The Securities and Exchange Commission proposed reforms to two rules under the Investment Advisers Act of 1940 relating to how advisers advertise to and solicit clients and investors.
The first rule, which relates to advertisements and would replace a rule adopted in 1961 that has not substantively changed since, would “replace broadly drawn limitations with principles-based provisions,” according to an SEC statement. It would include general prohibitions of some advertising practices with “more tailored restrictions and requirements that are reasonably designed to prevent fraud.” The approach allows for the use of testimonials, endorsements and third-party ratings, as well as “the presentation of performance with tailored requirements based on an advertisement’s intended audience.”
Specifically, the agency is proposing to define clients and investors that are “qualified purchasers” or “knowledgeable employees” as “Non-Retail Persons” and to define all other clients and investors as “Retail Persons.” It also seeks to define advertisements directed at Non-Retail Persons as “Non- Retail Advertisements” and all other advertisements as “Retail Advertisements.”
The agency is also proposing to update the Advisers Act cash solicitation rule to reflect regulatory changes and the evolution of industry practices since that rule was adopted in 1979. The SEC wants to expand the rule to cover solicitation arrangements involving all forms of compensation, as opposed to merely cash compensation, and eliminate requirements that are duplicative of other rules. The rule would also “refine the existing provisions regarding disciplinary events that would disqualify a person or entity from acting as a solicitor.”
Finally, the SEC is proposing related amendments to Form ADV that are designed to provide additional information regarding advisers’ advertising practices, and amendments to the Advisers Act books and records rule, rule 204-2, related to the proposed changes to the advertising and solicitation rules.
Herb Perone, spokesman for the Investment Advisers Association, an industry trade group, wrote in an email that “the proposal is a significant step in the right direction.” Most importantly, he said, the change “appears to take a principles-based, evergreen, approach to the rule in contrast to the per se prohibitions that currently exist.” In addition, he noted that 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,” which would be “welcome changes.”
Moreover, he added that the advertising rule “hasn’t been substantively amended since 1961 – long before social media, long before the Internet, even before fax machines.” Because “advancements in technology and communications have drastically changed the ways that every service provider in our economy engages with clients and prospective clients,” he noted that “because of this badly outdated rule, investment advisers are generally prevented from using communications and marketing methods that long ago became standard business practice elsewhere in the economy.”
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