We interrupt our regularly scheduled programming to bring you this special update. Well, technically it’s the U.S. Securities and Exchange Commission’s (“SEC”) update and it pertains to the regulation of investment adviser advertising. On December 22, 2020, the SEC amended the current regulatory framework governing investment adviser advertising. In making these changes, the SEC incorporated and/or rescinded years of no-action letters that pertained to various aspects adviser advertising. These changes will become effective 60 days after publication in the Federal Register and compliance with these changes will be required 18 months after that effective date. As of the date of this blog, the changes had not been published in the Federal Register.
You may recall that we discussed investment adviser advertising in a series of previous posts beginning in October 2019. Today’s post will be the first in a new series that will detail the changes resulting from the SEC’s rulemaking. As we did when we previously discussed advertising regulation; let’s start with the basics.
The principal rule governing adviser advertising is Advisers Act Rule 206(4)-1 (the “Advertising Rule”). While the Advertising Rule remains the key regulation governing adviser marketing and promotional activities, critical aspects of the rule have changed. Perhaps the most important of these changes is the definition of what qualifies as “advertising”.
First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. This prong of the definition excludes one-on-one communications (unless they contain hypothetical performance, in which case further analysis is needed). Also excluded are: (i) extemporaneous, live, oral communications (e.g., comments made in radio and TV interviews, unscripted panel remarks, etc.); and (ii) information contained in a statutory or regulatory notice, filing, or other required communication, provided that such information is reasonably designed to satisfy the requirements of such notice, filing, or other required communication
Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees). We will discuss endorsements and testimonials in further detail in a future post.
Just as important as what’s included in the Advertising Rule’s new definition of advertising is what is included in the general prohibitions added to the rule. The Advertising Rule will prohibit the following practices:
- making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;
- making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
- including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
- discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
- referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
- including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
- including information that is otherwise materially misleading.
While the changes to the Advertising Rule may seem overwhelming at first, keep in mind that the changes affect decades of regulatory framework. If you have particular questions as to how these changes impact your firm, please reach out to us and we’d be happy to assist. We continue our series on advertising next time when Marc will discuss how these changes will affect performance advertising. We hope to see you back then.