Compliant Advertising: Breaking it Down – Part 2: Testimonials

Compliant Advertising: Breaking it Down – Part 2: Testimonials

25 October 2019

Main Contributor: Elizabeth Cope, CPA, CSCP, CIPM, CEO & Lead Consultant


Review of Part 1: The Foundation

In the first article of this series, we discussed the foundational information you need to know to ensure your marketing and advertising materials are in compliance with the SEC’s rules and regulations.  We helped you clearly understand:

  1. the SEC’s definition of an “advertisement.” What is considered an advertisement, what is not, and why this is important
  2. what the Adviser’s Act prohibits, and
  3. where you can find the exceptions to the rules…as there are more than 14 place to look.

If you haven’t already read Part 1: The Foundation, we suggest you start here, as it will provide you with a fundamental understanding of compliant advertising before reading on.

Part 2: Testimonials

This article is going to focus on the use of testimonials.  We are going to start with what the Advisers Act does NOT allow you to do.  We will follow that up with the no-action letters and/or SEC guidance that provide you with more specific details of what you CAN do without violating the rules.

The Rules

For those of you that love rule references, Rule 206(4)-1 of the Advisers Act essentially prohibits an investment adviser from distributing an advertisement “which refers, directly or indirectly, to any testimonial of ANY KIND concerning any advice, analysis, report or other services” that you, the RIA, or individual at the RIA provide.

We added the emphasis here.  The SEC loves to use the term “indirectly” in their rules.  It’s their way of letting you know it’s not okay to be sneaky to circumvent the rule…so don’t bother trying.

What the Advisers Act does not do for us is define “testimonial.”  However, a “testimonial” is generally understood to be a statement from an existing or former client which endorses or discusses an investment experience with you, the adviser.

Why does the Advisers Act prohibit testimonials?  The SEC believes that testimonials are misleading.  For one, they might lead a potential client to think they will have that exact same experience when in fact they may not.  And two, they ignore any unfavorable experiences existing or former clients might have.

RIA regulations differ from broker-dealer regulations.  RIA regulations prohibit the use of testimonials because the SEC defines the very nature of testimonials as “misleading,” while broker-dealer regulations allow the use of testimonials as long as they are not misleading, leaving the term “misleading” up to interpretation.

Exceptions to the Rule

Partial Client List

The SEC provides relief to advisers for the use of partial client lists in advertising.  This can be found in two no-action letters, Cambiar and Denver.  They state that partial client lists would not be considered a testimonial as long as the following criteria are met:

  1. The list must be based off of objective criteria (NOT performance). For example, you can identify all of your pension and profit clients.
  2. You must add a disclosure similar to the following, “It is not known whether the clients identified approve or disapprove of the advisory services we provide.”
  3. You must also add a disclosure on the criteria used to determine the clients included on the list. This can be implied by the heading or title.  For example: Pension and Profit-Sharing Client List.

Finally, this is not explicitly identified as a requirement within the no-action letters, but always get your client’s permission before you publish their name so as to not violate any privacy regulations.

Fun Fact: the disclosure requirements listed above are only identified in the Denver no-action letter (not Cambiar which actually superseded Denver.  Denver was published in 1993 and Cambiar in 1997).  We have found that examiners still rely on Denver, and therefore, we always recommend taking the conservative approach of including the disclosures.

Ratings from Third Parties

Generally, a published satisfaction rating of your clients would be a testimonial; however, the DALBAR no-action letter, published in 1998, allows advisers to publish ratings of client evaluations as long as specific criteria are met as they relate to how the rating was conducted.  To provide you some context, DALBAR is a research firm that conducts survey research on financial institutions and provides the results of the survey for the advisers to utilize for a fee.

All of the following criteria must be met in order to rely on the DALBAR no-action letter:

  • The ratings must be created by a third party.
  • The rating cannot emphasize favorable client responses or ignore unfavorable client responses.
  • The rating must represent all, or a statistically valid sample of, the client responses.
  • The questionnaire sent to clients must not have been prepared in order to produce any pre-determined results that could benefit any adviser.
  • The questionnaire must be structured to make it equally easy for a client to provide a negative or positive response.
  • The research firm must not perform any subjective analysis of the survey results, but rather assign numerical ratings after averaging the client responses for each adviser.

The following additional criteria must also be met in the adviser’s advertisements that are published and disseminated:

  • The advertisement must disclose:
    • i) the criteria on which the rating was used, ii) the category for which the rating was determine, iii) the number of advisers surveyed and the percentage of advisers that received that rating, iv) who created the survey, and v) whether or not the adviser paid to participate or paid to receive results.
    • something similar to, “This rating is not representative of any one client’s experience because the rating reflects the average of all, or a sample of all, of the experiences of the adviser’s clients.”
    • “The rating is not indicative of the adviser’s future performance.”
    • All disclosures that, without them, would make the advertisement misleading (e.g., the rating demonstrates favorable results, while the firm has several client complaints reported against them).
  • The advertisement must be balanced (disclose unfavorable ratings as equally prominent as the favorable ratings).
  • The advertisement must not make statements about being top-rated, when the adviser was actually NOT first in that category.

Fun Fact: A second no-action letter on this topic, Investment Adviser Association, was published in 2005, but that no-action letter essentially just referred to the DALBAR response.

Unsolicited Requests

A response to an unsolicited request is NOT an advertisement, and therefore, providing a client testimonial in response to the unsolicited request is not prohibited.

This isn’t exactly an “exception” to the rule, but I wanted to include it as a reminder, since it is kind of an exception by way of not falling under the definition of “advertisement.”

The Gray Area

Testimonials in Social Media

In 2014, the SEC issued an IM Guidance Update ( to provide clarification on the use of testimonials in social media with respect to public commentary.  Social media sites and many third-party websites allow the public to make comments, such as in response to a social media posts or at the bottom of a webpage.  In the IM Guidance Update, the SEC addressed concerns about when public commentary, especially when it’s discussing the adviser’s services, is considered a testimonial.

So…is commentary on social media (such as a “like” or a comment from a client) considered a testimonial?  The answer is, it depends on the facts and circumstances surrounding that particular situation.  …This is where that lovely gray area comes in.  But there are some clear take-aways from this guidance.

Independent, Third-Party Sites

  • If you do not have control over the content (i.e., an independent party provides the content from which clients are commenting) this would NOT be a violation of the Advisers Act. An example of this could be a blog maintained by an independent party that is discussing the services of RIAs.
  • If you are independent from this third party, you can use the information from this independent site on your marketing materials—provided that the independent site doesn’t have copyright requirements—as long you include EVERYTHING and do not limit the comments to the ones that appear favorable or make the more favorable comments prominent (e.g., putting the negative comments towards the end and/or in tiny font). Warning – Don’t forget the facts and circumstances comment I mentioned above.   If the site, in any shape or form, appears to make misleading comments and statements and you re-publish those, you could be in violation of the Advisers Act.
  • If you, the RIA, draft a piece for the independent party or pay them a fee to draft it, then you could be violating the rule if clients start commenting and the comments appear to be testimonials.

LinkedIn Endorsements and Recommendations

As you may recall from our definition above, a testimonial can include the endorsement of an individual of the advisory firm.  One common area we see this is on LinkedIn.  LinkedIn has the ability for individuals to endorse people for their skills and to recommend them based on their skill sets (which is actually very entertaining to me, because I know for a fact I have been endorsed for a few skills that I should not have been).  This is another gray area that could be considered a testimonial.

We recommend two options to handle this:

  1. As an adviser, if you allow your employees to have endorsements and/or recommendations on their page, then make sure you have a process in place to monitor those to ensure they could not be viewed as a testimonial.
  2. Another option is to simply prohibit (in your compliance manual) the use of LinkedIn endorsements and recommendations and require all of your employees to turn this functionality off. This is a common road I see taken with firms that don’t have the resources or the desire to monitor those accounts.


The Advisers Act is clear that testimonials are prohibited.  There are few exceptions to this:

  1. Partial Client Lists
  2. Ratings from Third Parties, and
  3. Unsolicited requests

While there are exceptions to the rule, you need to make sure that your particular circumstances meet all of the specific criteria in order for those exceptions to apply.

And, as usual, there is also a gray area.  The primary gray area with regard to the use of testimonials in advertising is social media.  If you’re going to use social media, just be vigilant with your policies and procedures for monitoring it.  You’ll want to conduct reviews to confirm there are no inadvertent testimonials or misleading statements.

And, in general, it’s good to have policies in place for the review and approval of all marketing materials, including your website and social media platforms.

As with all areas of compliance, sometimes advisers have unique circumstances come up around marketing and advertising.  If you have a unique situation or if, after reading this, you have any questions or concerns and would like a sounding board, email us or give us a call (541) 227-2336.  We are always happy to help!

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