Eight months on the job and Securities and Exchange Commissioner Allison Herren Lee is already wading into controversial territory: wondering aloud at the Investment Adviser Association (IAA) annual compliance conference in Washington, D.C., yesterday whether the agency’s newly proposed advertising rules for advisors won’t lead to more of what they fear most—SEC examiner interpretations that lead to pricey, high-profile enforcement actions.

Herren said she thinks the advertising proposal—the first real update of advisor ad rules since 1961—represents meaningful improvement over the existing framework, but she is concerned the rule's open-ended flexibility could create compliance pitfalls and enforcement for firms that the SEC should avoid.

“I know there are concerns expressed by many about what is often referred to as ‘regulation by enforcement,’” Herren told the hundreds of compliance attorneys and RIA executives at the IAA event.

Both IAA and the Financial Services Institute have lobbied the SEC against what they have termed the creep of “regulation by enforcement,” particularly with regard to the SEC’s 2019 mutual fund share class settlements, which forced 95 broker-dealer to pay $135 million in investor restitution for failing to supervise reps who sold clients’ the most expensive fund share classes without disclosing it.

The new advertising rule proposal may have similar landmines, Herren said.

“If the rule’s requirements are too vague, how can the commission ensure compliance without raising those sorts of concerns? If it’s not enforceable, responsible advisors like the people in this room may find themselves competing against advisors who use performance information that is not fair and balanced at all. I believe that the current proposal may rely too heavily on high-level principles, which can certainly exacerbate that issue,” Herren said.

In general, the proposal would modernize much of the existing framework for advisor advertisements and address the presentation of advisor performance in a more holistic fashion than the piecemeal approach derived from existing staff guidance, which Herren called a meaningful improvement.

The SEC ad proposal also includes measures designed to ensure that investors are not misled. It updates and modernizes the regulatory regime to reflect the changing ways in which investors receive and review information and it requires advisors, in certain contexts, to provide specific information to facilitate more informed decision-making.

Herren said she supports rule updates that are consistent with the SEC’s mission to protect investors, but has concerns with proposal specifics that could lead to RIA misinterpretations or errors that should be avoided.

“First, one area that I believe merits significant thought and debate is the emphasis on a principles-based approach to certain of the rule’s requirements,” Herren said.

“If rules are too broad or vague, we may end up circumscribing conduct that we would not intend to capture," she added. "Let’s take for example, the proposal’s approach to whether a performance presentation or the presentation of specific investment advice is ‘fair and balanced.’ I think we can all agree that either type of presentation should be fair and balanced, but is that guideline alone enough information from the Commission for you to apply that standard on a daily basis?” she asked the ballroom of compliance professionals.

Another example is the prohibition of testimonials that are “reasonably likely to cause an untrue or misleading inference to be drawn. Again, does this aspect of the proposal provide sufficient guidance to facilitate compliance?” she asked.

Dalia Blass, director of the SEC’s Division of Investment Management, agreed that the scope of the proposal and “the compliance review aspect of the proposal ... could present potential problems.” The comment period on the proposal expired Feb. 10.

Blass said based on feedback, the SEC is working on a revised proposal that will accommodate the diverse community of RIAs that will be impacted by the advertising and solicitation rules—from retail and institutional advisors to robo-advisors and private fund managers.