More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
In response to complaints from fund companies that FINRA fails to consistently communicate new interpretations of existing advertising rules for mutual funds, the regulator says it now intends to send a “Notice” to firms detailing any “significant” new interpretations of fund advertising rules affecting “a broad section of the industry” to help protect investors from misleading ads.
FINRA’s pledge comes after the Government Accountability Office (GAO) performed a review of mutual fund advertising focused on the advertising of funds’ past performance. GAO’s report, which was mandated under Section 918 of the Dodd-Frank Act, examined three areas:
- What is known about the impact of fund advertisements on investors
- The extent to which performance information is included in advertisements
- The regulatory requirements for fund advertisements and how they are administered and enforced.
To address these objectives, GAO reviewed existing and proposed SEC and FINRA rules, conducted a literature review of studies related to mutual fund advertising’s impact on investors and reviewed a random sample of 300 fund advertisements. GAO also met with regulators, fund companies, academics, and industry and investor protection groups.
During its review, the GAO found that because FINRA communicates “some new interpretative positions initially by making comments on advertisements submitted for its review, only those firms that submit new advertisements learn of new interpretations of existing rules.” As a result, GAO said in its report, “they may be competitively disadvantaged if other firms attract additional investments by continuing to use previously approved advertisements that do not comply with the new position.”
In addition, GAO continued, this “uneven method of communicating changes in rule interpretations” can result in investors being exposed to advertising that does meet current standards and may be considered misleading. Therefore, the GAO concluded, the “SEC should take steps to ensure FINRA develops sufficient mechanisms to notify all fund companies about changes in rule interpretations for fund advertising.”
SEC Chairman Mary Schapiro told GAO in a July 15 letter that she is “committed to considering changes to the Commission's advertising regulations, such as the Commission’s target date retirement fund proposal, in order to reduce the
Tom Selman, executive VP of regulatory policy at FINRA, told GAO in a July 11 letter that FINRA would indeed develop “more mechanisms” such as providing a “regular summary of advertising rules and [FINRA’s] interpretation of the application of the advertising rules to these issues.” In addition, he said, FINRA’s Advertising Regulation managers “will pay particular attention to fund advertising issues that affect a broad section of the industry, and, if so, whether FINRA should issue a Notice or other guidance to the industry.”