When SEC Rule 206(4)-1 became effective in November 2022, it consolidated and rewrote decades of adviser-marketing regulation into a single rule. The most consequential changes, from the perspective of customer claims, were the new rules on testimonials and endorsements, the new conditions for performance advertising, and the framework governing hypothetical performance. Three years in, the recurring claim patterns are starting to settle.
The Marketing Rule replaced the previous advertising rule (Rule 206(4)-1) and the cash solicitation rule (Rule 206(4)-3), both of which dated from the early 1960s and had been amended only in narrow ways since. The new rule is principles-based rather than prescriptive, organized around a "general prohibitions" framework supplemented by detailed requirements for performance advertising and testimonials.
The Seven General Prohibitions
Rule 206(4)-1(a) lists seven general prohibitions that apply to all adviser advertisements. An advertisement may not (1) include any untrue statement of material fact; (2) include a material statement of fact that the adviser does not have a reasonable basis to believe it will be able to substantiate; (3) include information that is reasonably likely to cause an untrue or misleading implication or inference; (4) discuss potential benefits without providing fair and balanced treatment of associated material risks or limitations; (5) reference specific investment advice that is not presented in a fair and balanced manner; (6) include or exclude performance results or time periods in a manner that is not fair and balanced; or (7) be otherwise materially misleading.
These prohibitions are deceptively powerful. Each one independently provides a basis for an enforcement action by the SEC and, in our experience, a basis for misrepresentation and omission allegations in customer disputes. The "fair and balanced" formulation in particular has proven highly portable into customer-side claims.
Testimonials and Endorsements
The new rule permits, for the first time, the use of testimonials (statements by current clients) and endorsements (statements by non-clients, including promoters and influencers) in adviser marketing. The use of testimonials and endorsements is conditioned on a series of disclosure requirements: that the person is or is not a client, that the person was or was not compensated, and the material conflicts of interest associated with the statement.
The disclosures must be "clear and prominent," which the SEC has consistently interpreted to require placement that a reasonable viewer would notice. Disclosures buried in footnotes, behind hyperlinks, or in fine print at the bottom of marketing pieces have repeatedly been found inadequate in enforcement actions.
For customer claim purposes, testimonial and endorsement issues most often arise when a customer was induced to engage the adviser by marketing that featured testimonials or endorsements. If the required disclosures were missing or inadequate, and the customer was misled about the nature of the testimonial or endorsement, the misrepresentation theory is substantially strengthened.
Hypothetical Performance
"Hypothetical performance" under the Marketing Rule encompasses performance results that were not actually achieved by any portfolio of the adviser — including model performance, backtested performance, targeted or projected performance, and similar simulated results. The rule permits hypothetical performance only if three conditions are satisfied.
First, the adviser must adopt and implement policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience. The SEC has been emphatic that this condition functionally limits hypothetical performance to one-on-one presentations or narrowly targeted communications to financially sophisticated audiences. Hypothetical performance in mass-distributed marketing — a website, a general-audience presentation, a publicly available fact sheet — is presumptively non-compliant.
Second, the adviser must provide sufficient information to enable the intended audience to understand the criteria used and the assumptions made in calculating the hypothetical performance.
Third, the adviser must provide sufficient information to enable the intended audience to understand the risks and limitations of using the hypothetical performance in making investment decisions.
From a customer-claim perspective, hypothetical performance issues are powerful because they often touch directly on the inducement to invest. A customer who was shown backtested or model performance during the pre-engagement period, and who relied on it in making the decision to engage the adviser or to invest in the strategy, has a misrepresentation theory whose strength depends almost entirely on whether the hypothetical performance complied with the rule.
Gross and Net Performance
Whenever gross performance is presented, net performance must be presented with equal prominence. This deceptively simple requirement has generated a steady stream of enforcement matters and a corresponding stream of customer claims. The implementation issues are predictable: gross performance in the title, net performance in a footnote; gross performance in larger type; gross performance for a longer period; gross performance for the headline strategy and net performance for a different time period or a different strategy.
Where the gross-and-net presentation fails to satisfy the rule, the corresponding customer misrepresentation theory is straightforward: the customer was shown a higher number than was actually applicable, did not appreciate the difference between gross and net, and made the investment decision based on the higher (gross) figure.
Extracted, Related, and Predecessor Performance
Three additional categories of performance presentation are subject to specific rules.
Extracted performance — the performance of a subset of investments from a portfolio — is permissible only if the advertisement presents, with equal prominence, the performance of the total portfolio. The cherry-pick problem is the principal concern.
Related performance — the aggregated performance of a group of related portfolios — is permissible only if it includes all related portfolios; advisers cannot selectively exclude underperformers. The criteria for defining the related group must be applied consistently.
Predecessor performance — performance attributable to the personnel and strategy of a predecessor firm — is permissible only when certain personnel and strategy continuity conditions are met, and even then the advertisement must contain specific disclosures about the predecessor relationship.
What This Means for Claims
The Marketing Rule has not created a private right of action. But it has created a detailed regulatory framework against which adviser marketing is now measured, and that framework is routinely cited in customer disputes as the regulatory standard underlying breach-of-fiduciary-duty claims, misrepresentation claims, and aiding-and-abetting claims against the firm and individual representatives.
The most common Marketing Rule claim pattern we see has three elements: marketing that induced the engagement or the investment; specific provisions of the marketing that did not comply with the rule (typically performance-related or testimonial-related); and a measurable difference between what the customer was led to expect and what the customer actually received. When those three elements are present, the case is generally worth pursuing.