Agency updating marketing rules for first time
since 1961 to reflect new technology such as social media
The Securities and Exchange Commission has
proposed revising its advertising rules for investment advisers for the first
time in nearly 60 years, allowing them to post testimonials, endorsements and
third-party ratings on social media.
Under an SEC proposal released Monday night, the
SEC also would allow the presentation of investment performance results as long
as the ads met certain requirements.
"This is a big deal," said Karen
Barr, chief executive of the Investment Adviser Association. "This is a
complete overhaul of the advertising rules. There are communications practices
that every other business can employ that investment advisers can now employ.
Advisers will be able to engage in communications that are expected by
consumers."
The biggest change is in the definition of
advertising itself. The SEC proposal says an advertisement is "any
communication, disseminated by any means ... that seeks to obtain or retain
advisory clients or investors."
That's a major overhaul of the current
definition, which is limited to written communications, TV and radio ads.
"They've taken a principles-based
approach to the rule, which will make it more adaptable as technology and
business practices change," Ms. Barr said. "Now, the SEC has used
language that will work over time."
The current advertising rule has vexed investment advisers for
many years, especially because it didn't keep pace with
technological developments, such as the advent of social media.
"What they're proposing is
earth-shattering in a positive way," said Michael Caccese, a partner at
K&L Gates. "It's nice to see the regulators listening to the concerns
of the industry and trying to address them."
One of the major changes that would be ushered
in under the SEC proposal is the standardization of performance information.
For instance, the results of any portfolio or investment strategy would have to
be illustrated over 1-, 5-, or 10-year periods. Gross performance results would
be prohibited unless they are accompanied by net performance that factor in
fees and expenses.
"It's going to create a very level
playing field among advisers, especially when they present their investment
performance," Mr. Caccese said.
Allowing the use of testimonials will help
clear up confusion that exists over endorsements on social media as well as
other types of client comments. For instance, Ms. Barr pointed to an SEC
enforcement case that involved a client testimonal in a video celebrating the
anniversary of an advisory firm.
"We like that the SEC has modernized
certain areas (e.g., testimonials) and has clarified how to present performance
information," Todd Cipperman, principal at Cipperman Compliance Services,
wrote in an analysis. "We believe that clearer rules help compliance
professsionals and reduce the likelihood of enforcement cases resulting from
subjective standards."
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The agency also included in the 507-page
proposal an update to rules related to investment adviser payments to
solicitors, which haven't been amended since 1979.
"The advertising and solicitation rules
provide important protections when advisers seek to attract clients and
investors, yet neither rule has changed significantly since its adoption
several decades ago," SEC Chairman Jay Clayton said in the statement.
"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."
The Financial Industry Regulatory Authority
Inc. will be watching how the SEC revises adviser advertising rules to see how
they align with broker marketing rules.
"It might well be appropriate for us to
consider our rule and whether and how it should be comparable to the
SEC's," Finra chief executive Robert W. Cook said in an interview on the
sidelines of a securities conference at Georgetown University Tuesday.
The SEC's proposed amendments to the
advertising and solicitation rules will be open for public comment for 60 days
after they are published in the Federal Register. After reviewing the comments,
the SEC could modify the proposal and release final rules.
Over the years, the SEC staff has issued
no-action letters and other guidance to help advisers interpret the rules.
"The staff is reviewing these letters to
determine whether any should be withdrawn in connection with any adoption of
the proposed amendments," the agency said in a statement.
Instead of following no-action letters,
investment advisory firms will have to develop their own written policies and
procedures based any any new final rules the SEC approves.
"What [the SEC] has created is the
advertising compliance officer," Mr. Caccese said.
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