Finally, the SEC Is Looking at Modernizing the Advertising Rule

“The IAA has long advocated for modernizing the Advertising Rule and we are pleased to see our efforts bearing fruit. We certainly intend to engage with the SEC and will provide significant comments as it considers changes to the rule.”

Finally, the SEC Is Looking at Modernizing the Advertising Rule

Posted by Sanja Lamba, IAA Assistant General Counsel
01/24/2018 


If your firm engages in marketing, including via a website, social media or email, you are painfully aware of the restrictions imposed by the SEC’s Advertising Rule for investment advisers (Rule 206(4)-1). Calling the rule outdated would be a massive understatement. It has been on the books substantially unchanged for nearly six decades!

Good news! It appears that the SEC will reexamine the Advertising Rule at long last. The SEC’s published regulatory priorities for 2018 include amending the rule to “enhance marketing communications and practices by investment advisers.”

The IAA has long advocated for modernizing the Advertising Rule and we are pleased to see our efforts bearing fruit. We certainly intend to engage with the SEC and will provide significant comments as it considers changes to the rule. In fact, front and center in our letter welcoming Chairman Jay Clayton to the SEC was our view that the current rule is unworkable in the 21st century and our recommendation that the Chairman initiate a retrospective review of the rule.

Of course, the devil is in the details and we look forward to working with the SEC and our members to improve regulation in this area. As we consider specific improvements, we think it is important to bear in mind the following:    

The manner in which investors communicate and obtain information continues to evolve.

There was a time when investors relied solely upon information mailed to them, reading newspapers, or watching television. For historical information, investors typically went to the library. Anyone remember microfiche? Technology has removed traditional barriers to obtaining information. The Internet, the use of social media, and other modern advancements in communications have led to the significant proliferation of the availability of information. Investors can now access and assimilate a vast trove of information into their decision-making process. In addition, mobile devices have changed the way investors read, absorb, and respond to marketing and accompanying disclosures. The SEC should carefully consider the role technology plays in how investors communicate and obtain information today and into the future.

“(W)e believe that regulations should be easy to understand and implement. An unfortunate consequence of the Advertising Rule is that it has morphed into a regulatory scheme consisting of a complex maze of enforcement actions and a patchwork of SEC staff no-action letters that are difficult to decipher and apply to evolving circumstances. Advisers cannot simply read the rule and understand what is required, but rather must delve through a thicket of staff pronouncements and enforcement proceedings. Such a regulatory scheme is confusing for even the most seasoned advisers to understand and difficult for the SEC to enforce.”

  • The specific prohibitions in the Advertising Rule that are considered per se fraud no longer make sense.

    The Advertising Rule stems from the SEC’s determination in 1961 that certain types of advertisements should be deemed misleading or fraudulent regardless of intent. However, in our view, the activities explicitly prohibited by the rule should not be considered per se fraud. In particular, we believe that the rule’s treatment of any advertisements that refer to either client testimonials or past specific recommendations as fraudulent no longer makes sense in today’s investing environment. As noted above, investors are more informed and sophisticated than ever before. They seek detailed information about the performance of their accounts and their peers’ experience with an adviser. Consumers today are accustomed to conducting research on the Internet, evaluating and creating user reviews, and sharing views publicly. The ban on testimonials is particularly dated in this regard, in effect thwarting common uses of social media. For example, based on SEC staff interpretations, it is questionable whether members of the public can “like” an adviser’s online posts or endorse an adviser’s skill on LinkedIn without running afoul of the rule.

    The past specific recommendation ban highlights another unfortunate consequence of the Advertising Rule – it restricts the ability of an investment adviser to provide complete and accurate information to investors that may be useful in making decisions. For example, investors could benefit greatly from specific examples demonstrating how an adviser’s investment process or philosophy has been put to work in managing actual accounts. But providing concrete examples by referring to past specific investments (also referred to as “stock stories” or “case studies”) could be viewed as not being permitted under the existing rule. Put simply, these flat-out prohibitions run counter to investor expectations.

    As a result of the severe limitations imposed by the Advertising Rule, advisers routinely face the dilemma of attempting to provide information to existing and prospective clients that they believe clients would value and expect to receive without running afoul of the rule. Clearly, the public interest is not well served by a rule that flatly prohibits truthful advertisements containing information that investors want and that may be useful in making investment decisions. We believe the rule instead should reflect an adviser’s duty to make accurate and adequate disclosure of relevant and meaningful information to existing and prospective clients.

    The rulebook needs to be simplified.

    As a general matter, we believe that regulations should be easy to understand and implement. An unfortunate consequence of the Advertising Rule is that it has morphed into a regulatory scheme consisting of a complex maze of enforcement actions and a patchwork of SEC staff no-action letters that are difficult to decipher and apply to evolving circumstances. Advisers cannot simply read the rule and understand what is required but rather must delve through a thicket of staff pronouncements and enforcement proceedings. Such a regulatory scheme is confusing for even the most seasoned advisers to understand and difficult for the SEC to enforce.

    We recommend that the SEC simplify this regulatory scheme by clarifying and consolidating the substance of all no-action letters, interpretations, and other SEC statements governing adviser advertising that have continuing relevance and repealing those that no long make sense.

    Get Involved in IAA Advocacy!

    The IAA looks forward to providing specific feedback to the SEC and its staff as they consider proposed changes to the Advertising Rule. If you are interested in working with us in this effort, please contact IAA Assistant General Counsel Sanjay Lamba at sanjay.lamba@investmentadviser.org or (202) 293-4222.  

    You can also get involved, have your voice heard, and support the IAA’s advocacy efforts on other fronts either by contacting the IAA legal staff directly and sharing your views on the IAA Exchange (online communities) or through our various Committees and Working Groups. Details about our Committees and Working Groups are available on the IAA website at www.investmentadviser.org/resources/resources-committees.