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Advisors, industry officials and compliance pros are hailing the Securities and Exchange Commission’s plan to modernize its outdated 50-year-old Advertising Rule as a game changer for the industry, with some arguing that the proposed changes are poised to put the advisory profession on equal footing with others.

“This is BIG news!” Lisa Kirchenbauer, president of Omega Wealth Management in Arlington, Virginia, exclaimed in a mid-November email message. “I have never understood why people like realtors, also dealing with money and client trust, could have testimonials but we couldn’t. There has been a weird double standard for many years.”

The SEC’s proposed updates 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.

“Whew, it’s about time!” stated advisor and Nerds Eye View blogger Michael Kitces, in a mid-November email to me. “I understand the fundamental purpose of the anti-testimonial rule as originally written — to prevent advisors from inappropriately touting returns and cherry-picking the happiest clients. But in practice, financial advisors do so much more than ‘just’ manage portfolios for an investment return, including the full gamut of financial planning advice.”

Kitces said he’s “glad to see the SEC has recognized that there can be a more reasonable balance between still controlling the terms by which investment performance can be shared, while also allowing consumers to share their experiences with their advisor (and for the advisor to share those experiences with others).”

In releasing the plan in early November, which is out for a 60-day comment period, SEC Chairman Jay Clayton said “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.”

The changes, Clayton added, “are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices.” The changes aim to replace the current rule’s “broadly drawn limitations with principles-based provisions,” the agency said.

With the industry still digesting the 507-page plan, Gail Bernstein, general counsel for the Investment Adviser Association, said that “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 “is a significant step in the right direction,” said Karen Barr, IAA’s president and CEO, adding the rule hasn’t been substantively amended since 1961 — “long before social media, long before the internet, even before fax machines.”

IAA, she continued, has been “urging the SEC to update the rule for nearly 20 years.” Because of the “badly outdated rule, investment advisors are generally prevented from using communications and marketing methods that long ago became standard business practice elsewhere in the economy.”

The IAA has been pushing the Commission “to take a principles-based approach to modernizing the rule that is flexible enough to adapt as technology and business practices continue to evolve.”

Definition of ‘Advertising’ Altered

The securities regulator’s plan 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.”

Todd Cipperman of Cipperman Compliance Services noted in a recent alert that the SEC draft “would ­dramatically” alter current advisor marketing practices. The proposed Rule 206(4)-1 changes the definition of “advertising,” Cipperman said, as well as “applies different standards to retail-directed advertisements” and requires “a responsible employee to review and approve all materials.”

(Listen to Cipperman as he breaks down the SEC’s new Advertising Rule proposal in the latest Human Capital podcast.)

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.

Clara Shih, CEO of Hearsay Systems, maintains that the SEC’s plan to modernize its outdated advertising rules will help advisors reach prospective clients, as “more and more people are not engaging” with traditional media — like television, radio and print — that advisors currently use.

Shih said in an interview that the SEC’s planned change to its Advertising Rule is “a promising sign” for advisors, compliance teams and investors “because it provides clarity.”

Because the proposal modernizes the definition of an advertisement, advisors could “post and accept testimonials (i.e. LinkedIn recommendations), endorsements, performance reports, and third-party ratings on social media. This is critical as prospective clients heavily rely on this data to make informed decisions when researching advisors,” Shih said.

Currently, advisors are discouraged from leveraging social media as it’s not clear what is and isn’t allowed, she said.

Under the current Advertising Rule, a ‘Like’ on an advisor’s LinkedIn post is interpreted as an endorsement, which violates the rule. “Additionally, advisors posting about specific investments could be considered an endorsement and be in violation” of the current rule.

Retail investors today, Shih continued, “naturally look to social media as part of their client journey, to validate whether they want to work with a particular advisor or want to continue working with an advisor.”

She cited research by the Pew Charitable Trust, which found that 69% of American adults use at least one social media site, with use jumping to 88% among those age 18 to 29.

While investors, in many cases, still find advisors via referrals, “before they contact an advisor to whom they’ve been referred, … the first thing [investors] do is Google that person,” Shih explained. “The first thing they’re looking to validate is an advisor’s LinkedIn profile. Who is this person? How long have they been in the business? How long have they been an advisor? Is this someone I can trust?”

The SEC modernizing its advertising rules “is just as much about giving investors access to information as it is about helping advisors,” Shih said.

If the SEC’s rule is adopted, “compliance teams will see an influx of social media activity from advisors wanting to host testimonials,” Shih said. “Testimonials, like any other advertisements, have to be pre-approved by a registered principal. Compliance teams will need a way to manage these approval requests without doubling their headcount.”

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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