SEC Makes Major Change to Ad Rule Compliance

Investment advisors can no longer rely on a host of Securities and Exchange Commission staff letters that provided guidance on how to comply with the agency’s current advertising and cash solicitation rules.

The SEC’s Division of Investment Management recently issued an update on its new Marketing Rule, amended Rule 206(4)-1, stating that it was rescinding a bevy of SEC Staff Letters that provided guidance.

On Dec. 22, 2020, the Commission adopted amended rule 206(4)-1 under the Investment Advisers Act of 1940, a single rule that will replace both the current advertising and cash solicitation rules and will govern investment advisor marketing. The new rule has a compliance date of Nov. 4, 2022.

“Many of the positions taken in those guidance documents have been incorporated into the rule and others have been modified or rejected,” the SEC’s IM division said.

‘First Page of a New Book’

“Significantly, the update includes a list of the SEC no-action letters … that are now withdrawn and no longer valid for reliance by investment advisers,” explained FrontLine Compliance in a Friday alert. “It’s time to throw out the old book and open to the first page of a new book when it comes to advisers’ advertising and solicitation practices.”

For over 50 years, the compliance group states, “the industry has relied upon the various Staff Letters that existed, which provided guidance to firms on how to comply with current Rule 206(4)-1 (advertising) and Rule 206(4)-3 (solicitation).

“Until now, neither the Advertising Rule nor the Cash Solicitation Rule alone contained all the information needed for a firm to comply with the Rules. An advisory firm had to look to all the Staff Letters and know how to properly interpret those letters in order to comply with the Rules,” the group explained.

As of Nov. 4, 2022, FrontLine continued, “any firm intending to show predecessor performance, related performance, past specific recommendations, model performance, etc. will have to rely upon language in the new revised Rule as opposed to any Staff Letter that previously existed.”

Some of the most well-known Advertising Rule Staff Letters that are now obsolete, according to FrontLine, are:

• Clover Capital Management, both 1986 and 1991 letters
• Anametrics Investment Management, May 5, 1977
• Cambiar Investors, Aug. 28, 1997
• DALBAR, March 24, 1998
• Denver Investment Advisors, July 30, 1993
• Franklin Management, Dec. 10, 1998
• Horizon Asset Management, Sept. 13, 1996
• Investment Adviser Association, Dec. 2, 2005
• J.P. Morgan Investment Management, May 7, 1996
• The TCW Group, Nov. 7, 2008.

Related: Be Careful When Using Testimonials, Endorsements Under the SEC’s New Ad Rule