SEC Commissioner Lee Sees Trouble Spots in Ad Rule Plan

The Securities and Exchange Commission’s plan to update its Advertising Rule “may rely too heavily on high-level principles,” which can exacerbate the current re-energized debate over regulation by enforcement and create challenges for compliance officers, SEC Commissioner Allison Herren Lee said Thursday.

Speaking at the Investment Adviser Association’s annual compliance conference in Washington, Lee stated that while she supports the agency’s “first real update” to its advertising rule since 1961, “one area that merits significant thought and debate is the emphasis on a principles-based approach in certain areas.”

While a principles-based approach “creates flexibility,” Lee said, “that can come at the cost of certainty around compliance.”

Noting her prior experience as an in-house counsel, Lee said she can relate to “how difficult it can be to translate sometimes broad legal principles into answers — straightforward answers — to everyday questions from the business side. For the most part, they need yes-or-no answers.”

A “risk-averse compliance professional may default to a conservative approach that unduly restricts the substance of an advertisement” under the SEC’s current plan. “If rules are too broad or vague they end up circumscribing conduct that we never intended to capture.”

An example of this, she explained, is the proposal’s approach “to whether a presentation of performance or specific investment advice is fair and balanced. I think we can all agree that either type of presentation should be fair and balanced, but is that guideline alone enough for you to apply that standard on a daily basis?”

Another example: “the prohibition of testimonials that are reasonably likely to cause an untrue or misleading inference to be drawn,” Lee stated.