SEC Advertising Rules: Guidance on Proposed Amendments

By Global Relay on September 17, 2020
Global Relay

Attracting new prospects—or even retaining existing clients—could be about to get trickier as the SEC proposes the first changes to its advertising rules for investment advisors since the 1960s. This was the wide-ranging topic we covered in our recent webinar, now available to view on demand.

If they come into force, the new rules would broaden the definition of an advertisement to cover any communication that offers or promotes an investment advisor’s services, and which is disseminated by any means—physical or electronic.

Currently, for a communication to be considered an advertisement it has to be sent to more than one person. However, under the new rules a communication would only need to be sent to one investor or client for it to be considered an advertisement.

“That’s a big change,” says Max Mejiborsky, a senior consultant at NRS, adding that existing exemptions for client reporting on their accounts or portfolios will remain in place.

Other exemptions include live oral communications that are not broadcast in any way; information required to be disclosed for regulatory purposes; responses to RFPs (as long as they don’t include performance data if sent to a retail client); and third-party posts made on an advisor’s website or social media sites.

However, if advisors are sent questions by investors or clients, their response must only address what was asked—if an advisor decides to include additional information, this could potentially be deemed an advertisement, Mejiborsky says.

Another key change is the proposal to update the definition of retail and non-retail clients so that advertisements are appropriate for that particular audience.

One potential issue with the new definition is the threshold at which a client would be considered a non-retail investor. The SEC has proposed that these ‘qualified purchasers’ have either $5 million in investments or are knowledgeable employees of the advisor, says Mejiborsky. That threshold is higher than for existing accredited investors or qualified client thresholds, and the SEC will demand to inspect an underlying fund to determine the classification of its investors. This creates a dilemma for advisors who must decide whether to create advertisements that would also be suitable for retail clients, or whether to create two different advertisements, Mejiborksy says.

The proposed changes might also sweep away some of the no action letters that have been issued over the years where existing rules were unclear, as some may conflict with the new rules or become redundant if they are now covered by statutory guidance, says Mejiborsky.

Under the new proposals, advertisements will be subject to seven general prohibitions that will make it a fraudulent act to publish false or misleading information. Those include making unsubstantiated claims or statements, such as an advisor claiming they are the leading investment advisor in the US. Such statements would need to be backed up by data, otherwise they would be in clear breach of the new rules.

Should an advertisement include an untrue implication about an advisor, such as the advisor is better than or somehow different to other advisors in the industry, then that would also be prohibited.

“This is very common,” says Mejiborsky. “Advisors believe they are unique and they make very broad statements about how other advisors do this or don’t do that, and my question is always ‘how can you prove this, have you surveyed every other advisor?’. You can’t make that kind of claim without having the data to support it.”

Performance data is also a key area where advisors need to pay closer attention. For instance, advisors can’t cherry-pick performance results or omit context. If a fund returned 20% but the overall market returned 30%, then that detail must be included, says Mejiborsky.

Performance data must also be shown net of fees for retail clients and in a way that allows easy comparison. Retail clients must also be shown returns over one-, five- and 10-year periods (or since inception if shorter)—rather than a select period that shows more favorable results.

Finally, while advisors will be permitted to post testimonials and third-party rankings, they must make it clear if there was any compensation involved. For testimonials, advisors must also disclose their relationship with the endorsee (is it a client or investor?). And for third-party rankings, any surveys must be structured in a way that allows for both positive and negative responses, and must not be designed to produce any predetermined results.

Investment advisors will have some time to wait before the proposed amends become definitive. In the meantime, watch our webinar to learn more.

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