The Marketing Rule Makeover

The testimonial is permitted only if it is not misleading and includes required disclosures, such as whether the client is current, whether compensation was paid, and any conflicts. The phrase 'beat the S&P 500 by 4%' is risky because it lacks time period, net-of-fee presentation, benchmark methodology, and context; the phrase 'guaranteed retirement income' is a prohibited guarantee of specific results. The hypothetical performance chart triggers additional requirements: the adviser must adopt and implement written policies and procedures reasonably designed to ensure the information is relevant and not misleading, provide the assumptions and criteria underlying the performance, and present net performance with at least equal prominence to gross performance. The five-star review is a third-party rating and is permitted only with disclosures about the period, criteria, and any compensation. 'Will not lose your money' is a misleading guarantee. Holding stock certificates in the office safe is custody, requiring a qualified custodian or an annual surprise examination plus client notice. Sending the brochure after the agreement is signed is also a problem unless the client has a five-day right to terminate without penalty.

The adviser should first adopt and implement written marketing policies and procedures, including pre-approval, recordkeeping, and substantiation of performance and testimonials. It should remove or rewrite the guarantee language, present performance net of fees with equal prominence, and retain backup for the benchmark comparison. For hypothetical performance, it should document the assumptions, ensure the audience is appropriate, and avoid implying that the results are actual. The five-star rating should include the required disclosures about the rating period, criteria, and compensation. The adviser should either move custody of certificates to a qualified custodian or arrange a surprise examination, update Form ADV, and notify clients. It should fix brochure delivery so clients receive Part 2A and 2B at least 48 hours before signing, or have five business days to terminate. Finally, the adviser should retain the website versions and compliance approvals.

The discount is compensation for the endorsement, so the adviser must disclose that compensation and the conflict clearly and prominently. The quote becomes an endorsement with compensation, not a purely unsolicited testimonial. The adviser must still ensure the quote is not misleading, which means the 'beat the S&P by 4%' claim needs context, net-of-fee presentation, and a time period. The adviser should also consider whether the discount creates an incentive for other clients to give positive reviews and whether the testimonial is representative. If the client is not a current client, the disclosure must say so. The existence of compensation does not ban the testimonial, but it raises the disclosure and anti-fraud obligations.