NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
An investment adviser (IA) is developing its advertising materials. Which of the following statements about testimonials is most accurate under the Investment Advisers Act of 1940 and associated rules?
- ATestimonials from current clients are generally prohibited in all forms of IA advertising.
- BTestimonials from current clients are permitted if they are not paid for and disclose conflicts of interest.
- CTestimonials from current clients are permitted, provided they are not misleading and disclose any material conflicts of interest.
- DTestimonials from current clients are permitted if they disclose conflicts of interest.
Show answer & explanationAnswer & explanation
Correct answer: C. Testimonials from current clients are permitted, provided they are not misleading and disclose any material conflicts of interest.
Under the amended Investment Advisers Act Rule 206(4)-1 (the Marketing Rule), testimonials are now permitted, provided certain disclosure and oversight conditions are met to ensure they are not misleading.
Why the other options are wrong
- A. This option is incorrect; the SEC Marketing Rule (effective 2021) now permits testimonials under specific conditions, reversing previous prohibitions.
- B. This option is incorrect; payment for testimonials is now permitted under the Marketing Rule, provided appropriate disclosures are made.
- D. This option is incomplete as it doesn't mention the requirement for testimonials to not be misleading.
IA Marketing Rule - Testimonials
The SEC's Marketing Rule (Rule 206(4)-1) permits investment advisers to use testimonials in advertising, provided they meet specific disclosure and oversight requirements to prevent them from being misleading.
- Replaced the old advertising rule in 2021.
- Allows testimonials with proper disclosures.
- Must not be misleading, must disclose conflicts, and if compensated, must disclose compensation.
Memory trick: Marketing's New Rule: Testimonials are Fine, Just Disclose and Be Kind!