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Regulation and Compliance > Federal Regulation > SEC

SEC Issues Plan to Modernize RIA Ad Rules

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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.”

More Details

The agency explained that the proposed revision “would change the scope of the rule to encompass all promotional communications regardless of how they are disseminated,” with certain exceptions.

Communications with clients and prospects, it added, “may be disseminated through emails, text messages, instant messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, and all manner of social media, as well as by paper, including in newspapers, magazines and the mail.”

Neither Rule 206(4)-1 nor Rule 206(4)-3 has been amended significantly since adoption in 1961 and 1979, respectively, the agency said.

“Since that time, the Commission and our staff have continued to learn about advisor marketing and solicitation practices, as those practices have evolved significantly with advancements in technology and the changes within the asset management industry and its investor base,” the SEC explained.

The proposed amendments to the solicitation rule would expand the current rule to cover solicitation arrangements involving all forms of compensation, rather than only cash, subject to a new de minimis threshold. They also would update other aspects of the rule, such as who is disqualified from acting as a solicitor under the rule.

The Commission also voted to propose amendments to Form ADV, the investment advisor registration form, and Rule 204-2, the books and records rule, which would reflect the changes proposed to the advertising and solicitation rules.

The plan will be open for a 60-day comment period following publication in the Federal Register.

As the agency explained, “advertisements are a useful tool for investment advisors seeking to obtain new investors and to retain existing investors.”

Advisors, the agency said, “disseminate advertisements about their services to inform prospective investors and to persuade them to obtain and pay for those services or to learn more about the advisers.”

In addition, ads “can provide existing investors with information about new or revised services. Accordingly, advertisements can provide existing and prospective investors with useful information as they choose among investment advisers and advisory services,” it explained.


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