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Federal Register / Vol. 86, No. 42 / Friday, March 5, 2021 / Rules and Regulations
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fraud or other violations of specified laws.1071 Some types of bad acts could disqualify a person from engaging in certain capacities in a securities offering under Rule 506 of Regulation D under the Securities Act, as well as from engaging as a promoter under the final rule. Accordingly, as discussed above, we are providing an exemption from the disqualification provisions for covered persons that are subject to and not disqualified under Rule 506 of Regulation D under the Securities Act.
As discussed above, the final rules required disclosures provisions will apply to all testimonials and endorsements, including those that are provided by registered broker-dealers in certain circumstances. Such brokerdealers may also be subject to other regulatory disclosure provisions such as under Regulation Best Interest. To the extent that a broker-dealers testimonial or endorsement is a recommendation subject to Regulation BI, then there would be some overlapping requirements with our final rule i.e., disclosing compensation arrangements and material conflicts of interest under both provisions. For instance, under the Regulation BI disclosure obligations, when making a recommendation to a retail customer, a broker-dealer must disclose all material facts about the scope and terms of its relationship with a retail customer, such as the material fees and costs the customer will incur as well as all material facts relating to its conflicts of interest associated with the recommendation, including thirdparty payments and compensation arrangements.1072 Similarly, under the final rule, when soliciting for an adviser, the broker-dealer would have to disclose any material conflicts of interest on his or her part resulting from their relationship and/or any compensation arrangement with the adviser.1073 Accordingly, as discussed above, we are providing an exemption from the final rules required disclosures provisions for testimonials and endorsements that are disseminated by registered broker-dealers to the extent that such testimonials or endorsements are recommendations subject to Regulation BI in order to help eliminate regulatory duplication.
In addition to testimonials and endorsements that are recommendations subject to Regulation BI, we are providing a partial exemption from 1071 See
Disqualification of Felons and Other Bad Actors from Rule 506 Offerings, Release No.
339414 July 10, 2013 78 FR 44729 July 24, 2013.
1072 See Regulation Best Interest Release, supra footnote 146, at 14.
1073 See final rule 20641b1iii.

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certain disclosure requirements where a broker-dealer provides a testimonial or endorsement to an investor that is not a retail customer as defined in Regulation BI. As discussed above in section II.C.5.c., we believe that the clear and prominent disclosures such a broker-dealer will be required to provide under our final rule are sufficient to alert an investor that is not a retail customer that a testimonial or endorsement is a paid solicitation. In addition, we believe that these investors will be able to request from the brokerdealer other information about the solicitation.
2. Final Amendments to Form ADV
Our new subsection L Marketing Activities to Item 5 of Part 1A of Form ADV will require information about an advisers use in its advertisements of performance results, testimonials, endorsements, third-party ratings and its previous investment advice. These final requirements will not be duplicative of, or overlap with, other information advisers are required to provide on Form ADV.
G. Significant Alternatives 1. Final Rule 20641
The RFA directs the Commission to consider significant alternatives that would accomplish our stated objectives, while minimizing any significant adverse impact on small entities. We considered the following alternatives for small entities in relation to the final rule and the corresponding amendments to rule 2042 under the Advisers Act and to Form ADV: i Differing compliance or reporting requirements that take into account the resources available to small entities; ii the clarification, consolidation, or simplification of compliance and reporting requirements under the final rule for such small entities; iii the use of performance rather than design standards; and iv an exemption from coverage of the final rule, or any part thereof, for such small entities.
Regarding the first and fourth alternatives, the Commission believes that establishing different compliance or reporting requirements for small advisers, or exempting small advisers from the final rule, or any part thereof, would be inappropriate under these circumstances.1074 Because the 1074 For example, one commenter stated that smaller advisers would face challenges under the proposed rule in demonstrating that the performance of a representative account is no higher than if all related portfolios had been included. See IAA Comment Letter. See also proposed rule 20641c1iiiA. However, we do not believe that providing smaller advisers with
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protections of the Advisers Act are intended to apply equally to clients of both large and small firms, it would be inconsistent with the purposes of the Advisers Act to specify differences for small entities under the final rule and corresponding changes to rule 2042
and Form ADV. However, we are adopting an exemption for de minimis compensation with respect to the use of testimonials and endorsements, which we expect will apply to some small entities that offer de minimis compensation to promoters.1075
Although, as discussed above, we believe heightened safeguards would generally be appropriate for an advisers use of testimonials or endorsements, a promoters incentives are significantly reduced when receiving de minimis compensation. We believe the need for heightened safeguards for de minimis compensation is likewise reduced.
As discussed above, we believe that the final rule will result in multiple benefits to clients. For example, the final rules disclosure requirements and other conditions applicable to the use of advertisements will provide investors with information they need to assess the advisers advertising claims for performance results and third-party claims about the adviser for testimonials, endorsements, and thirdparty ratings. In particular, the disclosures related to testimonials and endorsements will: i Help to ensure that investors are aware that promoters have a conflict of interest in referring them to advisers that compensate them for the referral; ii extend the current solicitation rules investor protection to investors whose advisers compensate their promoters with non-cash compensation; iii extend the rule to private fund investors; and iv eliminate duplicative disclosures. We believe that these benefits should apply the benefit of presenting a single representative account that is not subject to prescribed conditions would justify the risks of cherry-picking related portfolios with higher-than-usual returns. As a result, we are not adopting different compliance requirements or exemptions for smaller advisers.
Instead, we have modified our final rule to allow all advisers to include performance returns of a single portfolio if they can demonstrate that the performance is not materially higher than if all related portfolios had been included, and the performance meets the rules general prohibitions.
See final rule 20641d4i. See also section II.E.4. discussing related performance.
1075 Specifically, the disqualification provisions of the rule related to testimonials and endorsements will not apply if the person has provided testimonials or endorsements for the investment adviser during the preceding twelve months and the investment advisers compensation payable to such person for those testimonials or endorsements is $1,000 or less or the equivalent value in non-cash compensation.

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