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Regulation and Compliance > Federal Regulation > SEC

SEC Adopts New Ad Rule, Allows Client Testimonials

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The Securities and Exchange Commission has finalized the long-awaited revamp of its advertising and marketing rules  allowing advisors to use testimonials and endorsements, which include traditional referral and solicitation activity, subject to certain conditions.

For advisors, the ability to use client feedback is a sea change.  ”I… Actually may be able to use testimonials soon? Imagine that. Me actually being able to say people like me,” tweeted Galen Herbst de Cortina, CFP, in response to the news.

On Tuesday, the SEC also adopted related amendments to the investment advisor registration form and to the books and records rule. Form ADV was also amended to require advisors to provide additional information regarding their marketing practices to help facilitate the SEC’s inspection and enforcement capabilities.

Meanwhile, Dalia Blass  director of the SEC’s Division of Investment Management and the individual who spearheaded the ad rule changes   has announced plans to leave the agency in January.

“This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors,” said SEC Chairman Jay Clayton, in a statement.

“The new rule provides for an extended compliance period intended to provide advisers with a sufficient transition period, including to enable consultation with the Commission’s expert staff,” Clayton explained.

More Details on Rule

According to the SEC, the rule replaces the current advertising rule’s “broadly drawn limitations with principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice,” and includes tailored requirements for certain types of advertisements.

For instance, the rule will require advisors to standardize certain parts of a performance presentation in order to help investors evaluate and compare investment opportunities, and will include tailored requirements for certain types of performance presentations, the SEC said.

“Advertisements that include third-party ratings will be required to include specific disclosures to prevent them from being misleading. The rule also will permit the use of testimonials and endorsements, which include traditional referral and solicitation activity, subject to certain conditions,” it noted.

The amendments will create a merged rule that will replace both the current advertising and cash solicitation rules, the SEC explained.

“These amendments reflect market developments and regulatory changes since the advertising rule’s adoption in 1961 and the cash solicitation rule’s adoption in 1979,” the agency said.

Reactions to the Changes

James Lundy, partner at Faegre Drinker in Chicago, called the revamped ad rule “positive.” The old rule, he told ThinkAdvisor in a Tuesday email, “was archaic and proscriptive, and no longer really appropriate for the way firms do business and communicate in the 21st century.”

Added Lundy: “We’ll all need to wait and see how [SEC] examines for compliance with and enforcement investigates potential violations of the new rule, but overall this is positive for the industry.”

Karen Barr, president and CEO of the Investment Adviser Association, said the commission incorporated a number of requests made by the IAA – “including permitting advisors to market themselves through social media and other modern means.”

Plus, the rule includes “a targeted definition of advertising that allows advisory firms to continue their typical communications with existing clients. We are also pleased that the SEC  focused on the compliance program requirements in lieu of the proposal requiring pre-approval of all marketing materials,” Barr said.

Others had more mixed opinions.

Mazi Bahadori, vice president of Securities at Altruist, said that although the change “opens the door to new opportunities for advisors, it adds to the compliance costs of operating an RIA (with respect to the revised definition of advertising capturing more content).”

While large advisory firms “will more easily bear the brunt of compliance with the modernized rules, smaller advisory firms will need to be careful to ensure they have proper pre-approval controls and processes in place or they’ll quickly run into trouble,” Bahadori explained in a statement.

Derek Hernquist, head of Advisor Experience at Aptus Capital Advisors, agreed, stating: “Independent advisors sometimes face an uphill battle in having prospects/clients understand their safety/value vs. national/regional brands.”

This is because “the overwhelming majority of consumer-facing outreach comes from these national/regional brands that can afford to share their message in a compliant way,” Hernquist explained. 

All of the rule changes will be effective 60 days after publication in the Federal Register. The compliance date is 18 months after the effective date.

See: Updates to Custody, Ad Rules Nearing the Finish Line


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