The Securities and Exchange Commission voted yesterday to overhaul the financial advisor advertising and cash solicitation rule, as well as allow advisors to use testimonials for the first time.

The changes are the first major revision of advisor ad rules in 60 years and update the rules for the modern era of internet communication, email and social media. In a statement, SEC Chairman Jay Clayton said the new framework for regulating advisors’ marketing communications 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 advisers with a sufficient transition period, including to enable consultation with the Commission’s expert staff,” he said.

The rule replaces the current ad rule’s broadly-drawn limitations with what the SEC said are principles-based provisions that will better accommodate “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” and 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—which include traditional referral and solicitation activity—subject to certain conditions and disclosures.

“We are pleased that the Commissioners and staff incorporated a number of requests made by the IAA [Investment Adviser Association]—including permitting advisers to market themselves through social media and other modern means,” IAA president and CEO Karen Barr said in a statement.

“We appreciate that the rule includes a targeted definition of advertising that allows advisory firms to continue their typical communications with existing clients. 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,” Barr said.  

To use testimonials or endorsements 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 regarding compensation and conflicts of interest. The new rule also eliminates the current rule’s requirement that an adviser obtain from each investor acknowledgements of 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 twelve 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 the following items are prohibited . . . “gross performance, unless the advertisement also presents net performance; any performance results, unless they are provided for specific time periods; performance results from fewer than all portfolios with substantially similar investment policies, objectives and strategies, with limited exceptions; performance results of a subset of investments extracted from a portfolio, unless the ad provides, or offers to provide promptly, the performance results of the total portfolio; hypothetical performance (which does not include performance generated by interactive analysis tools), with exceptions; and predecessor performance, with exceptions.”

To read more stories , click here