The Securities and Exchange Commission voted late last year to overhaul financial advisors’ advertising and cash solicitation rules, as well as allow advisors to use testimonials for the first time, a reflection of the modern era of internet communication, e-mail and social media.
These are the first major revisions of advisor ad rules in 60 years. SEC Chairman Jay Clayton said in a statement that the new framework recognizes the increasing use of electronic media and mobile communications and will help improve the quality of information available to investors.
“The new rule provides for an extended compliance period intended to provide advisors with a sufficient transition period, including to enable consultation with the commission’s expert staff,” he said.
The current ad rule’s broadly drawn limitations will be replaced with what the SEC said are principles-based provisions accommodating “the continual evolution and interplay of technology and advice.”
The rule includes tailored requirements for different types of advertisements. For example, the rule will require advisors to standardize certain parts of a performance presentation “in order to help investors evaluate and compare investment opportunities,” but also includes tailored requirements for certain types of performance presentations, such as any use of gross performance, the SEC said.
Advertisements that include third-party ratings will be required to include specific disclosures to prevent them from being misleading. And for the first time, the SEC will permit the use of testimonials and endorsements, subject to certain conditions and disclosures.
To use these in an advertisement, advisors must clearly disclose whether the person giving the testimonial or endorsement is a client and whether the promoter is compensated. Additional disclosures are required for compensation and conflicts of interest. The new rule also eliminates the current rule’s requirement that an advisor obtain from each investor acknowledgements of the receipt of disclosures.
Advisors must have written agreements with promoters, unless the promoter is an affiliate of the advisor or the promoter receives de minimis compensation ($1,000 or less, or the equivalent value in non-cash compensation, during the preceding 12 months). So-called “bad actors” who have been the subject of certain enforcement actions, such as regulatory industry bars, are prohibited from acting as promoters, the SEC said.
According to the SEC, advisors may use performance information, but several types are prohibited: That includes gross performance, unless the advertisement also presents net performance. Also, the SEC prohibits any performance results that aren’t provided with specific time periods. The results must come from all portfolios with substantially similar investment policies, objectives and strategies (with limited exceptions). And the ad cannot use the performance results of a subset of investments extracted from a portfolio without also offering the total portfolio’s results. Hypothetical performance is also prohibited (though that does not include performance generated by interactive analysis tools).
The president and CEO of the Investment Adviser Association, Karen Barr, said in a statement: “We are pleased that the commissioners and staff incorporated a number of requests made by the IAA—including permitting advisors to market themselves through social media and other modern means.
“We appreciate that the rule includes a targeted definition of advertising that allows advisory firms to continue their typical communications with existing clients,” Barr said. “We are also pleased that the SEC focused on compliance program requirements in lieu of an earlier proposal requiring pre-approval of all marketing materials.”