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November 04, 2019 at 08:27 PM
SEC Chairman Jay Clayton. (Photo: New York Law Journal)
The Securities and Exchange Commission has proposed updates to its Advertising Rule that would let advisors use testimonials, endorsements and third-party ratings to solicit clients, subject to certain conditions. The reforms also include tailored requirements for the presentation of performance results, based on an ad’s intended audience.
“The advertising and solicitation rules provide important protections when advisors seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago,” said SEC Chairman Jay Clayton in a statement late Monday, when the plan was issued.
“The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices,” Clayton added.
The proposed changes, explained in a 507-page document, aim to replace the current rule’s “broadly drawn limitations with principles-based provisions,” the agency said.
It would define “advertisement” to include communications “disseminated by any means,” which would replace the current rule’s requirement that an ad be a “written” communication or a notice or other announcement “by radio or television.”
Gail Bernstein, general counsel for the Investment Adviser Association, told ThinkAdvisor in an email late Monday: “It will take some time to digest the lengthy release but, based on an initial take, the proposal appears to address several of the specific themes we’d raised with Commission staff.”
Most notably, Bernstein added, “it appears to take a principles-based, evergreen, approach to the rule in contrast to the per se prohibitions that currently exist. It also appears to distinguish between retail and institutional investors, and would no longer prohibit the use of testimonials. These would all be extremely welcome changes.”
The plan amends rules that prohibit certain investment advisor advertisements and payments to solicitors, respectively, under the Investment Advisers Act of 1940. It was put forth by the agency’s Division of Investment Management and was slated to be considered at the agency’s open meeting on Tuesday.
Nicolas Morgan, a partner in Paul Hasting’s Los Angeles office, told ThinkAdvisor late Monday that “replacing the existing prohibitions against specific types of advertising such as testimonials and past specific recommendations with a ‘principles-based’ approach will provide RIAs with more flexibility in providing information to clients and potential clients.”
While RIAs should welcome such flexibility, Morgan said, “the real test for the proposed rule will come when the SEC seeks to enforce the principles: the inflexibility (but clarity) of outright prohibitions could be replaced with uneven, arbitrary or unpredictable enforcement. On balance, however, the proposed rule represents an improvement over the existing rule.”
