New rules on advisor advertising approved by the Securities and Exchange Commission may create another divide between small and large firms, according to GJ King, president of RIA in a Box, a firm that provides software compliance and support for RIAs.
The rules also may set up a conflict between firms that are registered with the SEC and those that only are registered on a state level, which includes the vast majority of RIA firms, King said in an interview today.
The rules allow firms to use testimonials and endorsements after some requirements are met, including specific disclosure, oversight and disqualification provisions. Under the rules approved by the SEC in December, firms can use third-party ratings in an advertisement. In addition, a number of modifications were made to address performance marketing recordkeeping. The new rules go into effect 60 days after being published in the Federal Register, which has not been done as yet, and firms then have 18 months to comply.
These are the first major revisions of advisor advertising rules in 60 years. When the rule was proposed, former SEC Chairman Jay Clayton said 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 rules provide for an extended compliance period intended to provide advisors with a sufficient transition period, including to enable consultation with the commission’s expert staff,” Clayton said.
“The changes present opportunities and challenges for advisors,” King said. “Smaller firms are not going to have the resources to hire big name celebrities for endorsements. There are also a lot of recordkeeping requirements that smaller firms do not have the resources to provide.
“On the other hand, if smaller firms can meet the compliance requirements, is an endorsement by a local person who is known to the community just as valuable as a celebrity? I don’t know the answer to that question,” King added.
The other problem that may be created could be differences in the new regulations imposed by the SEC and state financial regulations, which vary greatly.
“You may have a firm operating under federal regulations, and another right down the block that cannot do the same things with advertising,” King said. “It may take states a while to sort out the differences.”
Firms that advertise under the new regulations also should be prepared to undergo additional scrutiny from the SEC, he added. Under the SEC changes, advisors will have to say 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.