In mid-December, the SEC adopted an amended rule to the advisor advertising rule and cash solicitation rule to reflect market developments and regulatory changes since the advertising rule’s adoption in 1961 and the cash solicitation rule’s adoption in 1979. These amendments will be the first substantive change to either rule since their inception and will create a new merged rule, The Marketing Rule, that will replace both the current advertising and cash solicitation rules.
Originally, the advisor advertising rule and cash solicitation rule were designed mainly for media such as television, radio, and newspapers. But a lot has changed since 1961 with the evolution of advertising and referral practices, advancements in technology, the introduction of the internet, and more. The Commission recognized this, stating that the new rule recognizes these changes and will “contain principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice”. A few notable outcomes from this are the new rule applying to online outreach, such as adviser marketing over social media, and allowing for testimonials and endorsements.
The Final Rule
The Commission designed the new rule to comprehensively and efficiently regulate investment advisers’ marketing communications. The new rule will replace the broadly drawn limitations and prescriptive or duplicative elements in the current rules with more principles-based provisions, as described below.
Definition of Advertisement:
The final rule will include an expanded definition of “advertisement” that will encompass an investment adviser’s marketing activity for investment advisory services with regard to securities. This definition will exclude one-on-one communications (except with regard to compensated testimonials and endorsements and certain communications that include hypothetical performance information), extemporaneous, live, oral communications; and information contained in a statutory or regulatory notice, filing, or other required communication
Communications to Clients and Private Fund Investors
The final rule will apply to certain communications sent to clients and private fund investors but will not apply to advertisements about registered investment companies or business development companies.
The new rule will utilize a set of seven principles-based general prohibitions that will apply to all advertisements. These are drawn from historic anti-fraud principles under the Federal securities laws and are tailored specifically to the type of communications that are within the scope of the rule. The seven principles-based general prohibitions can be found starting on page 64 of the Final Rule Document.
Testimonials, Endorsements, and Third-Party Ratings
The final rule will permit an adviser’s advertisement to include testimonials, endorsements, and third-party ratings as long as they comply with anti-fraud protections and other conditions found on page 13 of the Final Rule Document.
The final rule will apply to performance advertising and will require presentation of net performance information whenever gross performance is presented, and performance data over specific periods. In addition, the final rule will impose requirements on advisers that display related performance, extracted performance, hypothetical performance, and predecessor performance
Amendments to the Books and Records Rule and Form ADV
The final rule will amend the record keeping rule and Form ADV to reflect the final rule and enhance the data available to support our staff’s enforcement and examination functions.
The SEC also makes a note that, in a change from the proposal, the new rule will not require investment advisers to review and approve their advertisements prior to dissemination.
When Does This Rule Go into Effect?
The effective date will be 60 days after publication in the Federal Register, but the final rule will provide an eighteen-month transition period between the effective date of the rule and the compliance date. Any advertisements disseminated on or after the compliance date by advisers registered or required to be registered with the Commission would be subject to the new marketing rule.
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