Investment Funds Advisory | SEC Updates Marketing Rule FAQs on Model Fees and Disqualifying Events

On January 15, 2026, the Securities and Exchange Commission (SEC) updated its Frequently Asked Questions on Rule 206(4)-1 of the Investment Advisers Act of 1940 (the Marketing Rule) to address the use of model fees and disqualifying events for testimonials and endorsements.

Use of Model Fees to Avoid Misleading Investors

The Marketing Rule requires an advertisement to display net performance of a portfolio or fund. While actual fees or a model fee may be used when calculating net performance, the SEC staff reminds advisers that when the anticipated fee to be charged to the intended audience of an advertisement is higher than the actual fees charged, the adviser must use a model fee to avoid misleading investors.

The staff stops short of imposing a universal mandate to use model fees, noting that advisers must consider all facts and circumstances, including relevant disclosures, when deciding which fees to use. However, when fees are expected to be higher than historical fees, advisers must use a model fee reflecting the highest fee for the new audience.

Narrow Relief for Promoters with Certain SRO Orders

Advisers are prohibited from compensating persons for testimonials or endorsements if those persons are subject to certain enumerated “disqualifying events,” including the entry of any final order by a self-regulatory organization (SRO) in the last 10 years of the type described in Section 203(e)(9) of the Advisers Act, which includes fraudulent, manipulative, or deceptive conduct.

The new FAQ provides that an adviser may compensate individuals for testimonials or endorsements even if they were subject to a final order by an SRO based on violations of laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct, if all of the following conditions are met:

1. The sole reason for the person’s ineligibility is the SRO’s final order.
2. The SRO has not expelled or suspended the person from membership, barred or suspended the person from association with other members, or prohibited the person from acting in any capacity.
3. The person is in full compliance with the SRO’s final order (e.g., all fines, disgorgement, and interest must be paid in full).
4. For 10 years following the SRO’s final order, any advertisement containing the person’s testimonial or endorsement must disclose the SRO’s final order and include the order or a link to it.

Action Items for Advisers

1. Fee Comparisons. Review historical performance data to determine whether actual fees charged are higher or lower than the fees anticipated for the target audience of any advertisement. If actual fees are lower, advisers should transition to using a model fee for those materials.
2. Document Facts and Circumstances. For advertisements where actual fees are used, keep a record of why net performance was calculated using actual fees in case you receive an inquiry from the SEC staff.
3. Promoter Check. Perform a 10-year disciplinary check on all paid promoters before engaging. If an SRO order of the type described in Section 203(e)(9) of the Advisers Act is found, ensure that all four conditions described above are met. Even when those conditions are met, advisers should consider whether the benefits of using the testimonial or endorsement outweigh the disclosure that must be made to investors.

If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.

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