IAA, Other Industry Groups Call for Modernized E-Delivery Framework

September 23, 2020

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The IAA, along with several other industry trade groups, has issued a discussion paper urging the SEC to update its regulations to establish electronic delivery as the primary means for delivering required disclosures to investors. The SEC is undertaking a comprehensive review of the current paper-based delivery framework for required disclosures and has asked the IAA to provide recommendations for modifying the framework. The IAA is in the process of formulating specific recommendations consistent with the general framework outlined in the discussion paper.

Current guidance relating to e-delivery of required disclosures dates back to a series of SEC interpretative releases between 1995 and 2000. Under that guidance, an investment adviser may satisfy its ongoing disclosure delivery obligations by providing notice that the information is available electronically, ensuring effective access to such information, and either evidencing actual delivery or obtaining informed consent from clients. In practice, many advisers have been reluctant to use e-delivery due to the costs involved, implementation issues, and lack of clarity associated with the current consent requirements, even though it would be much more efficient and cost-effective for those advisers to do so.

The industry discussion paper broadly recommends that the SEC make e-delivery of required disclosures the default framework while also providing advisers and their clients the flexibility to determine the best manner in which to have important information delivered.

As noted in the discussion paper, advancements in technology, specifically the Internet and social media, have significantly changed the way individuals and organizations communicate. The paper notes that an overwhelming majority of investors now have access to the Internet, and for many of them, going online or using social media is the primary way they access and share information, in many cases through their smartphones. The current pandemic has further highlighted the need to move away from a paper-based approach.

Under the joint paper framework, new clients would be informed that they will be enrolled in e-delivery if they provide an email or other e-delivery address at or before the time of entering into an investment advisory contract, but would have the option to elect physical delivery. Firms would not have to take follow-up steps to confirm electronic delivery absent red flags regarding client access (e.g., email bounce backs). In all circumstances, clients that do not provide a means for receiving required disclosures via e-delivery would continue to receive paper delivery, and any client could elect to receive paper delivery at any time.

The discussion paper suggests a one-year transition period during which firms could begin delivering required disclosures electronically to existing clients for whom the firms have email addresses or could use other means to provide notice to clients electronically that documents are available.

The IAA has long advocated for a shift in approach for e-delivery from the current “delivery with consent” model to a notice and access approach. Under a notice and access approach, an adviser could satisfy its delivery obligation by posting required disclosures on its website or other electronic medium and providing clients either a paper or electronic notice that directs clients to the exact location of the disclosure (e.g., a direct hyperlink to the disclosures on the adviser’s website). This notice would inform the client that the information is available and explain how to access it. Thus, clients would not have to affirmatively opt in to e-delivery. Advisers should also be able to satisfy delivery obligations by simply providing required disclosures directly electronically (e.g., by emailing a PDF). However, as noted above, clients would still have the option of opting to receive paper copies of the disclosures at any time.

The SEC’s willingness to reconsider its approach to e-delivery is an extremely positive development. The IAA plans to continue its longstanding advocacy on this issue by providing the SEC with recommendations for a comprehensive framework that is evergreen, workable, and cost-efficient for firms while ensuring that investors receive the important information they need to make informed decisions.

We encourage members to provide feedback regarding this important initiative by contacting IAA Associate General Counsel Sanjay Lamba at sanjay.lamba@investmentadviser.org.