Financial advisors would for the first time be able to use testimonials and third-party ratings in advertising under rule amendments being proposed by the SEC.
The Securities and Exchange Commission voted yesterday to propose amendments to rules that for decades have prohibited certain investment advisor advertisements and payments to solicitors.
The updates are needed to reflect the evolution of technology and industry practices, as well as the expectations of investors seeking advisory services and industry practices, the agency said in a press release. The rules haven't been revised since they were passed in the 1960s and 1970s, the SEC said.
"The advertising and solicitation rules provide important protections when advisors seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago," SEC Chairman Jay Clayton said.
"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,” he added.
The proposed changes would for the first time permit the use of testimonials, endorsements and third-party ratings, subject to certain limits, and would include tailored requirements for the presentation of performance results based on an advertisement's intended audience.
Investment Adviser Association President and CEO Karen Barr said modernization was necessary to allow advisors to be competitive. The ad proposal, she said, “appears to take a principles-based, evergreen approach to the rule in contrast to the per se prohibitions that currently exist. It also appears to distinguish between retail and institutional investors in certain aspects and would no longer ban the use of testimonials and past specific recommendations.
“These would be welcome changes," Barr continued. "However, there are aspects of the proposal that merit further analysis and we look forward to providing constructive comments to the SEC."
Under the proposal, ads designed for retail investor audiences would be required to provide additional “protections,” including the following information:
• Net performance alongside any presentation of gross performance.
• Performance results of any portfolio or certain composite aggregations across 1-, 5-, and 10-year periods.
The proposal prohibits including the following information in any advertisement:
• Gross performance results unless it provides (or offers to provide promptly) a schedule of fees and expenses deducted to calculate net performance.
• Any statement that the calculation or presentation of performance results has been approved or reviewed by the SEC.
• Performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered or promoted in the advertisement, with limited exceptions.
• Performance results of a subset of investments extracted from a portfolio, unless it provides or offers to provide promptly the performance results of all investments in the portfolio.
• Hypothetical performance, unless the advisor adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the financial situation and investment objectives of the recipient and the advisor provides certain specified information underlying the hypothetical performance.