SEC Proposes Changes to Advertising and Solicitation Rules

Rule 206(4)-1, which regulates investment adviser advertisements, was adopted in 1961 and has not been updated since. Major changes to technology and communication in recent decades incentivized the Commission to amend the Rule. Proposed changes intend to replace broad limitations on advertising with provisions which are more principles-focused. Highlights of the proposed rule are as follows:

• Changes to definition:
  • The Commission seeks to change the definition of an advertisement to remain flexible as technology continues to evolve
  • The new definition includes “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advertised by the adviser”
  • Several exclusions apply to the definition, including responses to unsolicited requests for information and information required to be included in regulatory documents or filings
• General advertising practices which will be prohibited under the Rule:
  • Materially untrue statements or omission of facts
  • Unsubstantiated claims
  • Misleading implications about an adviser
  • Discussion of potential benefits without mention of risks and limitations
  • Unfair or unbalanced reference to specific investment advice
  • Unfairly including or excluding performance results
• Advisers may be permitted, with the inclusion of certain disclosures, to use testimonials and endorsements as an advertising tool under some circumstances
• Third-party ratings will be allowed, subject to certain updated disclosures and criteria, generally inline with previously published no-action letters and guidance
• Inclusion of specific performance information may be prohibited, including:
  • Gross performance results without providing a schedule of fees and expenses deducted to calculate net performance
  • Stating that performance results have been reviewed or approved by the Commission
  • Advertising performance results from a group of similar portfolios without accounting for all the portfolios being promoted in the advertisement
  • Providing performance information on a subset of investments from a portfolio without offering to provide performance results of the entire portfolio
  • Advertising hypothetical performance, except under certain circumstances
• Inclusion of additional protections for including performance information on retail advertisements
• Advertisements must be reviewed and approved by a designated employee of a firm, with some exceptions, including advertising to a singular person or household or statements in live broadcast communications

Rule 206(4)-3 was adopted in 1979 and regulates cash payments for client solicitations. The proposed rule makes changes to the scope of the provisions, written agreement content, and disclosure requirements. The Commission proposes that the following amendments be made to the Rule:

• The scope of the Rule will change to include:
  • All forms of compensation to solicitors, not just cash payments; other payments include directed broker, awards or prizes, and free services, for example
  • Solicitation of current and possible investors in a private fund instead of only including clients of an adviser
  • Retention of the Rule’s current exemptions and addition of new exemptions
  • Expanded list of individuals disqualified from acting as a solicitor
• Under the Rule, advisers will be required to enter into a written agreement, which could include specific content, with solicitors who are compensated for their work
• The Rule could add several changes to disclosure requirements, including lifting the need for an adviser to obtain individual investor acknowledgement of disclosures
• Largely unamended provisions regarding adviser oversight of solicitors

Rule 204-2, which outlines books and records regulations, will likely be amended to require that additional information regarding adviser advertising practices be included on Form ADV.

The Commission instated a comment period on the proposed rule for the next 60 days. Comments can be made via the Commission and will be made available publicly if submitted. Commission staff will review comments and make further amendments to the proposed rule if deemed necessary and appropriate.

In recent years, the Commission has released a series of no-action letters and guidance documents with regard to the advertising rule and solicitation rule. Upon adopting the final rule, the Commission may withdraw some of these no-action letters and guidance. A full list of no-action letters and guidance is available in the proposed rule (beginning on page 298).

Fairview Investment Services is available to answer questions regarding the implications of the proposed rule on your firm’s compliance program. Fairview Performance Services is specifically able to assist with best practices for presenting aggregated strategy performance. Fairview will continue to update you on changes to the Rule as they occur.