consultant that administers a RFP to aid one or more investors in
selecting an investment adviser or a private fund investment
vehicle.\162\ The commenter stated that the investor typically hires
the consultant (the ``agent''), subject to the understanding that the
investor will only enter into a transaction with an investment adviser
that agrees to pay the expenses of the agent for providing this
service.\163\ In these circumstances, we do not believe the adviser
typically compensates the agent to endorse the adviser because the
investor engages the agent to evaluate the adviser based on criteria
that the investor provides.\164\
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    \162\ See IAA Comment Letter (alternately requesting, in the
absence of an exclusion, clarification as to status under the
proposed solicitation rule). This commenter stated that these agents
facilitate submissions by investment advisers in the RFP process and
prepare reports for prospective investors regarding investment
advisers under consideration. Furthermore, in many cases the adviser
must enter into an agreement with the agent to participate in the
RFP process.
    \163\ We understand that the consultant is typically not an
advisory client of the advisers it selects to participate in the RFP
process, and therefore the final rule's testimonial provision would
usually not apply.
    \164\ Though a quid pro quo is not always determinative of
whether the compensation element of this prong of the definition of
advertisement is satisfied, these facts suggest a lack of quid pro
quo and, without more, would not implicate the second prong of the
definition. The adviser in this scenario will likely also not
implicate the first prong of the definition of advertisement because
the adviser is not making a direct or indirect communication to more
than one person that offers the investment adviser's investment
advisory services with regard to securities to investors. See final
rule 206(4)-1(e)(1)(i). See also supra section II.A.2.
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d. Exclusion for Regulatory Communications; Inclusion of One-on-One and
Extemporaneous, Live, Oral Communications
    The second prong of the definition of advertisement excludes any
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.\165\ As with the same exclusion in the
first prong of the definition, this exclusion reflects our belief that
communications that are prepared as a requirement of statutes, rules,
or regulations should not be viewed as advertisements under the rule.
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    \165\ See final rule 206(4)-1(e)(1)(ii).
---------------------------------------------------------------------------

    Unlike the first prong of the definition of advertisement, however,
this prong does not exclude extemporaneous, live, oral communications
or one-on-one communications. These types of communications are
precisely what the second prong of the definition seeks to address,
along with other types of endorsement and testimonial activities. The
current solicitation rule has also addressed these types of
communications. In addition, the second prong does not exclude
communications that include hypothetical performance information.
    Compensated testimonials and endorsements have the potential to
mislead given a promoter's financial incentive to recommend the
adviser. Without appropriate safeguards, a compensated testimonial or
endorsement creates a risk that the investor would mistakenly view the
promoter's 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 otherwise would if the
investor knew of the promoter's incentive.
    Finally, some commenters requested an exclusion from the proposed
solicitation rule for persons registered with the Commission as broker-
dealers under the Exchange Act.\166\ We continue to believe that the
final rule's investor protections should apply to compensated
endorsements and testimonials by any person, including a registered
broker-dealer. However, we are adopting a partial exemption from the
rule's disqualification provisions for certain compensated testimonials
and endorsements made by a registered broker-dealer.\167\ We also are
adopting a partial exemption from the rule's disclosure provisions when
a broker-dealer provides a testimonial or endorsement to a retail
customer that is a recommendation subject to Regulation BI.\168\
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    \166\ See Credit Suisse Comment Letter (citing the ``robust
regulatory framework'' already applicable to SEC-registered broker-
dealers); MFA/AIMA Comment Letter I.
    \167\ See infra section II.C.5.
    \168\ See id.
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e. Investment Adviser and Broker-Dealer Status and Registration for
Persons Who Provide Endorsements or Testimonials
    We proposed to withdraw our position that a solicitor who engages
in solicitation activities in accordance with paragraph (a)(2)(iii) of
the cash solicitation rule will be, at least with respect to those
activities, an associated person of an investment adviser and therefore
will not be required to register individually under the Advisers Act
solely as a result of those activities (the ``1979 position'').\169\
Although the 1979 position will no longer apply upon the rescission of
the current solicitation rule, we are not adopting a similar position
with respect to endorsements and testimonials under the final marketing
rule.
---------------------------------------------------------------------------

    \169\ See 2019 Proposing Release, supra footnote 7, at n.346.
Two commenters argued that, as a matter of statutory interpretation,
solicitors fall within the Act's definition of ``person associated
with an investment adviser.'' See SIFMA AMG Comment Letter II;
Credit Suisse Comment Letter.
---------------------------------------------------------------------------

    A promoter may, depending on the facts and circumstances, be acting
as an investment adviser within the meaning of section 202(a)(11) of
the Act.\170\ Investment adviser status and registration questions
require analysis of the applicable facts and circumstances, including,
for example, whether a person is ``advising'' others within the meaning
of section 202(a)(11) of the Act.\171\ A promoter also may be acting as
a broker or dealer within the meaning

of section 3(a)(4) or 3(a)(5) of the Exchange Act, for example, when
soliciting investors for, or referring investors to, an adviser or a
private fund advised by the adviser. Any promoter must determine
whether it is subject to statutory or regulatory requirements under
Federal law, including the requirement to register as an investment
adviser pursuant to the Act and/or as a broker-dealer pursuant to
section 15(a) of the Exchange Act, respectively. If the promoter is a
supervised person of the adviser for which it is providing a
testimonial or endorsement, the promoter does not need to separately
register with the Commission as an investment adviser solely as a
result of his or her activities as a promoter.\172\ A promoter also
must determine whether it is subject to certain state law and certain
FINRA rules, including any applicable state licensing requirements
applicable to individuals.\173\ To be clear, we are not making a
presumption that a person providing an endorsement or testimonial meets
the definition of investment adviser or broker-dealer and must register
under the Act or the Exchange Act, respectively. Nor are we making a
presumption that such person may or may not be an associated person of
a registered investment adviser. Indeed, we agree that some promoters
may meet the definition of associated person of an investment adviser
depending on the facts and circumstances.\174\ Others may not.\175\
Under the final marketing rule, if an adviser determines that a person
providing an endorsement or testimonial is an associated person, the
adviser should have requisite control of such person.\176\
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    \170\ Depending on the facts and circumstances, a promoter may
also be acting as an investment adviser under applicable state law.
    \171\ Commission staff previously stated that a person providing
advice to a client as to the selection or retention of an investment
manager or managers also, under certain circumstances, would be
deemed to be ``advising'' others within the meaning of section
202(a)(11) of the Act. See Applicability of the Investment Advisers
Act to Financial Planners, Pension Consultants, and Other Persons
Who Provide Investment Advisory Services as a Component of Other
Financial Services, Release No. IA-1092 (Oct. 8, 1987) [52 FR 38400
(Oct. 16, 1987)], at footnote 6 and accompanying text. However,
solicitation of clients may not involve providing investment advice
on behalf of an adviser. See Release 1633, supra footnote 4, at text
accompanying n.123. See also Commission Interpretation Regarding the
Solely Incidental Prong of the Broker-Dealer Exclusion to the
Definition of Investment Adviser, Release No. IA-5249 (June 5, 2019)
[84 FR 33669 (July 12, 2019)].
    \172\ An adviser's registration with the Commission covers its
supervised persons, provided that their advisory activities are
undertaken on the adviser's behalf.
    \173\ Most states impose registration, licensing, or
qualification requirements on investment adviser representatives who
have a place of business in the state, regardless of whether the
investment adviser is registered with the Commission or the state.
See Staff of the U.S. Securities and Exchange Commission, Study on
Investment Advisers and Broker-Dealers As Required by Section 913 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Jan.
2011), available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf, at 86. See also rule 203A-3(a)(1) (definition of
``investment adviser representative''). In some states, a third-
party solicitor will be subject to state qualification requirements
to the extent state investment adviser statutes apply to solicitors.
See Release 1633, supra footnote 4, at text accompanying n.125.
    \174\ See Nesler Comment Letter (arguing that an SEC-registered
adviser should be entitled to treat a non-employee solicitor as an
``associated person'' as long as the adviser exercises control and
supervision over such solicitor in connection with the performance
of its solicitation activities).
    \175\ See Pickard Djinis Comment Letter (describing that
solicitors that perform paid unscripted media campaigns on behalf of
advisers, may not be under the adviser's control). Such a paid
solicitor may not be a ``person associated with the investment
adviser,'' depending on the facts and circumstances.
    \176\ See rule 204A-1(a) (requiring adviser codes of ethics
that, among other things, require supervised persons to comply with
applicable Federal securities laws).
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4. Investors in Private Funds
    Both prongs of the definition of ``advertisement'' will expressly
include marketing communications to private fund investors. The term
``private fund'' is defined in section 202(a)(29) of the Advisers Act
and means an issuer that would be an investment company, as defined in
section 3 of the Investment Company Act of 1940 (``Investment Company
Act''), but for section 3(c)(1) or 3(c)(7) of that Act. This is
consistent with the scope of the proposed amendments to the
solicitation rule.\177\ We are not adopting the broader scope of the
proposed amendments to the advertising rule, which generally would have
applied to advertisements sent to investors in ``pooled investment
vehicles,'' as defined in rule 206(4)-8 under the Act.\178\ In
connection with these changes, we have eliminated the need for the
proposed exclusion for advertisements, other sales materials, and sales
literature of registered investment companies (``RICs'') and business
development companies (``BDCs'') that are within the scope of rule 482
or 156 under the Securities Act of 1933 (``Securities Act'').\179\
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    \177\ See proposed rule 206(4)-3(c)(2).
    \178\ See proposed rule 206(4)-1(e)(9). See also definition of
``pooled investment vehicle'' in rule 206(4)-8 under the Act.
    \179\ Commenters recommended that the final rule exclude all
communications to investors in RICs and BDCs because the statutory
anti-fraud provisions and other Commission rules apply to these
communications. See, e.g., IAA Comment Letter; Comment Letter of the
European Fund and Asset Management Association (Feb. 13, 2020)
(``EFAMA Comment Letter'') (suggesting that the final rule also
exclude non-U.S. funds that are publicly offered (including UCITS));
ICI Comment Letter (recommending that the Commission exclude all
registered fund communications from the scope of the rule, including
sales literature subject to rule 34b-1 under the Investment Company
Act and generic advertisements subject to rule 135a under the
Securities Act). Given the regulatory framework applicable to
communications to investors in RICs and BDCs, we do not believe the
additional protections of the Advisers Act marketing rule are
necessary.
---------------------------------------------------------------------------

    Although we used different terms in each proposal, the scope of the
proposals effectively would have covered only certain communications to
private fund investors. In our advertising rule proposal, we included
all pooled investment vehicles and then excepted RIC or BDC
advertisements that were subject to rule 482 or 156 under the
Securities Act.\180\ We did not seek to apply the proposed solicitation
rule to promotional activity involving RICs and BDCs because we
believed that the primary goal of the proposal was already satisfied by
other regulatory requirements.\181\ Most notably, prospective investors
in RICs and BDCs sold through a broker-dealer or other financial
intermediary already receive disclosure about the conflicts of interest
that may be created due to the fund or its related companies paying the
intermediary for the sale of its shares and related services.\182\
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    \180\ See 2019 Proposing Release, supra footnote 7, at section
II.A.; proposed rule 206(4)-1(e)(9).
    \181\ See 2019 Proposing Release, supra footnote 7, at section
II.B.3.
    \182\ See Item 8 of Form N-1A. See also FINRA rule 2341(l)(4)
(generally prohibiting member firms from accepting any cash
compensation from an investment company, an adviser to an investment
company, a fund administrator, an underwriter or any affiliated
person (as defined in section 2(a)(3) of the Investment Company Act)
of such entities unless such compensation is described in a current
prospectus of the investment company).
---------------------------------------------------------------------------

    Commenters generally opposed applying the two rules to
communications to private fund investors.\183\ They stated that
existing, general anti-fraud provisions provide sufficient protection
and any additional regulation would be unnecessary and
duplicative.\184\ Other commenters supported explicitly including
private funds in the scope of the rules, arguing that doing so would
provide important protections to investors in these funds.\185\
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    \183\ See, e.g., AIC Comment Letter; MFA/AIMA Comment Letter I;
Comment Letter of the National Venture Capital Association (Feb. 14,
2020) (``NVCA Comment Letter''); IAA Comment Letter.
    \184\ See, e.g., AIC Comment Letter (citing rule 206(4)-1(a)(5)
and rule 206(4)-8 under the Advisers Act); NVCA Comment Letter
(citing rule 156(b)(3)(ii) under the Securities Act).
    \185\ See, e.g., ILPA Comment Letter; SBIA Comment Letter. See
also Consumer Federation Comment Letter; EFAMA Comment Letter
(supporting additional protections for investors in pooled
investment vehicles, but seeking an exception for certain non-U.S.
domiciled funds).
---------------------------------------------------------------------------

    We recognize that rule 206(4)-8 prohibits advisers to private funds
from making misstatements or materially misleading statements to
investors in those vehicles.\186\ An adviser's general anti-fraud
obligations to investors in private funds under rule 206(4)-8 parallel
an adviser's general anti-fraud

obligations to all clients and prospective clients under section 206 of
the Act. Accordingly, although the final marketing rule overlaps with
the prohibitions in rule 206(4)-8 in certain circumstances, just as it
overlaps with section 206 with respect to an adviser's clients and
prospective clients, we believe it is important from an investor
protection standpoint to delineate these obligations to all investors
in the advertising context and provide a framework for an adviser's
advertisements to comply with these obligations.
---------------------------------------------------------------------------

    \186\ Section 206(4) of the Advisers Act authorizes the
Commission to adopt rules and regulations that ``define, and
prescribe means reasonably designed to prevent, such acts,
practices, and courses of business as are fraudulent, deceptive, or
manipulative.'' 15 U.S.C. 80b-6(4). See rule 206(4)-8(a)(1). We are
adopting this rule under the same authority of section 206(4) of the
Advisers Act on which we relied in adopting rule 206(4)-8. See
Prohibition of Fraud by Advisers to Certain Pooled Investment
Vehicles, Release No. IA-2628 (Aug. 3, 2007) [75 FR 44756 (Aug. 9,
2007)].
---------------------------------------------------------------------------

    By including marketing communications to private fund investors,
the final rule will provide more specificity (and certainty) regarding
what we believe to be untrue or misleading statements that advisers
must avoid in their advertisements.\187\ The general prohibitions, for
example, will provide advisers with a principles-based framework to
assess private fund advertisements and will provide greater clarity,
compared to the anti-fraud provisions of the Act, on marketing
practices that are likely misleading.\188\ This approach is consistent
with some commenters who stated that the Commission should finalize
rules in a manner that provides guidance to advisers on how to comply
with a principles-based approach without creating overly prescriptive
requirements that can be difficult to apply in practice.\189\
---------------------------------------------------------------------------

    \187\ For example, rule 206(4)-8 prohibits investment advisers
to pooled investment vehicles from engaging in any act, practice, or
course of business that is fraudulent, deceptive, or manipulative
with respect to any investor or prospective investor in the pooled
investment vehicle. The final rule will include more specific
provisions in the context of advertisements. See final rule 206(4)-
1(b) through (d). To the extent that an advertising practice would
violate a specific restriction imposed by the final rule, rule
206(4)-8 may already prohibit the practice.
    \188\ We recognize that a single investor could invest in both
private funds managed by the adviser and other products (e.g.,
separately managed accounts) managed by the adviser. The final rule
would ensure that advisers apply the same principles-based framework
across products and services, which could reduce advisers'
compliance burdens.
    \189\ See MFA/AIMA Comment Letter III. But see supra footnotes
183-184.
---------------------------------------------------------------------------

    We understand that many private fund advisers already consider the
current staff positions related to the current advertising rule when
preparing their marketing communications.\190\ As a result, we believe
that our application of the final rule to advertisements to private
fund investors would result in limited additional regulatory or
compliance costs for many of these advisers.
---------------------------------------------------------------------------

    \190\ See SBIA Comment Letter; NRS Comment Letter.
---------------------------------------------------------------------------

    We also believe that the modifications from the proposal will
reduce potential costs and alleviate commenters' concerns regarding the
application of the final rule to an adviser's advertisements to private
fund investors. For example, the first prong of the definition of
advertisement will not include one-on-one communications to private
fund investors or communications with existing investors; as such,
those communications will be subject to rule 206(4)-8 and not the
advertising rule.\191\ The first prong of the definition of
advertisement also excludes live, oral, extemporaneous communications.
Further, we are not adopting a requirement for an adviser to pre-review
all advertisements prior to dissemination or requirements for retail
versus non-retail advertisements, as discussed below.\192\
Collectively, we believe these changes appropriately scope
advertisements that would be subject to the rule.
---------------------------------------------------------------------------

    \191\ These communications also are subject to various statutory
and regulatory anti-fraud provisions, such as section 17(a) of the
Securities Act, section 10(b) of the Exchange Act, and rule 10b-5
thereunder.
    \192\ See infra sections II.E. and II.G. See also NYC Bar
Comment Letter (discussing the administrative and compliance burdens
and costs associated with applying the standards for Retail
Advertisements and Non-Retail Advertisements (each as defined below)
for private funds under the proposed advertising rule).
---------------------------------------------------------------------------

    Not all communications to private fund investors would be
advertisements under the final rule. Most commenters stated that
private placement memoranda (``PPMs'') should not be treated as
advertisements.\193\ We agree that information included in a PPM about
the material terms, objectives, and risks of a fund offering is not an
advertisement of the adviser.\194\ Private fund account statements,
transaction reports, and other similar materials delivered to existing
private fund investors, and presentations to existing clients
concerning the performance of funds they have invested in (for example,
at annual meetings of limited partners) also would not be considered
advertisements under the final rule. However, pitch books or other
materials accompanying PPMs could fall within the definition of an
advertisement.
---------------------------------------------------------------------------

    \193\ See, e.g., MFA/AIMA Comment Letter I; AIC Comment Letter;
Proskauer Comment Letter.
    \194\ PPMs are subject to the anti-fraud provisions of the
Federal securities laws. See also supra footnote 88 (discussing an
adviser's fiduciary duties). Whether particular information included
in a PPM constitutes an advertisement of the adviser depends on the
relevant facts and circumstances. For example, if a PPM contained
related performance information of separate accounts the adviser
manages, that related performance information is likely to
constitute an advertisement.
---------------------------------------------------------------------------

    Some commenters sought clarification that due diligence rooms and
their contents would not be considered advertisements.\195\ While due
diligence rooms themselves are not advertisements, it is possible that
some of the information they contain could qualify as an advertisement
if the materials satisfy the requirements of the advertisement
definition.
---------------------------------------------------------------------------

    \195\ See, e.g., MFA/AIMA Comment Letter I; IAA Comment Letter;
ILPA Comment Letter (seeking clarification that non-promotional
material contained in a data room would not be subject to the rule).
---------------------------------------------------------------------------

    Some commenters recommended expanding the final rule to other types
of unregistered pooled investment vehicles, and one commenter specified
which other types of unregistered pooled investment vehicles should be
subject to the rule.\196\ While these commenters generally supported
the idea of extending the scope of the rule, they did not explain why.
Accordingly, we believe that the scope of the final rule is appropriate
at this time.
---------------------------------------------------------------------------

    \196\ See, e.g., EFAMA Comment Letter (supporting the
Commission's proposal to increase protections to investors in
collective investment schemes, but recommending that the Commission
exclude (i) non-U.S. domiciled publicly offered, closed-end and
open-end investment funds, including UCITS, and (ii) alternative
investment funds and other non-U.S. domiciled funds that would be an
investment company, as defined in section 3 of the Investment
Company Act, but for sections 3(c)(1) or 3(c)(7) of that Act); ILPA
Comment Letter (recommending expanding to funds excluded from the
definition of investment company by reason of section 3(c)(5) or
3(c)(11) of the Investment Company Act).
---------------------------------------------------------------------------

    A commenter specifically sought confirmation that the proposed
rules would not apply to an adviser whose principal office and place of
business is outside the United States (offshore adviser) with regard to
any of its non-U.S. clients even if the non-U.S. client is a fund with
U.S. investors.\197\ This commenter and others also asked the
Commission to clarify the application of the proposals to
communications with non-U.S. investors in funds domiciled outside of
the United States.\198\ We have previously stated, and continue to take
the position, that most of the substantive provisions of the Advisers
Act do not apply with respect to the non-U.S. clients (including funds)
of a registered offshore adviser.\199\ This

approach was designed to provide appropriate flexibility where an
adviser has its principal office and place of business outside of the
United States.\200\ We believe it is appropriate to continue to apply
this approach in this context. For an adviser whose principal office
and place of business is in the United States (onshore adviser), the
Advisers Act and rules thereunder apply with respect to the adviser's
U.S. and non-U.S. clients.\201\
---------------------------------------------------------------------------

    \197\ See Sidley Austin Comment Letter; see also Registration
Under the Advisers Act of Certain Hedge Fund Advisers, Release No.
IA-2333 (Dec. 2, 2004) [69 FR 72054, 72072 (Dec. 10, 2004)] (``Hedge
Fund Adviser Release'').
    \198\ See IAA Comment Letter; EFAMA Comment Letter.
    \199\ See Exemptions for Advisers to Venture Capital Funds,
Private Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers, Release No. IA-3222 (June
22, 2011) [76 FR 39645 (July 6, 2011)] (Most of the substantive
provisions of the Advisers Act do not apply to the non-U.S. clients
of a non-U.S. adviser registered with the Commission.); Hedge Fund
Adviser Release, supra footnote 197 (stating that the following
rules under the Advisers Act would not apply to a registered
offshore adviser, assuming it has no U.S. clients: Compliance rule,
custody rule, and proxy voting rule and stating that the Commission
would not subject an offshore adviser to the rules governing adviser
advertising [17 CFR 275.206(4)-1], or cash solicitations [17 CFR
275.206(4)-3] with respect to offshore clients); American Bar
Association, SEC Staff No-Action Letter (Aug. 10, 2006) (confirming
that the substantive provisions of the Act do not apply to offshore
advisers with respect to those advisers' offshore clients (including
offshore funds) to the extent described in those letters and the
Hedge Fund Adviser Release); IM Information Update No. 2017-03.
    \200\ See Hedge Fund Adviser Release, supra footnote 197 (noting
that U.S. investors in an offshore fund generally would not expect
the full protection of the U.S. securities laws and that U.S.
investors may be precluded from an opportunity to invest in an
offshore fund if their participation would result in full
application of the Advisers Act and rules thereunder, but that a
registered offshore adviser would be required to comply with the
Advisers Act and rules thereunder with respect to any U.S. clients
it may have).
    \201\ See, e.g., Hedge Fund Adviser Release supra footnote 197.
---------------------------------------------------------------------------

B. General Prohibitions

    We are adopting, largely as proposed, the general prohibitions of
certain marketing practices as a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts. We believe these practices
are associated with a significant risk of being false or misleading. We
therefore believe it is in the public interest to prohibit these
practices, rather than permit them subject to specified conditions. The
general prohibitions will apply to all advertisements to the extent
that an adviser directly or indirectly disseminates such advertisement.
Specifically, in any advertisement, an adviser may not:
    (1) Include any untrue statement of a material fact, or omit to
state a material fact necessary in order to make the statement made, in
the light of the circumstances under which it was made, not misleading;
    (2) Include a material statement of fact that the adviser does not
have a reasonable basis for believing it will be able to substantiate
upon demand by the Commission;
    (3) Include information that would reasonably be likely to cause an
untrue or misleading implication or inference to be drawn concerning a
material fact relating to the investment adviser;
    (4) Discuss any potential benefits to clients or investors
connected with or resulting from the investment adviser's services or
methods of operation without providing fair and balanced treatment of
any material risks or material limitations associated with the
potential benefits;
    (5) Include a reference to specific investment advice provided by
the investment adviser where such investment advice is not presented in
a manner that is fair and balanced;
    (6) Include or exclude performance results, or present performance
time periods, in a manner that is not fair and balanced; or
    (7) Otherwise be materially misleading.
    As noted in the proposal, to establish a violation of the rule, the
Commission will not need to demonstrate that an investment adviser
acted with scienter; negligence is sufficient.\202\
---------------------------------------------------------------------------

    \202\ See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992).
As we noted when we adopted rule 206(4)-8, the court in Steadman
analogized section 206(4) of the Advisers Act to section 17(a)(3) of
the Securities Act, which the Supreme Court had held did not require
a finding of scienter (citing Aaron v. SEC, 446 U.S. 680 (1980)).
See also Steadman at 643, n.5. In discussing section 17(a)(3) and
its lack of a scienter requirement, the Steadman court observed
that, similarly, a violation of section 206(2) of the Advisers Act
could rest on a finding of simple negligence. See also Fiduciary
Interpretation, supra footnote 88, at n.20.
---------------------------------------------------------------------------

    Many commenters supported the prohibitions' principles-based
framework.\203\ However, other commenters found the proposed general
prohibitions confusing and redundant and suggested streamlining them
into fewer standards (or eliminating them altogether) and relying on
the general anti-fraud standard instead.\204\ After considering
comments, we are making certain modifications, as discussed below. We
continue to believe that prohibiting certain marketing practices is
appropriate and that the final provisions provide important
requirements for investment advisers and protections for investors. In
our view, the general prohibitions provide greater clarity on marketing
practices that are likely misleading compared to just relying on the
anti-fraud provisions of the Act. We also believe that the general
prohibitions we are adopting provide appropriate flexibility and
regulatory certainty for advisers considering how to market their
investment advisory services.
---------------------------------------------------------------------------

    \203\ See, e.g., Wellington Comment Letter; ILPA Comment Letter;
IAA Comment; NRS Comment Letter; and NAPFA Comment Letter.
    \204\ See, e.g., MFA/AIMA Comment Letter I; Comment Letter of
Managed Funds Association and Alternative Investment Management
Association (May 8, 2020) (``MFA/AIMA Comment Letter II''). One
commenter also argued that withdrawing the SEC staff no-action
letters would create confusion and lack of guidance. NYC Bar Comment
Letter (citing, for example, Clover Capital Mgmt., Inc., SEC Staff
No-Action Letter (Oct. 28, 1986) (``Clover Letter''), Stalker
Advisory Services, SEC Staff No-Action Letter (Jan. 18,1994)
(Stalker Letter''), F. Eberstadt & Co., Inc., SEC Staff No-Action
Letter (July 2, 1978) (``Eberstadt Letter''), TCW Group, SEC Staff
No-Action Letter (Nov. 7, 2008) (``TCW Letter''), and Franklin
Management, Inc., SEC Staff No-Action Letter (Dec. 10, 1998)
(``Franklin Letter''). However, we do not view the principles of the
general prohibitions to be substantive departures from the positions
in existing staff no-action letters and guidance.
---------------------------------------------------------------------------

    In applying the general prohibitions, an adviser should consider
the facts and circumstances of each advertisement. The nature of the
audience to which the advertisement is directed is a key factor in
determining how the general prohibitions should be applied.\205\ For
instance, the amount and type of information that may need to be
included in an advertisement directed at retail investors may differ
from the information that may need to be included in an advertisement
directed at sophisticated institutional investors.
---------------------------------------------------------------------------

    \205\ The nature of the audience would be relevant if an adviser
chooses to tailor the content of an advertisement to a specific
audience because the content is not appropriate for a broader
audience. FINRA has a similar requirement under its General
Standards regarding Communications with the Public. See FINRA rule
2210(d)(1)(E) (``Members must consider the nature of the audience to
which the communication will be directed and must provide details
and explanations appropriate to the audience.'').
---------------------------------------------------------------------------

    We discuss below each of the general prohibitions and the comments
we received.
1. Untrue Statements and Omissions
    As proposed, the final rule will prohibit advertisements that
include any untrue statements of a material fact, or that omit a
material fact necessary in order to make the statement made, in the
light of the circumstances under which it was made, not
misleading.\206\ One commenter argued that this prohibition would be
duplicative of sections 206(1) and (2) of the Advisers Act, which
prohibit advisers from ``employ[ing] any device, scheme or artifice to
defraud any client or prospective client'' and ``engag[ing] in any
transaction, practice, or course of business which operates as a fraud
or deceit upon any client or prospective

client.'' \207\ However, we view this prohibition as complementary to,
rather than duplicative of, the statutory anti-fraud prohibitions cited
by the commenter.\208\ We continue to believe that this prohibition,
together with the other general prohibitions under the rule, is
appropriately designed to prevent fraud under the Act, specifically in
the context of marketing. Moreover, this provision retains the
substance of current rule 206(4)-1(a)(5).\209\
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    \206\ Final rule 206(4)-1(a)(1).
    \207\ NYC Bar Comment Letter. This commenter also noted that
section 206(4) prohibits investment advisers from ``engag[ing] in
any act, practice, or course of business which is fraudulent,
deceptive, or manipulative.''
    \208\ While we acknowledge there may be circumstances that are
covered by both the anti-fraud prohibitions and this provision, we
believe that this provision helps provide specificity when
addressing an adviser's marketing activities. In addition, to the
extent possible, this rule can serve as a resource for identifying
an adviser's obligations with respect to marketing generally, and
thus we believe that retaining this general prohibition will serve
to assist advisers in meeting their compliance obligations.
    \209\ Current rule 206(4)-1(a)(5) prohibits an advertisement
that contains any untrue statement of a material fact and uses
similar wording as other anti-fraud provisions in the Federal
securities laws. See, e.g., 17 CFR 240.10b-5; 15 U.S.C. 77q(a)(2);
17 CFR 230.156(a); rule 206(4)-8.
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    As with similar anti-fraud provisions in the Federal securities
laws, whether a statement is false or misleading depends on the context
in which the statement or omission is made.\210\ For example, as under
the current rule, advertising that an adviser's performance was
positive during the last fiscal year may be misleading if the adviser
omitted that an index or benchmark consisting of a substantively
comparable portfolio of securities experienced significantly higher
returns during the same period. To avoid making a misleading statement,
the adviser in this example could include the relevant index or
benchmark or otherwise disclose that the adviser's performance,
although positive, significantly underperformed the market.\211\
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    \210\ When we use the phrase ``false or misleading statements''
in this release, we are referring to this general prohibition
against advertisements that include any untrue statements of a
material fact, or omissions of a material fact necessary in order to
make a statement, in the light of the circumstances under which it
was made, not misleading.
    \211\ Although one commenter stated that an adviser should be
required to show returns of an appropriate benchmark for the same
periods as presented for the adviser's performance, we do not
believe that it is necessary to prescribe such disclosures and that
such decisions should be left at the discretion of the adviser,
subject to the general prohibitions of the final rule and the
general anti-fraud provisions of the Federal securities laws. See
CFA Institute Comment Letter. Accordingly, we are not requiring the
inclusion of a relevant index or benchmark to avoid making any
presentation of performance misleading.
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    Under the final rule, it would be misleading for an adviser to
compensate a person to refer investors to the adviser by stating that
the person had a ``positive experience'' with the adviser when such
person is not a client or private fund investor of the adviser for its
advisory services. To avoid making such a statement misleading, the
adviser could disclose that the experience does not relate to any
advisory services. It would also be misleading for an adviser to use a
promoter's testimonial or endorsement that the adviser knows or
reasonably should know to be fraudulent, misleading, or untrue,
regardless of whether the adviser compensates the promoter. For
instance, an adviser may not provide a testimonial on its website where
a client falsely claims that the client has worked with the adviser for
over 20 years when the adviser has only been in business for five
years.
    The current rule contains an explicit prohibition on advertisements
that contain statements to the effect that a report, analysis, or other
service will be furnished free of charge, unless the analysis or
service is actually free and without condition.\212\ We continue to
believe that this practice will be captured by the final rule's
prohibition on untrue statements or omissions. As a result, the final
rule will not contain separate explicit prohibitions of such
statements. In addition, depending on the disclosures provided and the
extent to which an adviser in fact does provide investment advice
solely based on such materials, it may be false or misleading under
this provision to represent, directly or indirectly, in an
advertisement that any graph, chart, or formula can by itself be used
to determine which securities to buy or sell.\213\
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    \212\ See current rule 206(4)-1(a)(4); see also Dow Theory
Forecasts, Inc., SEC Staff No-Action Letter (May 21, 1986) (``Dow
Theory Letter'') (staff declined to provide no-action recommendation
where an offer for ``free'' subscription was subject to conditions).
    \213\ An adviser's use of graphs, charts, or formulas to
represent, directly or indirectly, that such graphs, charts, or
formulas can in and of themselves be used to determine which
securities to buy or sell, or when to buy or sell them, is
explicitly prohibited in the current rule. See current rule 206(4)-
1(a)(3) (also prohibiting an advertisement from representing,
directly or indirectly, that any graph, chart, formula or other
device being offered will assist any person in making his own
decisions as to which securities to buy, sell, or when to buy or
sell them, without disclosing the limitations and difficulties with
respect to the use of such a graph, chart, formula or other device).
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2. Unsubstantiated Material Statements of Fact
    The proposed rule would have prohibited advertisements that include
any material claim or statement that is unsubstantiated.\214\
Commenters argued that the proposed ``substantiation'' requirement
would be overly burdensome.\215\ For example, two commenters argued
that it would require advisers to obtain evidence to support every
claim or statement in an advertisement out of uncertainty as to what
might be ``material.'' \216\ Commenters also found the requirement
unclear, questioning whether, for example, such a prohibition would
effectively foreclose any statements of opinion.\217\ We are sensitive
to commenters' concerns regarding the burdens and lack of clarity of
this proposed provision. As a result, we are making two changes to the
requirement.
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    \214\ See proposed rule 206(4)-1(a)(2).
    \215\ See, e.g., MFA/AIMA Comment Letter I (stating that this
requirement would greatly increase cost and operational burdens and
curb the flow of information to clients and investors); FPA Comment
Letter; NVCA Comment Letter; Fried Frank Comment Letter.
    \216\ See MFA/AIMA Comment Letter I; Fried Frank Comment Letter.
    \217\ See, e.g., MFA/AIMA Comment Letter I; FPA Comment Letter;
Fried Frank Comment Letter.
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    First, we are limiting the substantiation requirement to matters of
material fact rather than any material claim or statement. We do not
believe that this would be unduly burdensome for advisers as such
material statements of fact, as opposed to opinions, should be
verifiable. For instance, material facts might include a statement that
each of its portfolio managers holds a particular certification or that
it offers a certain type or number of investment products. Claims about
performance would also be statements about material facts.\218\
Conversely, statements that clearly provide an opinion would not be
statements of material fact.
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    \218\ For example, we would view performance returns included in
an advertisement to be material statements of fact that an adviser
would need a reasonable basis for believing that it will be able to
substantiate. Because current rule 204-2(a)(16) already requires the
maintenance of records ``to support the basis for or demonstrate the
calculation of the performance or rate of return of any or all
managed accounts or securities recommendations in any . . .
advertisement,'' we believe that any recordkeeping burden related to
performance information included in an advertisement will not be
significantly new or altered. See current rule 204-2(a)(16). Final
rule 204-2(a)(16) will similarly require advisers to retain records
or documents necessary to form the basis for or demonstrate the
calculation of the performance or rate of return of any or all
managed accounts, portfolio or securities recommendations presented
in any advertisement. See final rule 204-2(a)(16).
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    Second, we are requiring advisers to have a reasonable basis to
believe that they can substantiate material claims of fact upon demand
by the Commission.\219\ This change is designed

to reduce burdens on advisers and allow them to avoid the need to
develop and maintain a file of substantiating materials for every
advertisement.\220\
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    \219\ Final rule 206(4)-1(a)(2). Demand by the Commission
includes demand by the Commission's examiners or other
representatives. The adviser's obligation to produce such materials
on demand will last as long as the relevant advertisement needs to
be retained under the recordkeeping rule. See current rule 204-
2(e)(1).
    \220\ See, e.g., MFA/AIMA Comment Letter I; NVCA Comment Letter.
---------------------------------------------------------------------------

    Advisers would be able to demonstrate this reasonable belief in a
number of ways. For example, they could make a record contemporaneous
with the advertisement demonstrating the basis for their belief.\221\
An adviser might also choose to implement policies and procedures to
address how this requirement is met. However, if an adviser is unable
to substantiate the material claims of fact made in an advertisement
when the Commission demands it, we will presume that the adviser did
not have a reasonable basis for its belief. We believe that the burden
on advisers to have a reasonable basis for believing they will be able
to substantiate a material statement of fact upon demand by the
Commission is justified by the importance of ensuring that advisers do
not advertise material claims of fact that cannot be substantiated and
the need to facilitate our staff's examination of advisers.
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    \221\ Some advisers likely will (and some already do) maintain
records to substantiate non-performance material statements of fact
included in an advertisement when the advertisement is created;
however, this is not required as long as the adviser has a
reasonable basis for believing it will be able to substantiate the
information upon demand by the Commission.
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3. Untrue or Misleading Implications or Inferences
    The proposed rule would have prohibited any advertisement that
includes an untrue or misleading implication about, or is reasonably
likely to cause an untrue or misleading inference to be drawn
concerning, a material fact relating to an investment adviser.\222\
After considering comments, we are adopting this prohibition but
modifying it to add the reasonableness standard to ``implication,'' and
not only to ``inference.'' \223\ Accordingly, the final rule will
prohibit an adviser from including, in any advertisement, information
that would reasonably be likely to cause an untrue or misleading
implication or inference to be drawn concerning a material fact
relating to an investment adviser.\224\
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    \222\ See proposed rule 206(4)-1(a)(3).
    \223\ See Flexible Plan Investments Comment Letter II.
    \224\ Final rule 206(4)-1(a)(3). An adviser's statements in an
advertisement also are subject to section 208(a) of the Act, which
generally states that it is unlawful for a registered investment
adviser to represent or imply that it has been sponsored,
recommended, or approved by any agency of the United States. Section
208(b) of the Act generally states that Section 208(a) shall not be
construed to prohibit a person from stating that he is registered
with the Commission as an investment adviser if the statement is
true and if the effect of his registration is not misrepresented.
Nevertheless, an adviser's use of the phrase ``registered investment
adviser'' (or the initials ``RIA'' or ``R.I.A.'') to state or imply
that it has a level of professional competence, education or other
special training could be misleading under the final rule.
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    One commenter suggested eliminating this prohibition altogether and
instead relying on the prohibition against untrue statements or
omissions, stating that it is difficult to enforce when something is
``implied'' or ``inferred.'' \225\ However, we continue to believe that
this prohibition appropriately addresses certain activities that would
not be subject to the first prohibition, such as those raised in
previous staff no-action letters.\226\ For example, this provision will
prohibit an adviser from making a series of statements in an
advertisement that literally are true when read individually, but whose
overall effect is reasonably likely to create an untrue or misleading
inference or implication about the investment adviser.\227\ For
instance, if an adviser were to state accurately in an advertisement
that it has ``more than a hundred clients that have stuck with me for
more than ten years,'' we believe it may create a misleading
implication if the adviser actually has a very high turnover rate of
clients. Additionally, this provision will prohibit an adviser from
stating that all of its clients have seen profits, even if true,
without providing appropriate disclosures if it only has two clients,
as it may be reasonably likely to cause a misleading inference by
potential clients that they would have a high chance of profit by
hiring the adviser as well.
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    \225\ CFA Institute Comment Letter.
    \226\ See, e.g., Clover Letter (stating the use of performance
results in an advertisement in the staff's view would be false or
misleading if it implies, or a reader would infer from it, something
about the adviser's competence or about future investment results
that would not be true had the advertisement included all material
facts); Stalker Letter (stating that copies of articles printed in
independent publications that contain performance information of an
adviser would be prohibited if they implied false or misleading
information absent additional facts); Eberstadt Letter (stating that
advertisements could be misleading if they imply positive facts
about the adviser when additional facts, if also provided, would
cause the implication not to arise).
    \227\ See In the Matter of Spear & Staff, Inc., Release No. IA-
188 (Mar. 25, 1965) (settled order) (the Commission brought an
enforcement action against an investment adviser asserting, in part,
that the adviser's advertisements, which recounted a number of
factually accurate stories highlighting the outstanding investment
success of certain selected clients collectively created ``illusory
hopes of immediate and substantial profit'').
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    Commenters requested more guidance regarding when advertised
testimonials would comply with this general prohibition.\228\ Two
commenters argued that it would effectively eliminate an adviser's
ability to use testimonials if advisers had to present negative
testimonials alongside positive ones, particularly in the context of
online and social media platforms.\229\
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    \228\ See AIC Comment Letter (``The Proposing Release does not
suggest how an adviser may ascertain whether a testimonial is
representative of that adviser's investors. Such a determination may
require that an adviser poll or survey a material sample of its
investors.''); IAA Comment Letter; SIFMA AMG Comment Letter I;
Comment Letter of Truth in Advertising, Inc. (Feb. 10, 2020) (``TINA
Comment Letter'').
    \229\ See SIFMA AMG Comment Letter II and IAA Comment Letter.
---------------------------------------------------------------------------

    We do not believe that the general prohibition requires an adviser
to present an equal number of negative testimonials alongside positive
testimonials in an advertisement, or balance endorsements with negative
statements in order to avoid giving rise to a misleading inference, as
certain commenters suggested.\230\ Rather, the general prohibition
requires the adviser to consider the context and totality of
information presented such that it would not reasonably be likely to
cause any misleading implication or inference. General disclaimer
language (e.g., ``these results may not be typical of all investors'')
would not be sufficient to overcome this general prohibition. However,
one approach that we believe would generally be consistent with the
general prohibitions would be for an adviser to include a disclaimer
that the testimonial provided was not representative, and then provide
a link to, or other means of accessing (such as oral directions to go
to the relevant parts of an adviser's website), all or a representative
sample of the testimonials about the adviser.
---------------------------------------------------------------------------

    \230\ See, e.g., IAA Comment Letter; SIFMA AMG Commenter Letter
I.
---------------------------------------------------------------------------

    As discussed in further detail in section II.B.5. below, we believe
this provision (along with the other provisions discussed below) will
prohibit ``cherry picking'' of past investments or investment
strategies of the adviser--that is, including favorable results while
omitting unfavorable ones in a manner that is not fair and balanced.
4. Failure To Provide Fair and Balanced Treatment of Material Risks or
Material Limitations
    The proposed rule would have prohibited advertisements that discuss

or imply any potential benefits connected with or resulting from the
investment adviser's services or methods of operation without clearly
and prominently discussing associated material risks or other
limitations associated with the potential benefits.\231\ We are
generally retaining this requirement with some modifications in
response to comments.\232\
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    \231\ Proposed rule 206(4)-1(a)(4).
    \232\ See final rule 206(4)-1(a)(4).
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    Some commenters suggested eliminating this prohibition, arguing
that it is redundant since Form ADV Part 2 already requires the
disclosure of material risks.\233\ Commenters also expressed concern
that this prohibition would expand the amount of required disclosures,
dramatically lengthen advertisements, and overwhelm the content
included in the advertisement.\234\ One commenter recommended removing
``or imply'' from this prohibition, stating that it would be difficult
for the Commission staff to prove something is implied.\235\ Several
commenters requested that the Commission permit the use of hyperlinks
and layered disclosures to satisfy the requirement that the necessary
disclosures be made ``clearly and prominently,'' arguing that such an
approach would be consistent with the Commission's stated goal of
modernizing the advertising rule.\236\ Commenters also suggested that
requiring an adviser to include detailed risk disclosures required
under the proposed general prohibition in a clear and prominent manner
may not be feasible in certain formats without the use of
hyperlinks.\237\
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    \233\ See, e.g., Ropes & Gray Comment Letter and MFA/AIMA
Comment Letter I.
    \234\ See MFA/AIMA Comment Letter I.
    \235\ CFA Institute Comment Letter.
    \236\ See, e.g., Fidelity Comment Letter; Ropes & Gray Comment
Letter; IAA Comment Letter; Comment Letter of T. Rowe Price (Feb.
10, 2020) (``T. Rowe Price Comment Letter''); LinkedIn Comment
Letter; SIFMA AMG Comment Letter II.
    \237\ See, e.g., MFA/AIMA Comment Letter I; LinkedIn Comment
Letter; Ropes & Gray Comment Letter.
---------------------------------------------------------------------------

    In response to these concerns, we have modified this provision to
prohibit advertisements that discuss any potential benefits connected
with or resulting from the investment adviser's services or methods of
operation without providing fair and balanced treatment of any material
risks or material limitations associated with the potential
benefits.\238\ We continue to believe that advertisements should
provide an accurate portrayal of both the risks and benefits of the
adviser's services. However, as proposed, the prohibition may have led
advisers to provide overly voluminous disclosure of associated material
risks, as well as overly inclusive disclosure of ``other limitations.''
We believe this could have resulted in lengthy, boilerplate disclosure
that could reduce the salience of the risk and limitation information
for investors.
---------------------------------------------------------------------------

    \238\ Final rule 206(4)-1(a)(4). For the sake of clarity, the
materiality standard will explicitly apply to both the risks and the
limitations.
---------------------------------------------------------------------------

    Because we are requiring fair and balanced treatment of material
risks or material limitations associated with the benefits advertised,
we no longer believe the requirement to ``clearly and prominently''
provide material risk disclosures is necessary.\239\ The proposed
prohibition was designed to mitigate the risk that an adviser's
advertisement might discuss only the benefits of its services but not
include sufficient information about the material risks that the client
may face. We believe that the requirement to provide benefits and
material risks in a fair and balanced manner similarly achieves this
goal. In addition, it will promote a more digestible discussion for
investors by making clear that advisers need not discuss every
potential risk or limitation in detail, but must instead discuss the
material risks and material limitations associated with the benefits in
a fair and balanced manner.\240\
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    \239\ As we discussed in the proposal, this general prohibition
was drawn from FINRA rule 2210's general standards. See FINRA rule
2210(d)(1)(D). The final rule's use of ``fair and balanced'' is more
closely aligned with FINRA 2210, and accordingly, we believe that
advisers that are familiar with those standards may be able to use
that experience as a guide in complying with this requirement.
    \240\ For example, if an adviser states that it will reduce an
investor's taxes through its tax-loss harvesting strategies, the
adviser should also discuss the associated material risks or
material limitations, including that any reduction in taxes would
depend on an investor's tax situation.
---------------------------------------------------------------------------

    We expect that this approach will help facilitate layered
disclosure. For example, an advertisement could comply with this
requirement by identifying one benefit of an adviser's services,
accompany the discussion of the benefit with fair and balanced
treatment of material risks associated with that benefit within the
four corners of that advertisement, and then include a hyperlink \241\
to additional content that discusses additional benefits and additional
risks of the adviser's services in a fair and balanced manner. So long
as each layer of a layered advertisement complies with the requirement
to provide benefits and risks in a fair and balanced manner, providing
hyperlinks to additional content would meet the requirement of this
general prohibition. However, an adviser should not use layered
disclosure or hyperlinks to obscure important information. For
instance, it would not be sufficient to advertise only an adviser's
past profits on a web page and then include a hyperlink to another page
that included all material risks and material limitations as that would
violate the fair and balanced presentation requirement.
---------------------------------------------------------------------------

    \241\ In addition to hyperlinks, advisers may use other tools to
provide investors with layered disclosure, including QR codes or
mouse-over windows.
---------------------------------------------------------------------------

    We are also removing the term ``imply'' from this general
prohibition, which a commenter found unclear.\242\ Removing the term
imply will make this provision more consistent with similar
requirements with which many advisers are already familiar.\243\ In
addition, we believe that the other general prohibitions (including the
prohibition on information that could cause a misleading implication or
inference to be drawn), address the concerns that led us to include the
term imply in this general prohibition at proposal.
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    \242\ See CFA Institute Comment Letter.
    \243\ See rule 156(b)(3)(i); FINRA rule 2210(d)(1).
---------------------------------------------------------------------------

    We believe this prohibition differs in scope from the disclosures
required by Form ADV. For example, Item 8 of Form ADV Part 2A requires
material risk disclosures more specifically with respect to investing
in securities and certain investment strategies and risks involved.
Moreover, an investment adviser must provide its brochure prepared in
accordance with Form ADV to its clients, but not to investors in
private funds it manages. The marketing rule's prohibition requires
risk disclosures related to any potential benefits advertised to both
clients and private fund investors. We believe that providing such
disclosures in advertisements is necessary in order to avoid misleading
potential investors as well as existing investors in connection with
new services or investments.
5. Anti-Cherry Picking Provisions: References to Specific Investment
Advice and Presentation of Performance Results
    The final rule contains, as proposed, two other provisions designed
to address concerns about investment advisers presenting potentially
cherry-picked information in advertisements.
a. References to Specific Investment Advice
    As proposed, the final rule will prohibit a reference in an
advertisement to specific investment advice that is not presented in a
fair and balanced manner.\244\ Commenters supported

replacing the current rule's per se prohibition against past specific
recommendations with this principles-based restriction on the
presentation of specific investment advice.\245\ One commenter also
supported the new fair and balanced standard.\246\ However, some
commenters requested more guidance on how to satisfy the fair and
balanced standard.\247\ Other commenters requested clarification that
the principles from certain staff no-action letters would not be the
sole means to comply with the fair and balanced standard.\248\ One
commenter asked whether we intend to incorporate the body of judicial
or administrative decisions regarding FINRA rule 2210 and other similar
provisions.\249\
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    \244\ See final rule 206(4)-1(a)(5).
    \245\ See, e.g., MFA/AIMA Comment Letter I; IAA Comment Letter;
T. Rowe Price Comment Letter.
    \246\ NRS Comment Letter.
    \247\ See, e.g., ILPA Comment Letter (requesting clarification
in the context of private equity funds); NASAA Comment Letter;
Consumer Federation Comment Letter.
    \248\ See MFA/AIMA Comment Letter I; T. Rowe Price Comment
Letter (noting that an adviser could mention security selections in
a fair and balanced manner without complying with past staff
positions).
    \249\ See NASAA Comment Letter. The phrase ``fair and balanced''
is used in FINRA rule 2210, which requires, among other things, that
broker-dealer communications ``must be fair and balanced and must
provide a sound basis for evaluating the facts in regard to any
particular security or type of security, industry, or service.'' See
FINRA rule 2210(d)(1)(A).
---------------------------------------------------------------------------

    We continue to believe this limitation requiring advertisements to
have only fair and balanced inclusions of, or references to, specific
investment advice is appropriate. The factors relevant to when an
advertisement's presentation of specific investment advice is fair and
balanced will vary depending on the facts and circumstances. We provide
examples of such factors below to illustrate the principles.\250\ While
in some cases advisers may wish to consider FINRA's interpretations
related to the meaning of ``fair and balanced'' for issues we have not
specifically addressed, FINRA Rule 2210 and its body of decisions are
not controlling or authoritative interpretations with respect to our
final rule.
---------------------------------------------------------------------------

    \250\ For selecting and presenting performance information,
these factors are in addition to the requirements and restrictions
on presentation of performance discussed in section II.A.5. See
final rule 206(4)-1(c). In addition, other provisions of the general
prohibitions may prohibit a reference to specific investment advice,
depending on the facts and circumstances. See 2019 Proposing
Release, supra footnote 7.
---------------------------------------------------------------------------

i. Examples Regarding the Presentation of Past Specific Investment
Advice
    An advertisement that references favorable or profitable past
specific investment advice without providing sufficient information and
context to evaluate the merits of that advice is not fair and balanced.
For example, an adviser may wish to share a ``thought piece'' to
describe the specific investment advice it provided in response to a
major market event. This would be permissible under the final rule,
provided the advertisement included disclosures with appropriate
contextual information for investors to evaluate those recommendations
(e.g., the circumstances of the market event, such as its nature and
timing, and any relevant investment constraints, such as liquidity
constraints, during that time).
    One practice currently used by advisers is to provide unfavorable
or unprofitable past specific investment advice in addition to the
favorable or profitable advice.\251\ An adviser also may consider
listing some, or all, of the specific investment advice of the same
type, kind, grade, or classification as those specific investments
presented in the advertisement.
---------------------------------------------------------------------------

    \251\ As stated in the proposal, an adviser may consider the
current rule's required disclosures when furnishing a list of all
past specific recommendations made by the adviser within the
immediately preceding period of not less than one year. See rule
206(4)-1(a)(2). However, the final rule will not require that an
adviser include such disclosures, and such disclosures will not be
the only way of satisfying paragraph (a)(4).
---------------------------------------------------------------------------

    As an example, an investment adviser might provide a list of
certain investments it recommended based upon certain selection
criteria, such as the top holdings by value in a given strategy at a
given point in time. The criteria investment advisers use to determine
such lists in an advertisement, as well as how the criteria are
applied, should produce fair and balanced results. We continue to
believe that consistent application of the same selection criteria
across measurement periods limits an investment adviser's ability to
reference specific investment advice in a manner that unfairly reflects
only positive or favorable results.\252\ For example, in deciding what
to include in an advertisement, an adviser may wish to apply non-
performance related selection criteria across portfolio holdings, such
as listing them on an alphabetical or rotational basis.\253\
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    \252\ An investment adviser should be mindful of the general
prohibitions when selecting the measurement periods as well.
    \253\ Our staff has previously stated that it would not
recommend enforcement action under rule 206(4)-1 relating to an
advertisement that includes performance-based past specific
recommendations based on certain representations, including that the
adviser would use objective, non-performance based criteria to
select the specific securities that it lists and discusses in the
advertisement. See Franklin Letter. Although an adviser may find
such staff positions helpful in complying with the final rule, the
final rule does not include requirements corresponding to the
specific representations in the Franklin letter.
---------------------------------------------------------------------------

    Some commenters questioned whether this aspect of the final rule
would permit case studies, which are popular in the private equity
industry.\254\ We believe that case studies and any other similar
information about the performance of portfolio companies are specific
investment advice, subject to this general prohibition. For example, it
would not be fair and balanced for an adviser to present, in an
advertisement, case studies only reflecting profitable investments
(when there are also similar unprofitable investments). To meet the
fair and balanced standard, an adviser may, for example, disclose the
overall performance of the relevant investment strategy or private fund
for at least the relevant period covered by the list of investments.
Case studies that include performance information also will be subject
to the final rule's restrictions and requirements for performance
advertising.\255\
---------------------------------------------------------------------------

    \254\ See AIC Comment Letter; ILPA Comment Letter.
    \255\ See final rule 206(4)-1(d).
---------------------------------------------------------------------------

    In determining how to present information in a fair and balanced
manner, advisers should consider the facts and circumstances of the
advertisement, including the nature and sophistication of the audience.
For example, in an advertisement intended for a retail investor, an
adviser may include certain disclosures to help the investor understand
that past specific investment advice does not guarantee future results
such as an explanation of the particular or unique circumstances of the
previous investment advice and how those circumstances are no longer
relevant. Less detailed disclosure may be needed in an advertisement
solely for sophisticated institutional investors, who more likely
understand the risks associated with past specific investment advice.
    In response to the commenters who asked for clarification that the
methods described in past staff no-action letters on presenting past
specific recommendations would not be the only way to meet the fair and
balanced standard,\256\ we are not prescribing any of the factors in
those letters under the final rule. While advisers may wish to refer to
these letters for examples, we agree with commenters that an adviser
may satisfy the fair and balanced standard in other ways.\257\
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    \256\ See MFA/AIMA Comment Letter I; T. Rowe Price Comment
Letter.
    \257\ For example, our staff has stated that it would not
recommend enforcement action under the current rule with respect to
charts in an advertisement containing an adviser's best and worst
performers in certain circumstances. See the TCW Letter. Our staff
has also stated that it would not recommend enforcement action under
current rule 206(4)-1 relating to an advertisement that includes
performance-based past specific recommendations if the adviser uses
objective, non-performance based criteria to select the specific
securities that it lists and discusses in the advertisement in
certain circumstances. See Franklin Letter.

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    The final rule applies to any reference in an advertisement to
specific investment advice given by the investment adviser, regardless
of whether the investment advice is current or occurred in the past.
This provision will apply regardless of whether the advice was acted
upon, or reflected actual portfolio holdings, or was profitable. In
addition, the provision applies to discretionary investments because
the adviser is implementing its recommendation or advice in such a
context.\258\ We continue to believe that including current as well as
past references to specific investment advice in the final rule is
appropriate because it avoids questions about when a current
recommendation becomes past, which arise under the current advertising
rule. In addition, we continue to believe that selective references to
current investment recommendations in advertisements could mislead
investors in the same manner as selective references to past
recommendations.
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    \258\ We understand there has been confusion under the current
advertising rule's prohibition against past specific
``recommendations'' as to whether an adviser makes a
``recommendation'' when it implements its strategy in a
discretionary account because an adviser would not contact its
client to make a recommendation that the client then either chooses
to implement or decline. We believe an adviser's recommendation, or
investment advice, is implicit in the exercise of discretion.
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b. Presentation of Performance Results
    As proposed, the final rule will prohibit an investment adviser
from including or excluding performance results, or presenting
performance time periods, in a manner that is not fair and balanced in
an advertisement.\259\ One commenter supported the proposed
prohibition,\260\ while two others argued that the fair and balanced
standard is subjective and difficult to enforce in this context.\261\
Some commenters requested more guidance by way of example to
demonstrate how performance advertising could comply with the fair and
balanced standard.\262\
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    \259\ See final rule 206(4)-1(a)(6).
    \260\ See Ropes & Gray Comment Letter.
    \261\ Consumer Federation Comment Letter; NASAA Comment Letter.
    \262\ CFA Institute Comment Letter; Ropes & Gray Comment Letter;
NASAA Comment Letter; ILPA Comment Letter.
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    We continue to believe that this prohibition appropriately
addresses the concern that an adviser may ``cherry-pick'' the periods
used to generate performance results in advertisements.\263\ As with
specific investment advice, the factors that are relevant to whether an
advertisement's reference to performance information is presented in a
fair and balanced manner will vary based on the facts and
circumstances. For example, presenting performance results over a very
short period of time (e.g., two months), or over inconsistent periods
of time, may result in performance portrayals that are not reflective
of the adviser's general results and thus generally would not be fair
and balanced. Additionally, an advertisement that highlights one period
of extraordinary performance with only a footnote disclosure of unusual
circumstances that have contributed to such performance may not be fair
and balanced, depending on whether there are other sufficient clear and
prominent disclosures, as discussed below.\264\
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    \263\ An advertisement that includes only favorable performance
results or excludes only unfavorable performance results may also be
``misleading'' to the extent that such an advertisement would
reasonably be likely to cause an untrue or misleading implication or
inference to be drawn concerning the investment adviser that would
not be implied or inferred were certain additional facts--i.e., any
performance results excluded from the advertisement--disclosed. See
final rule 206(4)-1(a)(3).
    \264\ See Amendments to Investment Company Advertising Rules,
Release No. IC-26195 (Oct. 3, 2003) [68 FR 57760 (Oct. 6, 2003)].
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    In cases where additional information is necessary for an investor
to assess performance results, failure to provide such information in
an advertisement is not consistent with the fair and balanced standard.
For example, in order to provide investors with a fair and balanced
portrayal of its performance results, an adviser should consider
providing information related to the state of the market at the time,
any unusual circumstances, and other material factors that contributed
to such performance. In section II.E, we discuss further specific
requirements and conditions for portrayals of certain types of
performance in advertisements that we are also adopting as part of this
final rule.
6. Otherwise Materially Misleading
    Finally, we are adopting a catch-all provision, as proposed, that
will prohibit any advertisement that is otherwise materially
misleading.\265\ We did not receive any comments on this catch-all
provision. We continue to believe this prohibition will help ensure
that materially misleading practices not specifically covered by the
other prohibitions will be addressed. For example, if an adviser
provided accurate disclosures, but presented them in an unreadable
font, such an advertisement would be materially misleading and
prohibited under this provision.
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    \265\ Final rule 206(4)-1(a)(7).
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    Because we are prohibiting a variety of specific types of
advertisement practices within the general prohibitions, most of which
include an element of materiality, as discussed above, we are focusing
the catch-all provision on only those advertisements that are otherwise
materially misleading. We continue to believe that limiting the catch-
all to materially misleading advertisements will be more appropriate
within the overall structure of the prohibitions while still achieving
our goal of prohibiting misleading conduct that may affect an
investor's decision-making process. We also continue to believe that,
in light of the rule's prohibition on making untrue statements and
omissions of material fact, including ``false'' is unnecessary in the
catch-all provision as it is already covered by another
prohibition.\266\
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    \266\ See final rule 206(4)-1(a)(1).
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C. Conditions Applicable to Testimonials and Endorsements, Including
Solicitations

1. Overview
    Consistent with the proposal, the final rule permits advisers to
include testimonials and endorsements in an advertisement, subject to
the rule's general prohibitions and additional conditions.\267\ These
conditions differ depending on whether the testimonial or endorsement
is compensated or uncompensated, which is similar to the framework we
proposed.\268\
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    \267\ Statements made by an adviser that would be prohibited
under the final rule's general prohibitions of certain marketing
practices would also be prohibited in an adviser's advertisement if
made by a third party in a covered testimonial or endorsement. For
example, as we stated in the Proposing Release, we would generally
view an advertisement as unlikely to be presented in a manner that
is fair and balanced if it contains a testimonial, endorsement, or
third-party rating that references performance information or
specific investment advice provided by the adviser that was
profitable but is not representative of the experience of the
adviser's investors. 2019 Proposing Release, supra footnote 7, at
section II.A.2.e.
    \268\ Final rule 206(4)-1(b).
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    Numerous commenters supported the proposed expansion from the
current advertising rule to permit advisers to include testimonials and
endorsements in advertisements.\269\ Commenters

explained that consumer preferences have shifted to rely increasingly
on third-party resources to inform purchasing decisions.\270\ Other
commenters opposed permitting any testimonials or endorsements, paid or
unpaid, in adviser advertisements.\271\ These commenters were concerned
that permitting advisers to advertise paid testimonials and
endorsements would increase puffery and cause a ``race to the bottom''
for advisers seeking paid endorsements.\272\
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    \269\ See, e.g., Consumer Federation Comment Letter; IAA Comment
Letter; LinkedIn Comment Letter; Fidelity Comment Letter; TINA
Comment Letter.
    \270\ See Consumer Federation Comment Letter; IAA Comment
Letter.
    \271\ See Comment Letter of TABR Capital Management, LLC (Jan.
6, 2020); Comment Letter of the Institute for the Fiduciary Standard
(Feb. 10, 2020) (``Fiduciary Institute Comment Letter'').
    \272\ See NAPFA Comment Letter; Mercer Comment Letter (arguing
that permitting paid endorsements will lead to largest advisers
vying for endorsements from celebrities and popular ``financial
gurus'').
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    As discussed above, we have expanded the definitions of both
testimonial and endorsement to include certain solicitation
activity.\273\ This expansion recognizes the overlap between our
approach to solicitation under the proposal and compensated
testimonials and endorsements.\274\ It is also designed to capture
solicitation activities that previously have been subject to the cash
solicitation rule and subject them to the marketing rule. The final
rule includes conditions for an adviser's use of testimonials and
endorsements designed to address concerns raised by commenters. These
conditions include disclosure requirements to make prospective clients
and investors aware of the conflicts of interest associated with
testimonials and endorsements and a requirement that an investment
adviser have a reasonable basis to believe that the testimonial or
endorsement complies with the marketing rule. In addition, because we
believe compensated testimonials and endorsements present a heightened
risk for conflicts and misleading investors, the final rule will
prevent advisers from using certain compensated testimonials and
endorsements made by certain ``bad actors'' and other ineligible
persons. The final rule will also require that an investment adviser
have a written agreement with certain persons giving a testimonial or
endorsement for compensation above the de minimis threshold.\275\
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    \273\ See supra section II.A.3.
    \274\ Final rule 206(4)-1(e)(6) and (16).
    \275\ See final rule 206(4)-1(b) (imposing disclosure, adviser
oversight, and disqualification conditions). This approach derives
from the current solicitation rule. See also final rule 206(4)-
1(b)(4)(i).
---------------------------------------------------------------------------

2. Required Disclosures
    The final rule will require advertisements that include any
testimonials or endorsements to provide disclosures of certain
information similar to what was proposed under each of the advertising
and solicitation rules, subject to certain exceptions, as discussed
below. Specifically, the final rule will require that the investment
adviser disclose, or reasonably believe that the person giving the
testimonial or endorsement discloses, the following at the time the
testimonial or endorsement is disseminated:
    (i) Clearly and prominently:
    (A) That the testimonial was given by a current client or private
fund investor, and the endorsement was given by a person other than a
current client or private fund investor, as applicable;
    (B) That cash or non-cash compensation was provided for the
testimonial or endorsement, if applicable; and
    (C) A brief statement of any material conflicts of interest on the
part of the person giving the testimonial or endorsement resulting from
the investment adviser's relationship with such person;
    (ii) The material terms of any compensation arrangement including a
description of the compensation provided or to be provided, directly or
indirectly, to the person for the testimonial or endorsement; and
    (iii) A description of any material conflicts of interest on the
part of the person giving the testimonial or endorsement resulting from
the investment adviser's relationship with such person and/or any
compensation arrangement.\276\
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    \276\ Final rule 206(4)-1(b)(1). We proposed the final
disclosure requirements separately under the proposed amendments to
the advertising rule and solicitation rule. The proposed advertising
rule amendments would have required disclosures that: (1) The
testimonial was given by a client or investor, and the endorsement
was given by a non-client or non-investor, as applicable; and (2) if
applicable, 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). The
proposed amendments to the solicitation rule would have required
disclosure of the terms of the compensation arrangement and
description of any material conflicts of interest. See proposed
rules 206(4)-3(a)(1)(iii)(D) and (E).
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    We are not adopting the proposed requirement under the solicitation
rule to disclose the amount of any additional cost to the investor as a
result of solicitation for the reasons discussed below.\277\ We believe
that disclosures are needed to inform and protect investors effectively
when they are presented with testimonials and endorsements. We also
share the concerns raised by some commenters that permitting paid
testimonials and endorsements would increase the likelihood that
personal bias will mislead investors.\278\ To address these issues in
particular, we are adopting two disclosure requirements that we
proposed under the solicitation rule--the disclosure of compensation
arrangements and material conflicts of interest--under the final rule.
We believe that these disclosures will benefit investors by providing
them with a fuller context when presented with a testimonial or
endorsement, without overly burdening those providing the testimonial
or endorsement.
---------------------------------------------------------------------------

    \277\ See proposed rule 206(4)-3(a)(1)(iii)(F).
    \278\ See NAPFA Comment Letter; Mercer Comment Letter.
---------------------------------------------------------------------------

    Some commenters suggested that we should align our disclosure
approach with FINRA's rule 2210 to ease the compliance burdens of
investment advisers that are registered broker-dealers or affiliated
with broker-dealers.\279\ However, instead of aligning our disclosures
with FINRA's, such as FINRA's specific, standardized disclosures in
rule 2210(d)(6),\280\ we believe the final rule should provide advisers
with a broad framework within which to determine how best to present
testimonials and endorsements so they are not false or misleading.
Accordingly, we are not adopting standardized disclosure requirements
under our final rule. As a result, dually registered advisers and
broker-dealers, that are not subject to the exemptions discussed below,
that provide testimonials and endorsements with the disclosures
required by FINRA should consider what additional or different
disclosures they would need to make to comply with the final marketing
rule.\281\
---------------------------------------------------------------------------

    \279\ MMI Comment Letter; Mercer Comment Letter.
    \280\ FINRA's rule 2210(d)(6) requires, among other things, that
a testimonial disclose the following: (i) The fact that it may not
be representative of the experience of other customers; (ii) the
fact that the testimonial is no guarantee of future performance or
success; and (iii) if more than $100 in value is paid for the
testimonial, the fact that it is a paid testimonial. FINRA rule
2210(d)(6)(B).
    \281\ For example, unlike under FINRA rule 2210, an adviser
would be required to disclose the material terms of compensation for
a testimonial, even where a person receives de minimis compensation,
under the final marketing rule.
---------------------------------------------------------------------------

a. Clearly and Prominently
    The final rule will require that particular disclosures with
respect to testimonials and endorsements be made clearly and
prominently.\282\ The

proposed advertising rule would have required clear and prominent
disclosure of: (1) Whether the testimonial or endorsement was given by
a client or investor or a non-client or investor; and (2) if
applicable, that compensation was provided by or on behalf of the
adviser in connection with the testimonial or endorsement.\283\ The
proposed solicitation rule would have required that, under the terms of
the written agreement, the solicitor or adviser provide the investor at
the time of solicitation activities with a separate disclosure that
includes, among other matters, the terms of any compensation
arrangement, including a description of the compensation provided or to
be provided to the solicitor, and a description of any potential
material conflicts of interest on the part of the solicitor resulting
from the investment adviser's relationship with the solicitor and/or
the compensation arrangement.\284\ In merging the two rules under the
final rule, we have determined to preserve that testimonials and
endorsements must provide for certain concise disclosures to be made
clearly and prominently as well as for certain additional disclosures
to be made at the time the testimonial or endorsement is disseminated.
---------------------------------------------------------------------------

    \282\ See final rule 206(4)-1(b)(1)(i). If the promoter provides
the disclosures, the investment adviser must reasonably believe that
the promoter provides such disclosures clearly and prominently. See
final rule 206(4)-1(b)(1).
    \283\ See proposed rule 206(4)-1(b)(1).
    \284\ See proposed rule 206(4)-3(a)(1)(iii).
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    We continue to believe that certain required disclosures should be
made clearly and prominently to help prevent misleading testimonials
and endorsements.\285\ In addition to the two disclosures required
under the proposed advertising rule, we also are requiring that a brief
statement of any material conflicts of interest on the part of the
person giving the testimonial or endorsement be made clearly and
prominently. In order to be clear and prominent, the disclosures must
be at least as prominent as the testimonial or endorsement. In other
words, we believe that the ``clear and prominent'' standard requires
that the disclosures be included within the testimonial or endorsement,
or in the case of an oral testimonial or endorsement, provided at the
same time.\286\
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    \285\ We believe this will help reduce the risk of having
misleading testimonials or endorsements in addition to the general
prohibitions, which prohibit advertisements from being materially
false or misleading. See 206(4)-1(a).
    \286\ See infra section II.C.2.f. (discussing oral testimonials
and endorsements). The discussion in this section also applies to
other parts of the final rule that include a clear and prominent
disclosure standard, including the required disclosures related to
third-party ratings and predecessor performance. Accordingly, such
required disclosures should be included within the advertisement.
---------------------------------------------------------------------------

    As discussed above, many commenters requested more flexibility with
respect to hyperlinked disclosures under the clear and prominent
standard.\287\ With respect to the disclosures for testimonials and
endorsements that are subject to the clear and prominent standard, we
believe such disclosures must be provided clearly and prominently
within the testimonial or endorsement.\288\ Specifically, we believe
such disclosures should appear close to the associated statement such
that the statement and disclosures are read at the same time, rather
than referring the reader somewhere else to obtain the disclosures. In
cases in which an oral testimonial or endorsement is provided, it would
be consistent with the clear and prominent standard if the disclosures
are provided in a written format, so long as they are provided at the
time of the testimonial or endorsement.\289\ The requirement to provide
the disclosures with respect to testimonials and endorsements ``clearly
and prominently'' may necessitate formatting and tailoring based on the
form of the communication.\290\
---------------------------------------------------------------------------

    \287\ See section II.B.4. (discussing commenters' concerns with
respect to the clear and prominent standard). See, e.g., MMI Comment
Letter; T. Rowe Price Comment Letter; Fidelity Comment Letter; IAA
Comment Letter.
    \288\ See final rule 206(4)-1(b)(1)(i)(A) through (C).
    \289\ Accordingly, in the case of a compensated oral testimonial
or endorsement, the adviser may, instead of recording and retaining
the entire oral testimonial or endorsement, make and keep a record
of the disclosures provided to investors. See final rule 204-
2(a)(11)(i)(A)(2). See also infra section II.C.2.f and II.I.
(discussing oral testimonials and endorsements). If an adviser or
promoter provides an investor with written disclosures in connection
with an oral testimonial or endorsement, instead of delivering the
disclosures orally, the adviser or promoter should alert the
investor to the importance of the disclosures, particularly with
respect to the disclosures that must be provided clearly and
prominently. See final rule 206(4)-1(b)(1)(i). If an adviser did not
inform the investor about the importance of such disclosures, it
would violate the general prohibition against false or misleading
statements. See final rule 206(4)-1(a)(1).
    \290\ An advertisement intended to be viewed on a mobile device,
for example, may meet the standard in a different way than one
intended to be seen as a print advertisement (e.g., a person viewing
a mobile device could be automatically redirected to the required
disclosure before viewing the substance of an advertisement).
---------------------------------------------------------------------------

    However, after considering comments, we are requiring advisers to
provide only certain disclosures regarding testimonials and
endorsements clearly and prominently, as discussed in more detail
below.\291\ We believe that the disclosures required to be provided
clearly and prominently are integral to the concerns associated with
testimonials and endorsements in an advertisement. Our approach is
consistent with the Federal Trade Commission's (``FTC'') guidance,
which also requires disclosures that are integral to the claim to
accompany the claim to prevent deception.\292\ We also believe that
these disclosures can be provided succinctly within the testimonial or
endorsement such that advisers may advertise their services using
modern technology and platforms that limit the size or characters of an
advertisement. Moreover, we expect that succinctly providing these
disclosures will promote their salience and impact. Other required
disclosures, which provide investors with additional useful information
but that are not integral to the concerns related to these
advertisements, may be provided through hyperlinks, in a separate
disclosure document or any other similar methods.
---------------------------------------------------------------------------

    \291\ See infra section II.C.2.a.i. through iii. (discussing
status as a client or non-client, fact of compensation, and
statement of material conflicts of interest).
    \292\ See, e.g., Fidelity Comment Letter; IAA Comment Letter;
SIFMA AMG Comment Letter II (suggesting that we adopt, or adopt an
approach consistent with, the FTC approach to hyperlinks). See also
Federal Trade Commission, Dot Com Disclosures Guidance Update (Mar.
2013). While the FTC guidance permits the use of hyperlinks, it
generally allows the use of hyperlinks to provide disclosures that
are ``not integral to the triggering claim'' and places a number of
conditions on the ability to provide hyperlinks.
---------------------------------------------------------------------------

i. Status as a Client or Non-Client
    Similar to what we proposed under the advertising rule, the final
rule will require clear and prominent disclosure that a testimonial was
given by a current client or investor, and that an endorsement was
given by a person other than a current client or investor.\293\ We
believe that this disclosure will provide investors with important
context for weighing the relevance of the testimonial or endorsement.
For example, an investor might reasonably give more weight to a
statement made about an adviser by a current investor rather than
someone who was never an investor.\294\ Additionally, without clearly
attributing an endorsement to someone other than an investor, the
advertisement could mislead investors who may assume the

endorsement reflects the endorser's experience as an investor.\295\
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    \293\ Final rule 206(4)-1(b)(1)(i)(A). See proposed rule 206(4)-
1(b)(1)(i). The promoter may be an entity or a natural person.
    \294\ Client status will be assessed at the time that a
testimonial or endorsement is disseminated. However, depending on
the facts and circumstances, a former client may be considered a
client for these purposes. For example, if a person is giving a
statement about his or her recent prior experience with the adviser,
the communication could be treated as a testimonial.
    \295\ Testimonials and endorsements are subject to the rule's
general prohibitions. Whether a testimonial or endorsement would
reasonably be likely to cause an untrue or misleading implication or
inference to be drawn concerning a material fact relating to the
investment adviser would depend on the facts and circumstances. For
instance, it would be misleading for an adviser to provide investors
with a testimonial claiming a positive experience with the adviser
by a former client, without mentioning that the person has not been
a client for 20 years.
---------------------------------------------------------------------------

    The proposed solicitation rule would have required disclosure of
the name of the solicitor.\296\ However, similar to the proposed
advertising rule, the final rule will not require the disclosure of the
name of the promoter.\297\ We did not receive any comments on the
requirement under the proposed solicitation rule to disclose the name
of the solicitor. We expect that advisers may still choose to disclose
the full name of the promoter because disclosing the name of the
promoter could help an investor assess the reputation or other
qualifications of the person. However, we believe our final approach is
appropriate for privacy reasons and takes into account cases where a
promoter may not wish to give his or her name.\298\ We also believe
that in cases where a name is not provided, the rule's general
prohibitions will protect investors from fraudulent or misleading
testimonials or endorsements. An investor may also give less weight to
that particular testimonial or endorsement.
---------------------------------------------------------------------------

    \296\ See proposed rule 206(4)-3(a)(1)(iii)(B). The proposed
rule would have also required disclosure of the adviser's name.
Proposed rule 206(4)-3(a)(1)(iii)(A).
    \297\ Final rule 206(4)-1(b)(1)(i) through (ii). The proposed
advertising rule would have only required disclosure of the client
or non-client status of the person providing the testimonial or
endorsement and whether compensation has been provided for the
testimonial or endorsement. See proposed rule 206(4)-1(b)(1).
    \298\ In the case of testimonials and endorsements where
compensation paid is above the de minimis threshold, advisers are
required to maintain a written agreement with a promoter. See final
rule 206(4)-1(b)(2)(ii) and (b)(4)(i). In such cases, the agreement
would provide a record of the name of such promoter. See rule 204-
2(a)(10), which currently requires that advisers retain ``[a]ll
written agreements (or copies thereof) entered into by the
investment adviser with any client or otherwise relating to the
business of such investment adviser as such.''
---------------------------------------------------------------------------

ii. Fact of Compensation
    Similar to what we proposed under the advertising rule, the final
rule will require clear and prominent disclosure that cash or non-cash
compensation was provided for the testimonial or endorsement, if
applicable.\299\ Similar to the disclosure of a promoter's status as a
current investor or person other than a current investor, we continue
to believe that this disclosure will provide investors with important
context for weighing the relevance of the testimonial or endorsement.
Two commenters specifically supported requiring advisers to disclose
whether they paid for testimonials or endorsements under the proposed
advertising rule.\300\ One of these commenters stated that without
requiring clear and prominent disclosure that a particular testimonial
or endorsement is effectively a ``paid-for advertisement,'' investors
would not be able to determine whether they are consuming an authentic,
unbiased review of the adviser.\301\ We agree, and we believe that this
simple but clear disclosure is one that is both beneficial for
investors and easy to implement for advisers, including on space-
constrained platforms. For example, when providing a testimonial or
endorsement on a social media platform, an adviser must clearly and
prominently label the testimonial or endorsement as being a paid
testimonial or endorsement.
---------------------------------------------------------------------------

    \299\ Final rule 206(4)-1(b)(1)(i)(B). See proposed rule 206(4)-
1(b)(1)(ii).
    \300\ Consumer Federation Comment Letter; SBIA Comment Letter.
    \301\ Consumer Federation Comment Letter.
---------------------------------------------------------------------------

iii. Statement of Material Conflicts of Interest
    The final rule will require clear and prominent disclosure of a
brief statement of any material conflicts of interest on the part of
the promoter resulting from its relationship with the investment
adviser.\302\ Similar to the other disclosures subject to the clear and
prominent standard, we expect this disclosure to be succinct. For
example, it would be sufficient for an adviser to simply state that the
testimonial or endorsement was provided by an affiliate of the adviser,
or that the promoter is related to the adviser, if this relationship is
the source of the conflict.\303\
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    \302\ Final rule 206(4)-1(b)(1)(i)(C).
    \303\ We expect this brief statement of any material conflicts
of interest to be substantially shorter than the description of any
material conflicts of interest that is required, as discussed below.
See final rule 206(4)-1(b)(1)(ii).
---------------------------------------------------------------------------

    We believe the required disclosures result in information that
informs and protects investors, yet can be provided succinctly within
the testimonial or endorsement. We also believe this form of layered
disclosure enhances the salience of this information and may help
investors better focus on the presence of conflicts of interest than
requiring potentially more lengthy disclosures. We require a fuller
description of any material conflicts of interests resulting from the
promoter's relationship with the adviser and/or the promoter's
compensation arrangement with the adviser as part of the disclosures
provided with respect to testimonials or endorsements, but this is not
subject to the clear and prominent standard.\304\
---------------------------------------------------------------------------

    \304\ See final rule 206(4)-1(b)(1)(iii).
---------------------------------------------------------------------------

b. Material Terms of Compensation Arrangement
    The final rule will require disclosure of the material terms of any
compensation arrangement, including a description of the compensation
provided or to be provided, directly or indirectly, to the person for
the testimonial or endorsement.\305\ This provision is based on the
disclosure requirement of the proposed solicitation rule. The proposed
solicitation rule would have required the disclosure of the terms of
any compensation arrangement, including a description of the
compensation provided or to be provided to the solicitor.\306\ Some
commenters stated that the disclosure requirement was overbroad and
unclear.\307\ For instance, one commenter stated that it is unclear
whether an adviser should disclose reimbursing a solicitor for third-
party expenses in the solicitation process under this requirement.\308\
The final rule requires disclosure of compensation provided, directly
or indirectly, for the testimonial or endorsement. If payment of third-
party expenses is part of the compensation arrangement for the
testimonial or endorsement, then such payment should be disclosed under
the final rule.
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    \305\ Final rule 206(4)-1(b)(1)(ii).
    \306\ See proposed rule 206(4)-3(a)(1)(iii)(D).
    \307\ See, e.g., Comment Letter of Flexible Plan Investments,
Ltd. on proposed solicitation rule (Feb. 10, 2020) (``Flexible Plan
Investments Comment Letter I''); Comment Letter of Proskauer Rose
LLP (Feb. 10, 2020) (``Proskauer Comment Letter'').
    \308\ Flexible Plan Investments Comment Letter I.
---------------------------------------------------------------------------

    If a specific amount of cash compensation is paid, the
advertisement should disclose that amount.\309\ If the compensation
takes the form of a percentage of the total advisory fee over a period
of time, then the advertisement should disclose such percentage and
time period.\310\ With respect to non-cash

compensation, if the value of the non-cash compensation is readily
ascertainable, the disclosures should include that amount. Moreover, if
all or part of the compensation, cash or non-cash, is payable upon
dissemination of the testimonial or endorsement or is deferred or
contingent on a certain future event, such as an investor's
continuation or renewal of its advisory relationship, agreement, or
investment, then the advertisement should disclose those terms.\311\
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    \309\ This is consistent with the Commission's position
regarding the disclosure requirements under the existing cash
solicitation rule. See 1979 Adopting Release, supra footnote 3, at
text accompanying nn.15 and 16.
    \310\ This is similar to the Commission's position under the
existing cash solicitation rule. See 1979 Adopting Release, supra
footnote 3, at text accompanying nn.15 and 16.
    \311\ This is also similar to the Commission's position under
the existing cash solicitation rule. See 1979 Adopting Release,
supra footnote 3, at text accompanying nn.15 and 16.
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    In response to this requirement under our proposed solicitation
rule, one commenter argued that requiring detailed disclosures about
compensation arrangements would result in lengthy disclosures that
would be confusing for, and irrelevant to, investors.\312\ The
commenter suggested that the rule require solicitors to disclose only
that they are receiving compensation for the solicitation. This
commenter stated that this disclosure would adequately alert investors
to the inherent conflict of interest associated with such compensation.
At the same time, several commenters considered additional compensation
information about a compensated solicitor's referral, including the
amount paid to the solicitor for referring the adviser, whether there
would be any additional cost to the investor, and the solicitor's
relationship to the adviser, ``very important.'' \313\
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    \312\ See Proskauer Comment Letter.
    \313\ See Investment Adviser Marketing Feedback Form.
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    Although we believe that a simple disclosure that compensation was
provided is sufficient for purposes of the clear and prominent
disclosures, we continue to believe that the disclosure related to the
terms of the compensation arrangement help convey to the investor the
nature and magnitude of the person's incentive to refer the investor to
the adviser.\314\ The incentive might vary based on the structure of
the compensation arrangement. A promoter that receives a flat or fixed
fee from an adviser for a set number of referrals might have a
different incentive in referring to the adviser than another that
receives a fee, such as a percentage of the investor's assets under
management, for each investor that becomes a client of, or a private
fund investor with, the adviser. Furthermore, trailing fees (i.e., fees
that are continuing) that are contingent on the investor's relationship
with the adviser continuing for a specified period of time present
additional considerations in evaluating the promoter's incentives. It
would be relevant to an investor to know that a promoter continues to
receive compensation after the investor becomes a client of, or private
fund investor with, the adviser, as well as the period of time over
which the promoter continues to receive compensation for such
solicitation. A longer trailing period can present a greater incentive
to solicit the investor. In addition, if, as part of the compensation
arrangement between the adviser and promoter, an investor would pay
increased advisory fees for becoming a client as a result of the
promoter's testimonial or endorsement, then this information would be
relevant so that the investor can make such considerations when
choosing an adviser.\315\
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    \314\ As stated in our proposal, the materiality of the
incentive to solicit investors to an investor's evaluation of the
referral depends on the type and magnitude of the compensation. We
believe that the description of a compensation arrangement will be
helpful for investors to consider the types and levels of incentives
present. 2019 Proposing Release, supra footnote 7, at section
II.B.4.
    \315\ If the amount of increased fees for the investor is known
or could reasonably be obtained, then such amount should be
disclosed as part of this requirement.
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    After considering comments, we are requiring that the disclosures
only include the material terms of any compensation arrangement.
Accordingly, these disclosures need not include immaterial aspects of a
compensation arrangement. These disclosures also need not include
detailed information about the calculation of the compensation payable
to each person giving a testimonial or endorsement; they need not be
lengthy to convey the magnitude and nature of the conflict. In
addition, these disclosures should not include all compensation
arrangements that an adviser has with any and all promoters, as one
commenter suggested, but rather should include only information about
the relevant compensation arrangement between an adviser and a specific
promoter in order for the disclosure to be effective.\316\ As modified,
this provision will require disclosures about any compensation
arrangement with a promoter for its testimonial or endorsement.
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    \316\ Proskauer Comment Letter (stating that this requirement
would result in ``very extensive'' disclosures, particularly if an
adviser has multiple arrangements with multiple solicitors).
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    An adviser may arrange to compensate a third-party marketing
company to advertise and refer potential clients to the adviser. If the
compensation arrangement calls for a percentage of fees collected from
the referred clients, then the disclosures should state so and describe
what that percentage is. An adviser may also have a directed brokerage
arrangement with a third-party brokerage firm, in which the adviser
will direct brokerage to the firm as compensation for the firm's
solicitation of clients for, or referral of clients to, the
adviser.\317\ In these cases, the adviser or firm should disclose the
material terms of this arrangement, including a brief description of
the compensation provided or to be provided to the firm. As part of the
disclosure of the material terms of the compensation, the disclosure
should state the range of commissions that the firm charges for
investors directed to it by the adviser. Furthermore, if the
solicitation or referral is contingent upon the firm receiving a
particular threshold of directed brokerage (and other services, if
applicable) from the adviser, the disclosure should say so. Additional
disclosure would be required, for example, if the firm and the adviser
agree that as compensation for the firm's endorsement of the adviser,
the adviser's directed brokerage activities would extend to other
clients such as the solicited client's friends and family.
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    \317\ Such activities will fall under the definition of
endorsement.
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    The final rule will require the advertisement to disclose
compensation that the adviser provides directly or indirectly to a
person for a testimonial or endorsement.\318\ For example, if an
individual solicits an investor and the adviser compensates a related
person of that individual for such solicitation (such as an employer or
another entity that is associated with the individual), the adviser or
individual will need to include this compensation in its disclosures.
If a person, such as a broker-dealer, refers clients to advisers that
recommend the broker-dealer's or its affiliate's proprietary investment
products or recommend products that have revenue sharing or other
pecuniary arrangements with the broker-dealer or its affiliate, the
disclosures must say so.\319\ Regardless of whether the adviser's
arrangement is with an individual or the individual's firm,
compensation to the firm for any testimonial or endorsement will
constitute compensation under the rule, as it would be likely to affect
the

individual's salary, bonus, commission or continued association with
the firm.
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    \318\ See final rule 206(4)-1(e)(1)(ii).
    \319\ See also Fiduciary Interpretation, supra footnote 88, at
23 (``an adviser must eliminate or at least expose through full and
fair disclosure all conflicts of interest which might incline an
investment adviser--consciously or unconsciously--to render advice
which was not disinterested.'').
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c. Material Conflicts of Interest
    The proposed solicitation rule would have required a description of
any potential material conflicts of interest on the part of the
solicitor resulting from the investment adviser's relationship with the
solicitor and/or compensation arrangement.\320\ We have slightly
modified this proposed requirement by removing the word ``potential''
from ``potential material conflicts of interest,'' as discussed in
detail below. Accordingly, the final rule will require a description of
any material conflicts of interest on the part of the person giving the
testimonial or endorsement resulting from the investment adviser's
relationship with such person and/or any compensation arrangement.\321\
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    \320\ Proposed rule 206(4)-3(a)(1)(iii)(E).
    \321\ Final rule 206(4)-1(b)(1)(iii). The materiality standard
applies to the investor(s) being solicited by the promoter. In other
words, if an investor would consider a particular conflict of
interest on the part of the promoter to be material to his or her
decision to choose an investment adviser, then such conflict of
interest should be disclosed.
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    One commenter to the proposed advertising rule requested that we
broaden the disclosure provision and require disclosure of all
``material connections,'' stating that there are types of connections
besides the fact of compensation that could ``materially affect the
weight or credibility'' of a testimonial or endorsement.\322\ With
respect to the proposed solicitation rule requirement, some commenters
supported making clear to investors that a conflict of interest may
result from an adviser's relationship with the solicitor and/or their
compensation arrangement.\323\ Others stated that the disclosure of
potential material conflicts of interest would likely be redundant with
the required disclosure of the terms of any compensation
arrangement.\324\ Commenters also argued that such a requirement would
result in disclosure that is too lengthy without much benefit.\325\
These commenters stated that registered investment advisers and broker-
dealers who act as solicitors are already subject to similar disclosure
obligations under Form ADV Part 2 and Regulation BI, respectively.\326\
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    \322\ See TINA Comment Letter.
    \323\ See Proskauer Comment Letter; Mercer Comment Letter.
    \324\ See, e.g., MFA/AIMA Comment Letter I.
    \325\ See, e.g., Fidelity Comment Letter.
    \326\ See, e.g., Fidelity Comment Letter, which also stated that
Form CRS would be an additional place where investors may find
similar information.
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    We believe our modification of removing the word ``potential'' from
the proposed requirement will help reduce the burden on advisers as
well as the length of the disclosures without eliminating any material
information provided to investors. We do not believe the compensation
arrangement disclosure alone is sufficient as it merely implies the
conflict. Rather, there should be explicit disclosure that the
promoter, due to such compensation, has an incentive to recommend the
adviser, resulting in a material conflict of interest. Additionally, we
believe a promoter could have other material conflicts of interest
based on a relationship with the investment adviser that could affect
the credibility of the testimonial or endorsement. Accordingly, to the
extent that there is any material conflict of interest, the rule will
require a description of such material conflict of interest.
    We recognize that persons who are also registered as investment
advisers or broker-dealers have other disclosure obligations relating
to conflicts of interest, such as the requirements of Form ADV.\327\ We
do not believe that disclosures provided in Form ADV would sufficiently
satisfy this provision. For example, although Form ADV Part 2 requires
disclosure of material conflicts of interest, the disclosure required
by the form is limited to conflicts related to relationships with
specific personnel such as the adviser's supervised persons and related
persons.\328\ Moreover, we do not believe that an adviser that is
acting as a promoter would be required to deliver its Form ADV Part 2
to a person the adviser was soliciting to become a client of another
investment adviser. On the other hand, in circumstances where
Regulation BI applies to a broker-dealer's activity as a promoter, we
believe the Disclosure Obligation under Regulation BI is sufficiently
similar to satisfy the disclosure provisions under our final rule.\329\
Accordingly, as discussed below, we are adopting a partial exemption
from the final rule's required disclosures in certain
circumstances.\330\
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    \327\ Such persons would also have disclosure obligations under
the anti-fraud provisions of the Federal securities laws. If a
person meets the definition of ``investment adviser,'' as defined
under section 202(a)(11) of the Advisers Act, such person has a
fiduciary duty to clients, regardless of whether the adviser is
registered or required to be registered, and is thus liable under
the anti-fraud provisions of the Advisers Act and other Federal
securities laws for failure to disclose conflicts of interest.
    \328\ See, e.g., Item 4.A. of Form ADV, Part 2 (requires
disclosure if a relationship between adviser and supervised person's
other financial industry activities creates a material conflict of
interest with clients); Item 5.E of Form ADV, Part 2 (requires
disclosure of conflict of interest to the extent that the adviser or
any of its supervised persons accepts compensation for the sale of
securities or other investment products); Item 10.C. of Form ADV,
Part 2 (requires description of material conflict of interests with
related persons, as defined in Form ADV, and only if the
relationship or arrangement with the related person creates a
material conflict of interest with clients); Item 10.D. of Form ADV,
Part 2 (requires disclosure of material conflict of interest if the
adviser receives compensation from or has other business
relationships with other advisers).
    \329\ The Disclosure Obligation requires that a broker-dealer
disclose in writing all material facts about the scope and terms of
its relationship with a retail customer, including the material fees
and costs the customer will incur as well as all material facts
relating to its conflicts of interest associated with the
recommendation, including third-party payments and compensation
arrangements. See Regulation Best Interest Release, supra footnote
146, at 14. See also infra section II.C.5. (discussing exemptions).
    \330\ See infra section II.C.5. (discussing exemptions). To the