New Rules For RIAs On Testimonials, Performance Advertisements, And Marketing

New RIA Advertising Rules

January 13, 2021

Cathy Vasilev

This is a transcript of an A4A CE class about the new RIA advertising rules. A4A is member sponsored news and analysis service for tax and financial advisors, presented in webinars eligible for 24/7 continuing education credit for CFPs on demand anytime for $10 a month.

Andrew Gluck: Welcome! Today is January 13^th, and we have with us Cathy Vasilev from Red Oak Compliance.

The continuing ed program that A4A provides is really centered around Fritz Meyer, Bob Keebler, and Craig Israelsen. Bob is an expert on things like PPP and financial and tax planning. He’s from Green Bay, Wisconsin and has been teaching classes for legal and accounting professionals for three decades.

 In addition to that, A4A sponsors a monthly class by Craig Israelsen. Craig is doing a presentation, coming up next week, with 51 years of risk return and MPT statistics on seven core asset classes. He’s a portfolio design expert. He’s been published in Financial Planning magazine since 1996 or so, every month.

Fritz Meyer was a portfolio manager and the public face of one of the world’s largest investment companies for over 15 years., He’s been teaching classes to financial advisors for two decades. He’s been an independent economist and instructor on A4A for the last decade.

We also produce a feed of FINRA-reviewed content. And actually, Cathy reviews that content [laughs]. It includes a video library. It’s a new video every week, and you can actually narrate the videos. And we give you scripts every week. This is all in one dashboard. And we give email newsletters every week, on Friday nights, about investing. And then, we have a financial planning update that goes out Wednesdays, on tax and financial planning and long-term investing ideas. And there’s a lot more here.

If you want to purchase the slides, go to advisorproducts.com and create a new account to use our shopping cart. All of the presentations on A4A, you can download them over here, and you can get the transcript. So, you get the transcript and slides with all of the webinars about tax planning, portfolio design, and economic fundamentals.

Gluck: Cathy, it’s a pleasure to have you here doing this. What’s going on? New rules. How big a deal is this?

Cathy Vasilev: Well, it’s a big deal. First of all, thank everyone for attending. And I want to take a moment to thank Andrew Gluck and Advisors4Advisors for having me. They provide extremely high-quality advertising material for advisors, which is greatly needed. And it has been a pleasure working with them over the past year, providing review services and filing their material with FINRA. You guys run a quality organization. You are professional, you provide a much-needed service, and I’m very grateful for you guys.

Vasilev: In the agenda, we’re basically going to go through everything that has happened with this new rule that’s come up.

Vasilev: So, just as a level setter, I want to state this is an SEC rule currently. None of the states have adopted it yet. I do believe that that will come later on, because most states do rely upon whatever the SEC rules are, but currently this is for SEC-registered investment advisors only. There have not been any amendments to the advertising rules which were adopted in 1961 or the cash solicitation rules that were adopted in 1979. Therefore, these changes, they have been long awaited, and it is great to be able to update these antiquated rules. Since the previous rules were issued prior to the advent of the internet and any other technological advancements that have happened in the last 40 years, the streamlined approach that they have taken to this was much needed.

Vasilev: It’s good to note that the SEC commission did unanimously adopt these rules. This new rule, which is 206(4)-1, replaces the current rule. They have codified everything into one single rule, instead of it being two separate rules and a whole bunch of no-action letters that were issued. So, it does completely and totally replace the advertising and cash solicitation rules. It does not go into effect until 60 days after it's been published in the financial registry, which will make it sometime in March it will become effective, but firms do have 18 months to comply with it. And there are a lot of changes that are going to be required to a firm's compliance program in order for you to do this appropriately. I know there's a lot of firms that are waiting anxiously for that March date so that they can start doing testimonials and endorsements, but you have to have the whole program in place before you can start, so keep that in mind.

Vasilev: The new rule takes more of a principles-based approach to regulation, and it's a very comprehensive approach. It covers everything, all in one rule. It removes the prohibitions on testimonials and past-specific recommendations. It does add disclosure-based guidelines that have to be used for testimonials, endorsements, and third-party ratings, but it incorporates everything all into this one rule. And it provides more sensible guidance. Now, there are still a lot of questions that have not been answered yet, and the SEC is supposed to come out with some FAQs that they will publish on their site in the following 60 days, but that has not occurred yet.

Vasilev: The original rule was proposed with a pre-review requirement, which is very much like FINRA’s pre-review requirement. So, they were going to require a principal of the firm to pre-review and approve all advertising prior to dissemination. They did back off of that, so right now there is no pre-review requirement required. But there are some other things where they were requiring oversight that's going to require you to review advertising material more than you do now, but at least the pre-review requirement went away.

Vasilev: The amended definition of advertisement, again, has two parts now. It's a two-pronged approach. The first part captures what we traditionally think of as the advertising rules, and the second part governs the solicitation activities that were covered by the cash solicitation rule. So, the first prong of traditional advertising only has some exclusions, mostly one-on-one communications with your clients and prospects, and your extemporaneous live communications. However, if you record those and rebroadcast them, it's now considered advertising. Also, anything that's educational in nature, as long as it doesn't promote your business, or if it’s any type of a hypothetical one-on-one presentation, is now exempt from advertising.

Vasilev: The definition says it's any direct or indirect communication offering advisory services regarding securities to prospective clients or to private fund investors, and that “private fund investors” is new. Or it's any new services that are being promoted to current clients or private fund investors. They specifically state that advertising does not include any of these other compensated testimonials and endorsements that are covered by the second prong.

Vasilev: The definition has been expanded, and it encompasses an investment advisor’s marketing activity. And it's regardless of how it's disseminated. It used to be, it just talked about written material, written brochures, or written this.

Vasilev: Now, it specifically says it’s anything that’s disseminated through emails, text messages, instant messages, electronic presentations, videos, podcasts, digital audio or video files, blogs, billboards, and all manner of social media, in addition to your normal, traditional paper newspapers, magazines, those types of … It expanded your advisory relationship, so if you have commentaries, investment theses, things that are disseminated through … When they say “indirect,” they're talking about material that you have that’s sent out through a third party. And because you may have helped them create that content, or you may have editorial content on that, you're considered to have adopted or entangled it to yourself.

You are allowed to use hyperlinking to required disclosures. You just have to make sure that everything is with enough prominence that people can see it, and that it's fair and balanced. Use of social media by the firm’s employees in a personal capacity is going to require some type of oversight. Third party content advisors have to take steps to make sure that the third-party content is accurate, it is fair, it is balanced. And you have to be able to use objective criteria when you make that determination. And the SEC is going to make you document that you made this analysis, and what your result was from that analysis.

Vasilev: The second prong is generally endorsements and/or testimonials, and endorsements or testimonials are something that an advisor either provides cash or non-cash directly or indirectly to someone for that. So, you're basically compensating somebody in order to get that. And when they say non-cash, they're talking about if you're doing some type of an award, if you're giving out prizes. Or even if you've reduced somebody’s advisory fees in exchange for that, that's considered solicitation and falls under this rule.

Vasilev: So, what's excluded from this advertising rule? What isn't advertising? It's anything that's addressed to one person, anything that's designed to retain existing clients. Anything that a client asks you for specifically, or a prospect asks you for specifically, is not considered advertising. Your live oral communications, any advertising concerning registered investment companies or BDCs, information required to be included because it's some type of a filing for communication that is allowed by the regulators. White papers, if they’re educational in content only. Anything where you’re just trying to promote your brand, and you're not explicitly making any type of an offer, it’s just promoting your brand. So, maybe you're using your logo at a golf tournament. That's promoting your brand.

Vasilev: As I mentioned before, this new rule explicitly includes anything that is supplied to a private fund investor as an advertisement. The rule used to say that the fund itself was your client, not the underlying investors in the fund, but now they're saying anything that is given to an investor in the fund is advertising.

Vasilev: This now brings the anti-fraud provisions of the rule squarely into the advertising rule, and that's really important because that's what gives them the power to have enforcement actions. That “fraud” word is a bad word. The marketing rules have always prohibited and will continue to prohibit making any type of an untrue statement of a material fact, omitting a material fact that's necessary for someone to understand in order to make a sound investment decision, anything that can be considered to be misleading—that's a very big bucket—any material statement of fact that you don't have a reasonable basis for making. One of the things that this rule says is, if you are making a statement of fact in a piece of advertising, you’d better have the documents to back up that. You can say you believe, and then that is not a statement of fact. But if you actually make a categorical statement of fact, you must have the documentation to provide to show the regulators that you have a sound basis for including that. And no cherry-picking.

Vasilev: Discussing any potential benefits without being fair and balanced and putting in all of the material risks or limitations, including or excluding performance results, presenting performance time periods in a manner that's not fair and balanced, and including any other information that anybody would consider of a normal person to be misleading.

Vasilev: The rule currently prohibits the use of testimonials. The new rule allows the use of testimonials, as long as you have disclosure, oversight, and disqualification provisions. So, a testimonial is any statement by a current client or investor in a private fund where the client or investor talks about their experience with the investment advisor or any of the people who work at the investment advisor, that directly or indirectly solicits someone to become a client of the investor, and that refers to any current or prospective client or investor that the advisor advises. An endorsement, on the other hand, is any statement made by a person other than a current client or investor.

Vasilev: It indicates some type of approval, support, or recommendation of the advisor, it describes a person's experience with the advisor, it directly or indirectly solicits any current or prospective client or investor, or it refers to any current or prospective client of the firm.

Vasilev: Advertisements have to clearly and prominently disclose whether the person giving the testimonial or endorsement, which, in their terms, they call a promoter—that's a new term for the SEC. They're calling people who give endorsements promoters—is a client, or whether the promoter is compensated. If the compensation arrangements and material conflicts of interest are present, they must be disclosed at the time of the testimonial or endorsement. They have to have additional disclosures regarding that compensation and what the conflicts of interest are. The SEC does make some limited exceptions for broker-dealers. The rule will eliminate the current rule’s requirement that the advisor obtain from each investor an acknowledgement of receipt of the disclosure, but the advisor is going to have to police the promoter’s activity. And even now, referrals from lawyers are considered testimonials.

Vasilev: An advisor that uses testimonials or endorsements in an ad, they have to make sure that they oversee compliance with the rule. They have to enter into a written agreement with the promoters, except if the promoter is an affiliate of the advisor. They have to disclose whether they receive more than de minimis compensation, so that’s 1,000 dollars or more, or if they receive some type of non-cash compensation during the preceding 12 months. If the testimonial is done for free, then the disclosures are not necessary. The SEC gives a lot of guidance stating, “Make sure you are not cherry-picking testimonials,” meaning you are not just picking out the testimonials that are the good ones. You have to be fair and balanced. And there are certain bad-actor qualifications, where you are prohibited from allowing a bad actor to act as a promoter.

Vasilev: Third-party ratings are now allowable, but they have very defined disclosure qualifications that have to be included. They define a third-party rating as a rating or ranking of an advisor provided by someone who is not related to them, and these persons provide these types of rankings in the ordinary course of their business. You will have to have policies and procedures to make sure that you are following all the rules, where you have to give the date of the rating, you have to give the time period for the rating, the identity of the third party that created it, and whether cash or non-cash comp was provided. So, you have to specifically be able to say that you have a reasonable belief that the advertisement complies with all the standards.

Vasilev: Advertising performance has been completely added into the rules. Performance advertising in the past was pretty much done by no-action letter. So, someone would send in a request for a no-action letter. “If I did this this way, would you recommend enforcement proceedings?” So, now they have taken all of that information from these no-action letters, and they have put it into the rule. So, the rule generally prohibits you from using gross performance unless net performance is also presented. This does not apply to institutional clients. So, for institutional clients, you do not have to do that. Any performance results, unless they are provided for a specific time period, so one, five, ten since inception. Unless it’s a private fund or a hedge fund. This is a significant change, and you must remember that you have to have documentation to prove all of these performance numbers.

Vasilev: You cannot say that the SEC has reviewed, approved, or had anything to do with the calculations that you’ve created. You do not have to deduct custodial fees. Now, the new rules do not say if you can present just gross of fees, but it does say that if you present gross of fees, you have to include net of fees. It also includes performance targets. So, any of your funds that have targets on them, they now apply to this. Performance results from fewer than all portfolios with similar investment policies and objectives and strategies, these are all allowed, with limited exceptions. There's always limited exceptions to everything. Performance results of a subset of investments extracted from a portfolio is now allowed if the offer is provided promptly for them to be able to get the performance results for the total performance portfolio.

Vasilev: Hypothetical performance. Except performance that's generated by your interactive analysis tools like Morningstar and eMoney and even Riskalyze, hypothetical performance cannot be advertised unless the advisor has policies and procedures to ensure the performance is relevant to the investment objectives of the intended audience. In one of the new requirements, it’s for everything that you produce. You have to mark on it what the intended audience is. That is going to be one of the things that you're audited for.

Vasilev: Predecessor performance is something that lots of firms like to take with them when they move from firm to firm. And the proposed rules will allow the presentation of an investment advisor's track record, as long as you do the following. You have to have gross performance information, which has to be accompanied by, or you have to promptly provide, the fee schedule and the expenses that were used to deduct the net performance. You have to state whether portfolios were related, whether or not they were, and all related portfolio performance has to be there. It cannot be misleading, so you have to make sure it's accurate in every way.

When presenting extracted performance, an advertisement has to provide or offer to provide the performance results for all the portfolios from which the performance is extracted. And the hypothetical performance can only be presented if you have policies and procedures that are designed to ensure that performance information is relevant to the financial situation and investment objectives of the client, provides additional information about the criteria, the assumptions, the risks, and the limitations that are relevant with a hypothetical illustration, so that the client can understand. Always, number one, cannot be misleading in any way.

Vasilev: The new rules codify the existing staff’s no-action letters, requiring the same person to be primarily responsible for achieving prior performance. And the accounts have to be substantially similar. And there's a lot of requirements for disclosures that go along with taking performance with you.

Vasilev: One of the things that the SEC is going to do is, they're going to withdraw all of the no-action letters that are being replaced by this new rule. They are going to list these on SEC.gov when they do. They have not done it yet, but it will happen sometime within the next 45 days. They will just no longer be there, and you will have the rule to go by.

Vasilev: One of the other changes is you're going to have to make substantial changes to your Form ADV. Even if you wanted to implement this, say, right out of the box, in March or April, once it becomes effective, the form ADV in the CRD system is not available yet for you to make the changes that are required to your ADV. That will come about in the fall of 2022. There are going to be programming changes that have to be made to the system in order for them to gather the information that is going to be required. So, it’s changing your Part 1A, as well as your Part 2A.

So, you're going to have to state specifically in this ADV, in your Part 2 and your Part 1A, market performance, that you use testimonials, that you use endorsements, that you use third-party rankings, and if you give references to specific type of investment advice. All of this is going to have to be in there, and it is going to have to be updated annually, and it's going to have to be updated within 30 days anytime you make a change to it going forward from the time that you implement this. This is a another very large change that will take some time for firms to implement.

Vasilev: They have expanded the books and records rules, so RIAs have to keep copies of all ads that are disseminated. If disclosures of testimonials are not in the ads, then you have to retain copies of the disclosure information that was provided in addition to the ad to all of your clients and investors. The records have to be retained for all ads that are sent to more than 10 people. Make your life easier. So that you don't have to track it, which is hard, just keep records of all ads sent to more than one person.

Your books and records have to be formulated in a way to prevent violations from occurring. That means that you have to be able to detect a violation, amend your policies to make sure it doesn't happen again, and continue testing it to make sure that it doesn't occur again. You have to include objective and testable means to prevent violations. Those are internal pre-reviews, internal approvals, maybe reviewing some type of a sample based on the risk to the firm. Or a lot of firms, I think, will actually create preapproved templates. So, they'll have templates that the advisors can use with the client to make sure that all the disclosures are on there, everything’s on there. All they have to do is change bits of information.

In implementing your new compliance program, you need to sit down and take into effect the timeline is 18 months after it is published in the register for you to be compliant. So, you need to decide what your timeline is going to be. You're going to have to consider what things need to be changed within your business, what things need to be changed within marketing, as well as what things need to change in compliance. You're going to have to plan for training for everyone at the firm, so that they understand what this new rule is and what the new requirements are for document retention. You're going to have to begin looking at all the applicable policies and procedures that you currently have, and how you're going to have to change and add to it for the new rule. You’re going to have to learn what the new performance advertising requirements are, and you're going to have to consider how your current solicitation and referral agreements are going to have to change.

Right now, most people are very, very focused on what they directly pay for compensation, but you're now going to have to take into consideration all of that indirect compensation. I know a lot of firms that they will give their clients a reduction in their advisory fee for client referrals, and all of that's going to have to be tracked and documented. You are going to have to make sure that when you use promoters, that they are not a bad actor. So, now you’re going to have to do a background check on them to make sure that they're OK. And a lot of these rules are actually going to apply to PPMs, so many firms with funds will have to actually revise their PPMs to take all of these new rules into consideration, especially when it comes to quoting performance.

And then, once you have developed your new policies and procedures as to how the firm's going to operate, you're going to have to incorporate spot checks in them to see how they're doing and if it's going according to plan, or if you're going to have to revise something. You're going to have to have periodic reviews on a regular basis, be it quarterly or biannually. And you need to have a training program in place so that you can train not only your current employees, but any new ones that may come on board, because this is new for everybody.

It is very likely that the SEC is going to make you maintain everything about whether a testimonial is relevant, whether an endorsement is relevant. There's a lot of questions out there to the SEC currently, to see if they can provide some additional information on this. You are going to have to retain all performance data and every statement of fact that’s material to it. You're going to have to define what your intended audience is for all of these. And again, this is fall of 2022. If you want to make a good impression on the regulators, spend some time defining all of this and getting it right. It will pay off by a much easier audit for you.

Vasilev: I also just wanted to hit on the new definition for accredited investors, which changed on December 9^th. It used to be that an accredited investor was someone who had at least a million dollars of net worth and had 200,000 dollars of income for the last two years, or 300,000 dollars if it was combined with a spouse. There were a lot of enforcement cases lately where firms were taken to task for considering their employees to be accredited investors, and they didn't meet the actual definition of an accredited investor. But they tried to say, well, because they work for the firm, they have superior knowledge, and therefore they should be able to invest in it. Well, they have finally decided, lo and behold [laughs], the firms are correct. These people should be allowed to invest, even if they didn't meet the actual accredited investor.

So, now they're going to allow persons to qualify as an accredited investor if they have certain professional certifications, or designations, or some type of credentials. So, your Series 7, your Series 65, your Series 82, your CFP, your CFA, they're going to allow those people to be considered accredited investors. They said that they do plan to continue to add to the list of certifications and designations that they will allow, so this will amend. In addition, they also added what's called a “spousal equivalent” to the definition, so that now you'll be able to pool your finances in order to be considered an accredited investor. They also added certain entities like LLCs and family offices that have at least five million dollars in assets to the accredited investor definition. So, this is going to open up a lot of opportunities to individuals who were not allowed to invest in private equity and hedge funds, so more selling opportunity and more opportunity for investors to be included in alternative asset investment.

Q&A Start

Vasilev: And now, it is time for questions and answers.

Gluck: Boy, you zipped through that fast. You were just flying through those slides. Some questions. I just want to get these arranged in front of me here. OK, local papers, they host “best of” votes from the community, and you see a lot of that—best florist, best restaurant, best accountant, best financial advisor. As an RIA, are we allowed to send email campaigns to clients to tell them about the voting period and ask for their support? A “vote for us” type of promotional campaign. Is that permitted?

Vasilev: Not currently, but it will be once this goes into effect. And you have to be very careful. You have to be very careful when you do that. There's a lot of disclosures that go into emails that you send like that, but, yes, in the future, you can do that.

Gluck: So, you can't do it, though, for 18 months, is what you're saying?

Vasilev: Well, until you are compliant and have your compliance program in place. Some firms are not going to wait 18 months. Some firms are going to want to do this as quickly as possible, and they'll probably be up and running in six months. But you can take the full 18 months if you want to. The problem is that you can't take advantage of “I'm going to use this and do this,” and then not do the compliance program that goes along with it. You have to have both parts.

Gluck: Can employees of an RIA like and share and comment on the firm's social media posts or from their personal social media accounts? Great question.

Vasilev: That is a really good question. Not from their personal social media accounts. Because if they do it from their personal social media accounts, the requirement is that you have to be able to archive any communications at the firm, and anything that you're doing that's business-related on your personal social media accounts is considered business of the firm. And unless you have some type of technology in place in order to do that, most firms just don't allow you to do anything on their social media. Your firm putting out social media accounts, they can do. Again, the same requirements are you have to be able to archive it all, so you have to be able to produce it for a regulator. But if your firm allows people to comment on their social media site, which a lot of firms don’t, because they don't want to have to deal with the positives and the negatives, especially the negatives, you can. But you cannot do it from your personal social media account.

Gluck: Now, everybody has a Google account for their company, and Google lets everybody rate them. Can you ask people to post ratings?

Vasilev: Not currently. Because when you ask people to do things for you, you entangle yourself in it. If someone just goes to Google and rates you, that's great, and that's not a problem. But when you specifically ask for it, you’ve entangled yourself in it, so that's now a problem. And one of the things with the regulators is realizing that just because you ask for a rating doesn't mean you're going to get a positive one [laughs]. But they're terrified that people will only ask those clients that they know they'll get a positive rating from, and the same opportunity will not be extended to those clients that they're not as sure of.

Gluck: Yeah, that sounds like a lot of people can quietly ask and nobody will be the wiser, I would think, quite frankly.

Vasilev: I wouldn't put it in writing [laughs].

Gluck: Yeah. And how about things like LinkedIn? What do these new rules mean for LinkedIn recommendations? Some advisers have, because of the testimonial rule, not done LinkedIn testimonials. Or recommendations, that is. Does this rule now open the floodgates and say, “OK, I can let everybody who wants to. I can display recommendations on my LinkedIn account”?

Vasilev: Yes, that's exactly what this rule is going to allow them to do. There are disclosures that they're going to have to put on their social media page, but, yes, they will be able to do this.

Gluck: And how about Yelp? Is that the same thing, then?

Vasilev: Same thing.

Gluck: Now, also, one of the things I think that's interesting is these services that kind of … I see them in magazines, and you see them. It's the kind of thing, like that questioner was asking about, where you have best florist. I’ve seen a lot of these five-star advisor ads, and a lot of them, they don't really require anything much, except maybe to pay a fee to the company [laughs]. But they don't check your credentials carefully, or there's no objective point of view to them. And still, advisors put their badges on their site. Any thoughts on what's going to happen with that whole area?

Vasilev: I mean, that's been going on forever, and it will continue. Lots and lots of advisors use that. There are a lot of disclosures that go along with using all of those, if done correctly. If not done correctly, it can be a nightmare, especially when they get audited. But yeah, it will continue.

Gluck: But the new rule does attempt to toughen that up, doesn't it?

Vasilev: The new rule codifies what should have already always been done. So, if you've ever been audited and you’ve used that five-star rating, you will get a comment back in a deficiency letter saying, “Yeah, you can use this, but you didn't disclose these facts.” And it will walk you through what you have to do to continue using it going forward. Now they're just codified in the rule, whereas before you were just expected to know them.

Gluck: The new rule says that the advisor has to believe that the recommendation is unbiased, that it's based on an unbiased, fair promotion system, I guess.

Vasilev: Yes.

Gluck: How will that be judged? How will anybody know whether they can believe that the system is … How will an advisor know that it’s going to meet the SEC’s standard for being unbiased, the rating system?

Vasilev: You learn that over time, anytime a new rule comes out, as you get audited, and as new FAQs are published on the sites because people ask those specific types of questions. In the beginning, an advisor has to put down a rationale for why they believe it's OK, because it's a whole lot easier to write down today why I think it's OK than it is 3 years from now, when I get audited, to try to remember why I thought it was OK. So, you document it. And as long as you are documenting it and you are following the spirit of the law, if they don't like the way you've done it, you’re going to get a deficiency in a letter stating that they want something more specific, and you have to put together some other more specific way to do it based on what's happened over the years.

But basically [laughs], you learn about it as you go along, looking at enforcement actions and looking at FAQs on the SEC's website. They've made this very much an advisors’ problem, not an SEC problem. So, they have taken away the “No, no, no, no, no,” and they’ve said, “Yes, you can do this, as long as you can provide a rationale for why you believe this is in the best interest, and this is fair and balanced, and this was all the things that meet the law.” So, they put the onus of proof more squarely on the advisor’s shoulders than it was before.

Gluck: When somebody comments on an advisor post or something and they say something, is the advisor responsible for that? What kind of guidance could you give advisors about comments on their blogs that might be incorrect, or might promote something that's not that good for clients? Any thoughts on what to do about any of that?

Vasilev: Firms have to have a policy for when they will allow comments from clients to stand, and what the criteria is they use for taking comments down. Obviously, if something is racial, if it's something that's derogatory, that's something that you want to make sure that you take off of your site. A lot of times you'll get comments from people where they're trying to promote their own scheme. “Don’t do what this advisor says. You need to do what I say and do this.” So, you need objective criteria that you use to judge when you take material off, and then you have to adhere to it 100% of the time. And you have to document it.

Gluck: If a client is already receiving a discount for some time, and now offers a testimonial, is that considered cash or non-cash payment?

Vasilev: Not if they were already receiving it. When you adopt this rule for your firm, if you do it before the 18 months are up, whatever the clients are paying at that point in time is your reference point for the start of it. If I’ve charged a client 1%, which is a reduced rate from what I normally charge, but we've negotiated a 1% rate, and they give me a testimonial, they didn't get paid for it. They already had a reduced rate. If I offer them an additional reduced rate, so now I’m only going to charge them 80 basis points because they've given me a testimonial where I've gotten some clients for it, now that’s non-cash comp.

Gluck: For managers publishing their data to the investment databases like eVestment, Morningstar, Mercer, Callan, what do they need to consider, since any communication designed to acquire clients can be considered advertising? And how do the books and records rules affect data distribution, both qualitative quantitative?

Vasilev: The firms that are sending out the data, that are distributing the data, they're going to have to make sure that they are adhering to all the new requirements, which most of these requirements were already in with no-action letters, so most of what they're presenting won't change. There will be some changes, but once they send it to Morningstar or whatever and the advisors get it, the advisors are going to rely upon that data. They're going to document that they're relying upon it, because they have no way to prove whether it's accurate or not. But those firms that promote that data, they're going to need the backup information to prove that they’re calculating it correctly. Because if they're not, the SEC is going to hold them accountable.

Gluck: These rules become effective in 2022.

Vasilev: Correct.

Gluck: In your view, how long will it be before the principle-based rules are enacted at the state level?

Vasilev: Some will start in 2022. Others will follow, probably not until the spring of 2023.

Gluck: So, it's going to depend on the state?

Vasilev: Every state gets to do it when they're comfortable doing it.

Gluck: Doesn't NASAA organize them to do it all at once, somehow?

Vasilev: NASAA has a proposed model for states to adopt, but it's up to the state to adopt it. They don't have to.

Gluck: Talk about models. With regard to model portfolios, are the rules the same for advertising the performance of model portfolios?

Vasilev: Yes.

Gluck: OK, thanks. If a webinar includes examples, is this a hypothetical that would make the webinar an advertisement?

Vasilev: Yes.

Gluck: Let us know if you have follow-ups on some of these questions, please. How would the new advertising rules affect someone who writes regular blogs and does informational videos on a business website, and on the website also has a solicitation to call for the possibility of doing business?

Vasilev: Well, it’s going to be considered advertising, so they're going to have to adhere to all the advertising rules and all of the document retention rules for what's promoted on that site and what blogs are written.

Gluck: When you write a weekly column for a local newspaper, is that considered advertising? And how do you handle the disclosures? Good question.

Vasilev: It depends on what the blog is about [laughs]. I mean, if you're writing a blog that's just general economic information, and you're not promoting that you're an investment advisor anywhere in there, you don't mention your firm or any of that, then it doesn't. If you are writing it and it's something that's related to the industry, and what you have to do, and what you do in the industry, it may require disclosures. Now, the media is an interesting animal in that you can tell them that they have to publish and add these disclosures, but they always have the ability not to, based on space in their newspaper, or space in the magazine, or whatever. But you have to have documentation to prove that you requested it, and that they published it without it at their discretion.

Gluck: Is marketing an educational webinar on LinkedIn considered advertising subject to these rules?

Vasilev: It depends on what you consider educational. If you have a webinar in there and all you do is talk about what is a mutual fund, and you look at it as purely educational, you are not talking about yourself, you are not talking about your firm, you’re not talking about anything except “I am just going to teach this 15-minute class on what a mutual fund is,” that's not an advertisement. But the minute that you put your firm’s name out there as promoting it, you’ve crossed the line.

Gluck: So, the actual presentation itself may not be an advertisement, but promoting it would be?

Vasilev: Yes.

Gluck: [laughs]

Vasilev: It's why most compliance departments are like, “Just show me what it is that you're going to say. Show me the presentation. Show me the notes. Show me whatever, so I can tell you what to stay away from, so that you can keep this purely educational, and not as an advertisement, if that's what you're trying to accomplish.” Because without seeing the material, or without knowing what someone intends to talk about, it’s really hard to make a judgment call like that.

Gluck: So, just as the old rules, once you mention the name of your firm, it’s an ad. End of topic.

Vasilev: With these new rules, the mentioning of the name of the firm you can probably get away with without it being considered, because they're allowing you to consider it a branding opportunity. But again, it depends on the facts and circumstances of what else you say, what else is in the educational presentation. Everybody thinks their information is purely educational, but we're in a business where we make money by promoting ourselves, we get clients by promoting ourselves. So, it's really hard to separate the two.

Gluck: Can we publish client stories or testimonials in a website blog format that share how a CFP in our firm supported a client to achieve a financial goal? It would be a story approach, where the thought process in the financial advice discussion allows a client to be empowered to make decisions to accomplish their goal—purchasing a new home, starting their own business, et cetera. A more narrative share, versus specific account and investment information.

Vasilev: Currently, no. You will be able to do that with the new rules. I will also say that you can do it if you do it from the format of “I want to tell you how we go about helping the clients of our firm. What is our typical process?” But if you take how a specific CFP supported a specific client to achieve a goal, even if it's just something as easy as buying a house, you cannot, currently. I’ve also seen some very clever cartoons that have been created to promote this that I think are very effective.

Gluck: If you are requested to do a local TV news interview on topics that they choose, including your financial and personal opinions on the market, is that an advertisement if they say what firm they are from, but the RIA does not?

Vasilev: No, that is not an advertisement. But you have to be very, very careful when you are providing your opinion that it does not come off as a blanket recommendation. So, if you say, “I would do this,” that’s a blanket recommendation, and you can't say that. You have to be very careful what you say, to keep it from being an advertisement. No, currently, that’s not an advertisement.

Gluck: So, state-regulated RIA firms are not subject to these new rules until the state adopts them, correct?

Vasilev: Correct. That’s correct. Which means, unfortunately, they can't take advantage of the more user-friendly endorsements and testimonial rules because the states are not allowing that yet.

Gluck: OK. Well, we had a lot of great questions. I appreciate that, everybody. Thank you. I'm going to post the slides and more information. I’m going to follow up on this because I think there's a lot to cover here. So, if you want the slides, check back on the page. I'll post them either tonight or tomorrow. I'll try to do it today. Cathy Vasilev, great job. Just a fount of knowledge at a time when things are really changing, so thank you for that. Great job, Cathy.

Vasilev: Thank you very much. Thank you, everyone, for allowing me to help you.

Gluck: Thank you, everybody. Cathy Vasilev from Red Oak Compliance is doing a semi-regular series of quarterly webinars, and as news pops up, we’ll be covering more with her. Thank you, everybody, for paying attention to us. We've got Bob Keebler coming up, doing something on the new tax rules under the new, totally Democratic-controlled government [laughs], and what that means for advisors in terms of the higher taxes expected. That's coming up in just another week and a day. So, thank you, everybody. Thank you, Cathy. We’ll see you guys next time. Take care, everybody.

Vasilev: Thank you, Andy. Thanks, everyone. Bye-bye.