SEC Staff Grants No-Action Relief for Adviser Advertisements with Ratings

Washington, DC, April 14, 1998 - The staff of the Securities and Exchange Commission recently granted no-action relief to DALBAR, Inc. under Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-1(a)(1) thereunder in connection with a proposal to include DALBAR ratings of investment advisers and their representatives in advertisements.

DALBAR proposed to conduct surveys of services provided by investment advisers and/or their investment advisory representatives ("IARs") which would be paid for by the rated advisers or IARs. Advisers and IARs would have to meet certain minimum criteria, such as years of experience, number of clients and assets under management, and no record of regulatory sanctions, in order to participate in the survey. DALBAR proposed to send questionnaires to all or a selected sample of an adviser's or IAR's clients (depending on the total number of clients serviced), who would be asked to assign various numerical, positive or negative responses to questions based upon the level of service received from the adviser or IAR.

By averaging the responses to the questionnaires for each adviser or IAR, DALBAR proposed to rate advisers and IARs in three major categories: performance, trust, and satisfaction. DALBAR would then publicly release the names of the advisers and IARs who satisfied certain minimum rating guidelines and publish some or all of the survey results in its written directories and on its Internet website. In addition, some advisers and IARs could be expected to refer to their ratings and/or other relevant survey ratings of their services in their own advertisements or sales materials.

DALBAR argued in its request for no-action relief that such ratings are not testimonials within the meaning of Rule 206(4)-1 (which prohibits the use of testimonials in adviser advertising), since, among other things, the ratings do not represent the experience of any particular advisory client. The SEC staff disagreed, finding that a DALBAR rating is a testimonial because the rating is an implicit statement of clients' experience with an adviser or IAR and because the rating purports to convey the experience of a hypothetical average, or typical, client.

Nevertheless, the staff agreed to grant no-action relief under Section 206(4) and Rule 206(4)-1(a)(1) if DALBAR, any adviser, or any associated person of an adviser publishes or circulates advertisements containing DALBAR ratings as described in the requesting letter. The staff found that the use of such ratings would not raise any of the dangers that Rule 204(6)-1(a)(1) was designed to prevent because: (i) the ratings do not emphasize favorable client responses or ignore unfavorable responses; (ii) a DALBAR rating represents all, or a statistically valid sample, of an adviser's or IAR's clients; (iii) the client questionnaire was not prepared to produce any predetermined results that could benefit any particular adviser or IAR; (iv) the questionnaire was structured to make it equally easy for a client to give negative or positive responses; and (v) DALBAR did not propose to perform any subjective analysis of the survey results, but instead would assign numerical ratings by averaging client responses.

The staff also relied in particular on a number of representations, including: (1) participating advisers and IARs would have to meet certain eligibility criteria; (2) DALBAR would not be affiliated with any participating adviser or IAR; (3) DALBAR would survey all, or a statistically valid sample, of an adviser's or IAR's clients; (4) all participating advisers and IARs would pay a uniform fee in advance; (5) DALBAR would not issue ratings to an adviser or IAR unless the ratings were statistically valid with respect to the rated adviser or IAR; and (6) any survey results published by DALBAR would contain information that clearly identifies the percentage of survey participants who have received each designation and the total number of survey participants.

The staff did not express any view on whether a particular presentation of DALBAR ratings in an adviser's or IAR's advertisement would violate Section 206(4) or Rule 206(4)-1(a)(5). However, the staff did list specific factors that advisers and IARs should consider in determining whether an advertisement that includes a DALBAR rating is misleading.