Financial professionals have relied on client referrals and word-of-mouth testimonials for decades. Until now, these types of advertising have been banned by the SEC.
Through amendments to the Investment Advisers Act, a single rule will replace the current advertising and cash solicitation rules. The amended rule comes after forty years of evolving technology and client interaction, and is designed to simplify regulation of investment advisers’ marketing communications.
The new single rule will replace the current advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively. Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule, also have related amendments. The amendments are designed as common sense “principles-based provisions” to address the growing issues around the current rules.
Former SEC Chairman Jay Clayton acknowledged that the amendment rule is a result of increased digital communication. “The new rules provide for an extended compliance period intended to provide advisors with a sufficient transition period, including to enable consultation with the commission’s expert staff,” Clayton said.
What is an advertisement?
Definition of Advertisement
An “advertisement” will be defined by a combination of two previously separate rules: communications traditionally covered by the advertising rule and solicitation activities previously covered by the cash solicitation rule.
The newly defined advertisement includes any direct or indirect communication an investment adviser makes to current or prospective clients or private fund investors offering their services (excluding certain on-on-one communications). An advertisement includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly.
What will be allowed?
Testimonials and Endorsements
- Advertisements must clearly disclose whether the person giving the testimonial is a client and if they were compensated, as well as any examples of conflicts of interest
- An adviser that uses testimonials must oversee compliance with the marketing rule. An adviser also must enter into a written agreement with promoters in certain cases
- The rule prohibits certain “bad actors” from acting as promoters
- All relevant disclosures must be displayed clearly and prominently in the advertisement.
What’s still prohibited?
General Prohibitions
The amended marketing rule retains several prohibited practices, such as:
- Making an untrue statement of a material fact
- Providing information that would reasonably be likely to cause an untrue or misleading implication
- Discussing any potential benefits without providing associated material risks
- Including or excluding performance results in a manner that is not fair and balanced
- More
General Performance Information
- Gross performance, unless net performance is included
- Performance results, unless they are provided for specific time periods
- Hypothetical performance (not including use of interactive analysis tools), unless the adviser provides certain performance information
- More
What does it mean for advisors?
“The changes present opportunities and challenges for advisors,” said GJ King, president of RIA in a Box, pointing to limited firm resources and competing federal and state regulations. “It may take states a while to sort out the differences.”
This marketing rule was published on the Federal Register and is effective as of May 4, 2021. A transition period of 18 months has been implemented to give advisors time to comply.
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