SEC Marketing Rule

An adviser may not use a business name that:

1. A.Uses the owner's surnameNaming a firm after its founder is the oldest convention in the advisory business and deceives nobody. The prohibition targets names that falsely suggest a regulator stands behind the firm, not ordinary personal names.
2. B.Includes the word advisersUsing a word that accurately states what the firm does is not misleading. A name only becomes a problem when it implies something untrue, such as official endorsement or a guaranteed outcome.
3. C.Implies government endorsementCorrect - no implied government approval.
4. D.Describes its services plainlyPlain description is the standard the rule is trying to encourage, not something it forbids. What is off limits is a name that leads a prospect to believe a government body has approved or sponsored the adviser.

Why: A name implying government endorsement or approval is misleading and prohibited.

Alder Peak Capital's new fact sheet shows its flagship strategy returned 12.4% last year, in 24-point type, with the after-fee figure of 10.9% in a footnote at the bottom in 6-point type. Under the SEC marketing rule, this presentation is:

1. A.Acceptable, because gross performance better reflects the manager's investment skill apart from fee choicesThat argument has real analytical merit, which makes it tempting, but the rule requires the investor to see what she would actually have earned.
2. B.Deficient, because net performance must be shown with at least equal prominence to gross performance over the same periodCorrect. Equal prominence is the operative standard, so burying net performance in small-type footnotes fails even though the number is disclosed.
3. C.Deficient, because an adviser may never show gross performance in a retail advertisement under any circumstancesGross performance is permitted. What is required is that net performance accompany it with equal prominence.
4. D.Acceptable, because the net figure is disclosed and a reasonable investor is expected to read footnotesPresence is not prominence. The rule was written precisely to stop performance from being framed by the gross number.

Why: When an SEC-registered adviser presents gross performance, it must present net performance with at least equal prominence, calculated over the same time period and using the same methodology. A headline gross number with a tiny footnoted net number fails the equal-prominence requirement, because the reader's impression is formed by the large figure. The clue is the 24-point versus 6-point contrast. Review the marketing rule's performance requirements.

Under the current SEC marketing rule, client testimonials in advertising are:

1. A.Required in every adNothing obliges an adviser to use testimonials at all. The rule sets conditions on their use; it does not mandate a marketing technique.
2. B.Allowed with no conditionsHalf right, since testimonials are no longer banned outright. The permission comes with strings: the audience must be told the speaker is a client, whether the speaker was compensated, and what conflicts exist.
3. C.Permitted with required disclosuresCorrect - allowed under conditions.
4. D.Always prohibitedThis reflects the older regime and is the classic outdated answer. The current marketing rule replaced the flat prohibition with a conditional permission built on disclosure.

Why: Testimonials are allowed if the required disclosures and conditions of the marketing rule are met.

An adviser implies that being a Registered Investment Adviser is a government-conferred mark of skill. This is:

1. A.Fine if registeredHolding a valid registration is exactly what the adviser is misusing. Registration confirms the firm filed and met the conditions to do business; it says nothing about competence, and claiming otherwise is the violation.
2. B.A prohibited misrepresentationCorrect - registration is not a skill credential.
3. C.Accurate marketingAdvertising may state truthfully that a firm is registered, which is why the line feels close to legitimate. It crosses over once registration is dressed up as a government seal of quality, because no regulator passes on an adviser's skill.
4. D.Required disclosureNo rule requires this statement, and the required disclosures run the other way. Advisers are expected to make clear that registration does not imply approval or endorsement.

Why: Suggesting that registration signifies skill or approval is a prohibited misrepresentation.