclusion will apply to ``live'' oral communications, as
proposed. Accordingly, previously recorded oral communications
disseminated by the adviser would not qualify as live because the
adviser had time to review and edit the recording before such
dissemination and thus can ensure compliance with the marketing rule.
In these circumstances, an adviser would need to treat its subsequent
dissemination of the recording as an advertisement under the rule if
the recording offers the adviser's investment advisory services with
regard to securities. However, we believe that an oral communication
would be ``live'' even if there is a time lag (e.g., streaming delay),
a translation program is used, or adaptive technology is used to create
a personal transcription (e.g., voice to text technology or other tools
that assist the deaf, hard-of-hearing, or hearing loss communities).
ii. Information Contained in a Statutory or Regulatory Notice, Filing,
or Other Required Communication
    The final rule excludes from the definition of advertisement
``[i]nformation contained in a statutory or regulatory notice, filing,
or other required communication, provided that such information is
reasonably designed to satisfy the requirements of such notice, filing,
or other required communication.'' \115\ In response to commenters, we
have broadened the proposed exclusion, which would have applied to
``[a]ny information required to be contained in a statutory or
regulatory notice, filing, or other communication.'' \116\ Commenters
generally supported the proposed exclusion,\117\ but recommended we
expand it to ease compliance burdens and avoid duplicative regulation
that would have resulted from applying another layer of review to
mandatory filings.\118\
---------------------------------------------------------------------------

    \115\ Final rule 206(4)-1(e)(1)(i)(B). As with the exclusion for
extemporaneous, live, oral communications, the exclusion for
regulatory notices will apply regardless of whether the notice
includes a discussion of hypothetical performance.
    \116\ Proposed rule 206(4)-1(e)(1)(iv).
    \117\ See, e.g., Mercer Comment Letter; NRS Comment Letter.
    \118\ See, e.g., Comment Letter of Ropes & Gray LLP (Feb. 10,
2020) (``Ropes & Gray Comment Letter''); (noting that the proposal
raises questions as to what information is required in Commission
filings, especially for publicly traded advisers); Comment Letter of
BlackRock, Inc. (Feb. 10, 2020) (``BlackRock Comment Letter'')
(same); SIFMA AMG Comment Letter II (noting that advisers are
already subject to legal duties and potential liability for
information included in regulatory filings making it unlikely that
advisers would include excess information in such filings).
---------------------------------------------------------------------------

    Specifically, commenters stated that compliance personnel would
have difficulty determining exactly which information contained in a
regulatory filing is strictly and explicitly required by applicable law
versus which information is not (and would therefore be subject to the
rule). In response to these comments, we broadened the exclusion to
cover information in a statutory or regulatory, notice, filing or other
required communication, provided the information is reasonably designed
to satisfy the requirements, rather than information required to be
contained in such a communication.\119\ For example, information
reasonably designed to satisfy the requirements of Form ADV Part 2 or
Form CRS will not be an advertisement.\120\
---------------------------------------------------------------------------

    \119\ See final rule 206(4)-1(e)(1)(i)(B).
    \120\ See Form CRS Relationship Summary; Amendments to Form ADV,
Release No. IA-5247 (June 5, 2019) [88 FR 33573 (July 12, 2019)]
(``Form CRS Adopting Release'') (noting that the relationship
summary is designed to serve as disclosure, rather than marketing
material).

---------------------------------------------------------------------------

    This exclusion will apply to information that an adviser provides
to an investor under any statute or regulation under Federal or state
law, including rules promulgated by regulatory agencies. We generally
do not believe that communications that are prepared as a requirement
of statutes, rules, or regulations should be viewed as advertisements
under the final rule.\121\ However, if an adviser includes in such a
communication information that is not reasonably designed to satisfy
its obligations under applicable law, and such additional information
offers the adviser's investment advisory services with regard to
securities, then that information will be considered an
``advertisement'' for purposes of the rule.
---------------------------------------------------------------------------

    \121\ However, information that is required to be provided or
offered by the final rule will not qualify for this exclusion. For
example, final rule 206(4)-1(d)(2) requires an adviser to provide
performance results over one-, five-, and ten-year periods. This
information is part of the advertisement and subject to the rule.
---------------------------------------------------------------------------

3. Definition of Advertisement: Compensated Testimonials and
Endorsements, Including Solicitations
    To reflect the merger of the two rules, the final rule's definition
of ``advertisement'' includes a new second prong that applies to ``any
endorsement or testimonial for which an investment adviser provides
compensation, directly or indirectly'' subject to an exclusion for
certain regulatory notices, filings, and other required
communications.\122\ A compensated testimonial or endorsement will meet
the definition of advertisement's second prong regardless of whether
the communication is made orally or in writing, to one or more
persons.\123\ By contrast, an uncompensated testimonial or endorsement
would have to meet the elements of prong one in order to be considered
an ``advertisement.''
---------------------------------------------------------------------------

    \122\ Final rule 206(4)-1(e)(1)(ii).
    \123\ See id. The definition of advertisement's second prong
includes a testimonial or endorsement for which an adviser directly
or indirectly provides de minimis compensation (as defined below).
However, these types of testimonials and endorsements will be exempt
from some of the final rule's prescribed conditions for testimonials
and endorsements. See infra section II.C.5.
---------------------------------------------------------------------------

a. Definitions of Testimonial and Endorsement
    The final definition of testimonial includes any statement by a
current client or private fund investor about the client's or private
fund investor's experience with the investment adviser or its
supervised persons.\124\ The definition of endorsement includes any
statement by a person other than a current client or private fund
investor that indicates approval, support, or recommendation of the
investment adviser or its supervised persons or describes that person's
experience with the investment adviser or its supervised persons.\125\
This scope of how these activities are defined is similar to the
proposal, with a few changes described below, including adding
solicitation and referral activities drawn from the proposed definition
of solicitor.
---------------------------------------------------------------------------

    \124\ Final rule 206(4)-1(e)(17)(i). We proposed to define
``testimonial'' as ``any statement of a client's or investor's
experience with the investment adviser or its advisory affiliates,
as defined in the Form ADV Glossary of Terms.'' See proposed rule
206(4)-1(e)(15).
    \125\ Final rule 206(4)-1(e)(5)(i). We proposed to define
``endorsement'' as ``any statement by a person other than a client
or investor indicating approval, support, or recommendation of the
investment adviser or its advisory affiliates, as defined in the
Form ADV Glossary of Terms.'' See proposed rule 206(4)-1(e)(2). To
align the definitions of testimonial and endorsement better, and
address situations where an endorser who is not a client
nevertheless provides statements about the endorser's experience
with the adviser, the final definition of endorsement includes any
statement made by a non-investor that describes the endorser's
experience with the adviser or its supervised persons, like under
the definition of testimonial.
---------------------------------------------------------------------------

    These definitions include statements about the adviser's
``supervised persons,'' rather than the proposed inclusion of
statements about the adviser's ``advisory affiliates.'' \126\ One
commenter recommended this change, stating that an endorsement or
testimonial regarding a supervised person is more likely to provide
relevant information to an investor than a statement about an adviser's
advisory affiliate.\127\
---------------------------------------------------------------------------

    \126\ Final rule 206(4)-1(e)(5)(i) and (17)(i). Under the final
rule, supervised person has the same meaning as in section 2(a)(25)
of the Act. Final rule 206(4)-1(e)(16). See also proposed rule
206(4)-1(e)(2) and (15) (referring to advisory affiliates).
    \127\ See Pickard Djinis Comment Letter.
---------------------------------------------------------------------------

    We received a variety of comments about the statements these
definitions would capture. One commenter supported a broad approach
that would include statements about an adviser's traits, such as
trustworthiness, to reflect the commenter's belief that prospective
clients typically select an adviser based on emotion.\128\ Another
commenter requested that we limit the definitions to include only
statements that explicitly discuss the adviser's services or
capabilities as an adviser.\129\
---------------------------------------------------------------------------

    \128\ See Comment Letter of William A. Jacobson, Esq., Clinical
Professor of Law, Cornell Law School, and Director, Cornell
Securities Law Clinic (Feb. 3, 2020) (``Prof. Jacobson Comment
Letter'').
    \129\ See SIFMA AMG Comment Letter II.
---------------------------------------------------------------------------

    Under the final marketing rule, testimonials and endorsements will
include opinions or statements by persons about the investment advisory
expertise or capabilities of the adviser or its supervised
persons.\130\ Testimonials and endorsements also include statements in
an advertisement about an adviser or its supervised person's qualities
(e.g., trustworthiness, diligence, or judgment) or expertise or
capabilities in other contexts, when the statements suggest that the
qualities, capabilities, or expertise are relevant to the advertised
investment advisory services. We believe that an investor would likely
perceive these statements as relevant to the adviser's investment
advisory services.\131\
---------------------------------------------------------------------------

    \130\ Complete or partial client lists that do no more than
identify certain of the adviser's clients or private fund investors
will not be treated as testimonials. See also 2019 Proposing
Release, supra footnote 7, at 78.
    \131\ See Dan Gallagher, Staff No-Action Letter (pub. avail.
July 10, 1995) (stating that the staff could not assure that it
would not recommend enforcement action for a violation of rule
206(4)-1 if the letter writer used client testimonials describing
its character and skills in relation to matters other than the
letter writer's role as an investment adviser). See also Guidance on
the Testimonial Rule and Social Media, Division of Investment
Management Guidance Update No. 2014-04 (Mar. 2014) (``IM Staff
Social Media Guidance'') (withdrawing staff position in the
Gallagher Staff No-Action Letter). See infra section II.J.
---------------------------------------------------------------------------

    The definitions of testimonial and endorsement under the final rule
also include solicitation and referral activities drawn from the
proposed definition of solicitor.\132\ After considering comments on
the overlapping scope of testimonials, endorsements, and solicitations
under the proposed advertising and solicitation rules, we are adding
solicitation activities to the definitions of testimonial and
endorsement. The definition of testimonial includes any statement by a
current client or private fund investor that directly or indirectly
solicits any investor to be the adviser's client or a private fund
investor, or refers any investor to be the adviser's client or a
private fund investor. The definition of endorsement includes any such
statements by a person other than a current client or private fund
investor. This change will address compensated

testimonials and endorsements under one rule with one set of
conditions. For example, a person providing an endorsement or
testimonial under the final rule might be a firm that solicits for an
adviser (such as a broker-dealer or a bank), an individual at a
soliciting firm who engages in solicitation activities for an adviser
(such as a bank representative or an individual registered
representative of a broker-dealer), or both. Other examples could be an
unaffiliated fund-of-funds or a feeder fund that solicits investors in
an underlying fund or a master fund, respectively.
---------------------------------------------------------------------------

    \132\ Final rule 206(4)-1(e)(5)(ii) and (iii), and (e)(17)(ii)
and (iii). See also proposed rule 206(4)-3(c)(4) (proposing to
define ``solicitor'' as ``any person who, directly or indirectly,
solicits any client or private fund investor for, or refers any
client or private fund investor to, an investment adviser''). Both
the proposal's definition of ``solicitor'' and the final rule's
inclusion of solicitation and referral activities are drawn from the
current cash solicitation rule's definition of ``solicitor,'' with
the exception that the current rule does not apply to solicitation
of private fund investors. See rule 206(4)-3(d)(1).
---------------------------------------------------------------------------

b. Cash and Non-Cash Compensation
    The second prong of the final marketing rule's definition of
advertisement is triggered by any form of compensation--whether cash or
non-cash--that an adviser provides, directly or indirectly, for an
endorsement or testimonial. This mirrors the types of compensation that
we stated would trigger the proposed solicitation rule and the proposed
advertising rule's compensation disclosure requirement in connection
with a testimonial, endorsement, or third-party rating.\133\ As we
stated about both proposed rules, compensation an adviser provides,
directly or indirectly, for these activities can incentivize a person
to provide a positive statement about, solicit an investor for, or
refer an investor to, the investment adviser.\134\ Therefore, we
believe that the marketing rule's protections should apply.
---------------------------------------------------------------------------

    \133\ See 2019 Proposing Release, supra footnote 7, at section
II.A.4 and II.B.2 and text accompanying n.172.
    \134\ See id. at n.372. The proposed solicitation rule would
have applied to an adviser's direct and indirect compensation to a
solicitor for any solicitation activities. See proposed rule 206(4)-
3(a). The current cash solicitation rule also covers direct and
indirect cash compensation. See rule 206(4)-3(a). Similarly, our
proposed advertising rule would have required disclosure, if
applicable, that cash or non-cash compensation has been provided by
or on behalf of the adviser in connection with obtaining or using
the testimonial or endorsement. See proposed rule 206(4)-
1(b)(1)(ii).
---------------------------------------------------------------------------

    Some commenters agreed that non-cash compensation creates the same
conflicts of interest as cash compensation for solicitation.\135\ These
commenters also agreed that investors should be made aware of the
solicitor's conflict of interest regardless of the form of
compensation. Other commenters, however, raised concerns about
extending the rule to cover certain forms of non-cash compensation,
such as gifts and entertainment,\136\ or non-transferable advisory fee
waivers in connection with refer-a-friend arrangements.\137\ Some
commenters argued that the final rule should only apply to
solicitations for which the adviser provides incentive-based
compensation tied to the funding of an advisory account and the
solicitation activities are directed at specific clients.\138\
Commenters generally opposed applying the proposed solicitation rule to
communications to investors in private funds, which we address
below.\139\
---------------------------------------------------------------------------

    \135\ See Consumer Federation Comment Letter; Mercer Comment
Letter.
    \136\ See MFA/AIMA Comment Letter I; MMI Comment Letter (stating
that the rule should not apply to an adviser that sends a gift to a
third-party adviser or broker-dealer with which it routinely does
business, and such third party completely unrelatedly refers a
client to the adviser, unless the third party has a reasonable
expectation that it will receive some form of compensation from the
adviser in exchange for that referral).
    \137\ See IAA Comment Letter (also recommending that the rule
exclude refer-a-friend programs that involve a small amount of
compensation per referral). While the final marketing rule will
apply to all compensated refer-a-friend programs (regardless of the
form of compensation), we expect that many advisers that engage in
these programs will fall under the de minimis exemption, and be
subject to fewer conditions than other compensated testimonials and
endorsements. See infra footnote 481.
    \138\ See SIFMA AMG Comment Letters I & III; FSI Comment Letter.
    \139\ See infra section II.A.4.
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    Forms of compensation under the final marketing rule will include
fees based on a percentage of assets under management or amounts
invested, flat fees, retainers, hourly fees, reduced advisory fees, fee
waivers, and any other methods of cash compensation, and cash or non-
cash rewards that advisers provide for endorsements and testimonials,
including referral and solicitation activities.\140\ They also include
directed brokerage that compensates brokers for soliciting
investors,\141\ sales awards or other prizes, gifts and entertainment,
such as outings, tours, or other forms of entertainment that an adviser
provides as compensation for testimonials and endorsements. In
addition, compensated endorsements and testimonials may or may not be
contingent on the endorsement or testimonial resulting in a new
advisory relationship or a new investment in a private fund. We believe
that non-cash compensation, including forms of entertainment, can
incentivize persons to provide a positive statement about an adviser,
or make a referral or solicitation on an adviser's behalf and should be
included in the rule to make clients aware of such incentive. Whether
an adviser provides cash or non-cash compensation in exchange for a
testimonial or endorsement depends on the particular facts and
circumstances.\142\
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    \140\ See 2019 Proposing Release, supra footnote 7, at nn.357
and 358 and accompanying text (discussing, for example, refer-a-
friend programs).
    \141\ Advisers are currently required to disclose to clients in
the Form ADV brochure if they consider, in selecting or recommending
broker-dealers, whether they or a related person receives client
referrals from a broker-dealer or third party. As proposed, broker-
dealers or dual registrants that receive brokerage for solicitation
of client accounts in wrap fee programs that they do not sponsor
will be subject to the final marketing rule if they solicit those
clients to participate in the wrap fee program. See 2019 Proposing
Release, supra footnote 7, at section II.B.2.
    \142\ Although commenters did not specifically address to what
extent compensation paid to an adviser's personnel, such as an
employee, would implicate the proposed solicitation rule, we are
clarifying that compensation for purposes of prong two of the
definition of advertisement will not include regular salary or
bonuses paid to an adviser's personnel for their investment advisory
activities or for clerical, administrative, support or similar
functions.
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    Some commenters requested that we exclude training or meetings that
educate solicitors about the adviser's services, even if there are some
incidental benefits associated with such training.\143\ We continue to
believe, as we stated in the 2019 Proposing Release, that attendance at
training and education meetings, including company-sponsored meetings
such as annual conferences, will not be non-cash compensation, provided
that attendance at these meetings or trainings is not provided in
exchange for solicitation activities.\144\
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    \143\ See, e.g., MMI Comment Letter; MFA/AIMA Comment Letter I
(discussing training for certain fund-of-funds arrangements); SIFMA
AMG Comment Letter III (encouraging the Commission to draw from a
FINRA 2016 proposal relating to non-cash compensation, which the
commenter states includes conditions such as prior approval,
attendance not being preconditioned on the achievement of certain
sales targets, appropriate location (whether an office or other
facility) and no payment for additional guests).
    \144\ See 2019 Proposing Release, supra footnote 7, at n.360.
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    Some commenters also raised concerns about potentially conflicting
regulations for advisers dually registered as broker-dealers with
respect to the inclusion of sales awards as non-cash compensation under
the proposed solicitation rule.\145\ While we acknowledge that other
Commission rules for broker-dealers address concerns underlying non-
cash compensation in the context of recommendations, the final
marketing rule covers a broader range of activities and types of
promoters.\146\ Thus, we do

not believe that an exemption for sales awards or contests from the
final marketing rule would be appropriate on these grounds. As
discussed further below, however, we are adopting a partial exemption
for broker-dealers from the rule's disqualification provisions. We are
also adopting partial exemptions from the disclosure provisions when a
broker-dealer provides a testimonial or endorsement to a retail
customer that is a recommendation subject to Regulation Best Interest
(``Regulation BI'') under the Securities Exchange Act of 1934 (the
``Exchange Act'') and from certain disclosure requirements when a
broker-dealer provides a testimonial or endorsement to a person that is
not a retail customer (as that term is defined in Regulation BI).\147\
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    \145\ See SIFMA AMG Comment Letters I & III (requesting
alignment with FINRA's 2016 non-cash compensation rule proposal);
FSI Comment Letter.
    \146\ See, e.g., Regulation Best Interest, Release No. 34-86031
(June 5, 2019) [84 FR at 33400 (July 12, 2019)] (``Regulation Best
Interest Release'') (adopting rule 15l-1 under the Exchange Act,
requiring broker-dealers to establish written policies and
procedures reasonably designed to identify and eliminate any sales
contests, sales quotas, bonuses, and non-cash compensation that are
based on the sale of specific securities or the sale of specific
types of securities within a limited period of time, noting that
these compensation practices create high-pressure situations for
associated persons to increase the sales of specific securities or
specific types of securities within a limited period of time and
thus compromise the best interests of their retail customers). The
policies and procedures required thereunder must also be reasonably
designed to identify and mitigate any conflicts of interest
associated with the broker-dealer's recommendations to retail
customers that create an incentive for the broker-dealer's
associated persons to place their interest or the interest of the
broker-dealer ahead of the retail customer's interest. Id.
    \147\ See id. Regulation BI defines a retail customer as a
``natural person, or the legal representative of such natural
person.'' See id., at 768.
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    Other commenters stated non-cash compensation could capture
benefits that advisers provide in the ordinary course of business
unrelated to any solicitation activity.\148\ Relatedly, some commenters
considered our proposed view of ``indirect'' compensation overly broad,
particularly with respect to non-cash compensation.\149\ These
commenters recommended that we apply the final rule only to
compensation an adviser provides to a solicitor after its solicitation
activities, unless the solicitation agreement between the adviser and
solicitor specifically includes compensation provided prior to the
solicitation; or replace the solicitation rule's reference to
compensation that an adviser provides ``indirectly'' with compensation
that is direct or ``in connection with solicitation activities.'' \150\
Others expressed concerns that, under our proposed solicitation rule,
every mutually beneficial arrangement between an investment adviser and
a potential facilitator of client relationships would be subject to
scrutiny for indicia of quid pro quo solicitation.\151\
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    \148\ See, e.g., MFA/AIMA Comment Letter I; Fidelity Comment
Letter; Fried Frank Comment Letter; IAA Comment Letter; Mercer
Comment Letter; SIFMA AMG Comment Letter I.
    \149\ See, e.g., SIFMA AMG Comment Letters I & III; FSI Comment
Letter.
    \150\ See SIFMA AMG Comment Letter III.
    \151\ See, e.g., MFA/AIMA Comment Letter I; Mercer Comment
Letter.
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    We believe the timing of compensation relative to an endorsement or
testimonial is relevant in determining whether an adviser is providing
compensation for the testimonial or endorsement. In addition, we
believe that there will be a mutual understanding of a quid pro quo,
whether explicit or inferred based on facts and circumstances, for most
compensated endorsements or testimonials.\152\ However, we decline to
draw bright lines around either the timing of the compensation or the
establishment of a mutual understanding. We believe such bright lines
would unnecessarily limit the final rule and would encourage advisers
to structure their arrangements to avoid application of the rule in
situations where it would otherwise apply. In addition, we believe that
in many cases compensation will be in connection with testimonials and
endorsements. We decline to remove the word ``indirectly'' from the
rule for the same reasons discussed above.\153\
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    \152\ We would expect that, where required, the written
agreement would be evidence of such a mutual understanding in most
circumstances. See infra section II.C.3.
    \153\ For example, an adviser will be subject to the rule's
provisions for compensated testimonials and endorsements when the
adviser's parent company pays a third party to endorse the adviser
to the third party's network of members that are prospective
clients. See final rule 206(4)-1(b). Such indirect compensation
could include the adviser's parent company providing representatives
to the third party and compensating them to promote the adviser's
business.
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c. Activities That Constitute a Testimonial or Endorsement
    Some commenters requested guidance on whether certain activities
would constitute solicitation or referral activities under the proposed
amendments to the solicitation rule.\154\ Since the combined marketing
rule includes statements that solicit investors for, or refer investors
to, an investment adviser as testimonials or endorsements, we are
addressing these comments in the context of these definitions.
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    \154\ See, e.g., FSI Comment Letter; SIFMA AMG Comment Letter I;
MFA/AIMA Comment Letter I; Fried Frank Comment Letter; IAA Comment
Letter.
---------------------------------------------------------------------------

    For example, some commenters questioned whether lead-generation
firms or adviser referral networks (collectively, ``operators'') would
fall into the scope of the rule. One commenter described these
operators as networks operated by non-investors where an adviser
compensates the operator to solicit investors for, or refer investors
to, the adviser.\155\ Another commenter described these operators as
for-profit or non-profit entities that make third-party advisory
services (such as model portfolio providers) accessible to investors,
and stated that the operators do not promote or recommend particular
services or products accessible on the platform.\156\ In both examples,
the operator's website likely meets the final marketing rule's
definition of endorsement. An operator may tout the advisers included
in its network, and/or guarantee that the advisers meet the network's
eligibility criteria. In addition, because operators typically offer to
``match'' an investor with one or more advisers compensating it to
participate in the service, operators typically engage in solicitation
or referral activities.\157\
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    \155\ See Commonwealth Comment Letter. This commenter stated
that such operators typically offer to ``match'' an investor with an
adviser. When an investor clicks on a link, the investor provides
information to the operator (e.g., age, investable assets, and
goals) and the operator matches the investor to one or more advisers
participating in the service. Advisers generally pay a flat fee and/
or a per-lead fee to receive matches of potential investors from the
operator.
    \156\ See MMI Comment Letter (stating that in some cases, the
operator charges an administrative or service fee to the investment
advisers whose products and services are accessible through the
operator).
    \157\ See final rule 206(4)-1(e)(5)(ii) and (iii) and (17)(ii)
and (iii).
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    Similarly, a blogger's website review of an adviser's advisory
service would be a testimonial or an endorsement under the final
marketing rule because it indicates approval, support, or a
recommendation of the investment adviser, or because it describes its
experience with the adviser.\158\ If the adviser directly or indirectly
compensates the blogger for its review, for example by paying the
blogger based on the amount of assets deposited in new accounts from
client referrals or the number of accounts opened, the testimonial or
endorsement will be an advertisement under the definition's second
prong.\159\ Depending on the facts and circumstances, a lawyer or other
service provider that refers an investor to an adviser, even
infrequently, may

also meet the rule's definition of testimonial or endorsement.
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    \158\ See final rule 206(4)-1(5)(i) and (17)(i).
    \159\ See final rule 206(4)-1(e)(1)(ii).
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    On the other hand, where an adviser pays a third-party marketing
service or news publication to prepare content for and/or disseminate a
communication, we generally would not treat this communication as an
endorsement under the second prong of the definition of
``advertisement.'' \160\ Similarly, a non-investor selling an adviser a
list containing the names and contact information of prospective
investors typically would not, without more, meet the definition of
endorsement.\161\ This activity typically would not fall within the
plain text of the definition of endorsement (e.g., the seller does not
indicate approval, support, or recommendation of the investment
adviser, or describe its experience with the adviser, or engage in the
solicitation or referral activities described therein).
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    \160\ However, such a communication would be an advertisement
under the first prong of the definition of ``advertisement.'' See
supra section II.A.2.
    \161\ See Nesler Comment Letter.
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    One commenter requested an exclusion from the definition of
solicitor under the proposed solicitation rule for an investment