Third-Party Rating

Carrowmore Advisers wants to advertise that a regional financial magazine named it one of the "Top 50 advisory firms." Under the SEC marketing rule, the firm may use that THIRD-PARTY RATING only if:

1. A.The rating is less than twelve months old, which is the sole condition imposedRecency is not the test, and the required disclosures apply regardless of the rating age.
2. B.It reasonably believes the underlying questionnaire or survey allowed unfavourable responses as easily as favourable ones and was not designed to reach a predetermined result, and the advertisement clearly discloses the date and period of the rating, who produced it, and any compensation paidCorrect. A diligence condition plus four specific disclosures.
3. C.Third-party ratings may never be used in an investment adviser advertisementThey may be used, subject to the diligence and disclosure conditions of the rule.
4. D.The firm paid nothing to obtain the rating, in which case no disclosure is necessaryEven an unpaid rating requires disclosure of the date, the period covered and the identity of the rating provider.

Why: A third-party rating may be used only where the adviser has a reasonable basis to believe that any questionnaire or survey behind it was structured so that participants could as easily give unfavourable as favourable responses, and was not designed or prepared to produce a predetermined result. In addition, the advertisement must clearly and prominently disclose the date of the rating and the period it covers, the identity of the third party that created it, and, if applicable, that compensation was provided directly or indirectly in connection with obtaining or using the rating.

Halyard Advisory launches a campaign with three elements: its landing page headline reads NO FEES - YOU PAY US NOTHING, because the firm is compensated entirely through revenue sharing from fund sponsors; the page features a glowing quote from a client who received a $500 credit against her advisory fee for providing it, with no mention of the credit; and it displays a Top Regional Adviser badge from a publication that awarded it after Halyard paid a submission and licensing fee, with no mention of the payment. Which elements are problematic?

1. A.Only the no-fees headline, because testimonials and third-party ratings are permitted in adviser advertising without further conditionsBoth are permitted, but neither is unconditional. Compensation and the basis for a rating must be disclosed.
2. B.None - each statement is factually accurate, since the client pays the firm nothing directly, the quote is genuine, and the award was actually conferredEach statement is technically defensible in isolation and materially misleading in context. That gap between literal accuracy and overall impression is exactly what the advertising rules address.
3. C.Only the testimonial, since compensated endorsements are prohibited outright while pricing claims and awards are matters of commercial judgmentCompensated testimonials are permitted with disclosure, not prohibited. And a false pricing claim is not commercial judgment - it is a misstatement.
4. D.All three - the no-fees claim is affirmatively misleading, and both the compensated testimonial and the paid award require clear disclosure of the compensation and the conflictCorrect. Each element misleads by omission or by outright inaccuracy, and each has a defined disclosure requirement attached to it.

Why: All three are. NO FEES is misleading because the client bears the cost indirectly through the funds she is steered into, and the arrangement creates a conflict rather than eliminating a cost. The client quote is a testimonial for which cash compensation was provided, and compensated testimonials require clear and prominent disclosure that the endorser was compensated, along with disclosure of the resulting conflict. The award is a third-party rating obtained through payment, and advertising it requires disclosure of the payment and of the criteria and process behind the rating.