The allowance of testimonials and endorsements under the SEC Marketing Rule represents a sea change in how investment advisers can market their services. Before November 2022, the use of client testimonials was categorically prohibited under the former advertising rule. The new framework recognizes that testimonials and endorsements are valuable sources of information for prospective clients, provided adequate safeguards are in place to prevent misleading communications.
Defining Testimonials vs. Endorsements
Under the Marketing Rule, a testimonial is defined as a statement by a current client or private fund investor about their experience with the adviser. An endorsement is a statement by a person other than a current client that indicates approval, support, or recommendation of the adviser. The distinction matters because different disclosure obligations attach to each category, and firms must correctly classify each statement to apply the appropriate compliance requirements.
Required Disclosures
Required disclosures for both testimonials and endorsements include a clear and prominent statement indicating whether the person giving the testimonial or endorsement is a current client or investor, whether compensation was provided (directly or indirectly), and a description of any material conflicts of interest. These disclosures must be presented in a manner that is clear and prominent, meaning they cannot be buried in footnotes or presented in a way that a reasonable investor would overlook.
Compensation Disclosure
Compensation disclosure is particularly important. If an adviser compensates someone for a testimonial or endorsement, whether through direct payment, fee reductions, enhanced services, or other forms of value, the adviser must disclose this fact. When total compensation exceeds $1,000 over the preceding twelve months, the adviser must also enter into a written agreement with the promoter and have a reasonable basis for believing the promoter complies with the disclosure requirements at the time of the testimonial or endorsement.
Conflicts of Interest
The Marketing Rule also addresses conflicts of interest that may arise in testimonial and endorsement arrangements. Advisers must disclose any material conflicts, such as when a person providing an endorsement is also a client who receives reduced fees, or when the endorser has a business relationship with the adviser beyond the endorsement arrangement. The SEC expects advisers to evaluate these conflicts holistically and provide disclosures sufficient for investors to assess the credibility and potential bias of the testimonial or endorsement.
Transition from Cash Solicitation Rule
The transition from the former Cash Solicitation Rule to the new framework for promoters under the Marketing Rule also warrants careful attention. The old solicitor arrangements required advisers to enter into written agreements with solicitors and deliver a separate disclosure document to prospective clients. Under the Marketing Rule, the requirements for paid promoters differ in several respects, including the elimination of the separate solicitor disclosure document in favor of integrated disclosures and the expansion of coverage to include both cash and non-cash compensation.
Practical Compliance Steps
Practical compliance steps include developing a standardized testimonial request process with pre-approved disclosure language, creating a centralized log of all testimonials and endorsements with associated documentation, implementing a periodic review to confirm that disclosures remain accurate and that no material changes have occurred in the relationship with the person providing the testimonial or endorsement. Advisers should also establish clear policies for soliciting and curating testimonials on third-party platforms such as Google Reviews or industry-specific rating sites.
Firms should be especially vigilant about social media testimonials. A client post on LinkedIn praising the adviser service may constitute a testimonial, and the adviser use or republication of that post triggers the Marketing Rule requirements. Advisers should monitor social media channels for organic testimonials and have a process for either obtaining the necessary disclosures or requesting removal of posts that cannot be brought into compliance.