The Securities and Exchange Commission (the SEC) proposed amendments to the rules that govern advertising and cash solicitation by investment advisers. The amendments mark the first substantial changes since these rules were adopted in 1961 and 1979, and are intended to reflect changes in technology, investors’ expectations and the evolution of industry practices. The SEC is seeking feedback from the industry on their proposed changes to these rules.
The Advertising Rule
Definition of Advertisement
The SEC proposes to expand the type of communications that
would qualify as "advertisements" by including evolving
methods of communication. In addition, these amendments bring the
rule in line with accepted industry practices and investor
expectations, namely by establishing a clear distinction between
solicited and unsolicited communication (i.e., in general, a
communication that simply responds to an unsolicited request from a
client or prospective client for certain information about the
investment adviser would not be deemed an
"advertisement.").
Prohibited practices
The provision governing the advertisement of specific
investment advice would replace the current prohibition with a
principles-based approach. This would allow investment advisers to
better tailor the information included in advertisements that
contain references to specific investment advice.
Testimonials, endorsements and third-party ratings
The proposed amendments relax the restrictions on the use of
testimonials, allowing testimonials and endorsements as well as
third-party ratings, all subject to specified disclosures.
Performance advertising
The current rule does not specifically address performance
result calculations, but the proposed amendment would add a number
of prohibitions in this area. Additionally, if performance
information is included in an advertisement targeted to retail
investors, the investment adviser must also present net performance
alongside gross performance, and show performance results across
one-, five- and 10-year periods.
The Cash Solicitation Rule
Changes in scope
These amendments also clarify the cash solicitation rule and,
if adopted, would promote improved compliance and investor
protection. The proposed amendments would apply regardless of
whether an investment adviser pays cash or non-cash compensation to
a solicitor, whereas the current version of the rule does not cover
non-cash compensation.
The proposed amendments would also apply to the solicitation of current and prospective investors in private funds, rather than only to the solicitation of current and prospective clients of the investment adviser.
Comment Period
Comments on the proposals are due 60 days following publication of the proposing release in the Federal Register. The SEC also encourages investors and smaller investment advisers to use two short-form tear sheets to submit additional feedback about their experiences with investment adviser marketing and how the proposed rules would affect them, respectively.
This is a condensed version of a recently published alert on the proposed rules, available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
