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SEC Proposes Amending Investment Adviser Solicitation and Advertising Rules's picture
Commentary by Steven Lofchie

The SEC proposed amending advertising and solicitation rules under the Investment Advisers Act of 1940 (the "Advisers Act"). The proposed rule changes (i) adopt broader definitions of "advertising," "improper behavior" and "solicitor," (ii) impose conditions on the use of hypothetical and performance information in advertisements, (iii) impose additional conditions on the use of solicitors, such that numerous firms may not be eligible to act as solicitors, and (iv) amend certain recordkeeping requirements.

Among other provisions, the proposed amendments to Advisers Act Rule 206(4)-1 ("Advertisements by Investment Advisers") would:

  • expand the definition of "advertisement" to include any communications intended to promote the adviser, subject to exclusions for "live oral communications" that are not electronically transmitted, and responses to unsolicited requests for information (though such excluded communications may not relate to performance information or hypothetical performance);

  • prohibit fraudulent or unsupported claims;

  • allow testimonials and endorsements, but require disclosure of whether they are from clients and if compensation has been provided;

  • allow third-party ratings, subject to disclosure and other conditions;

  • put conditions on the use of performance information in advertisements, with increased conditions if advertisements are intended for a retail audience;

  • require the adoption of procedures around the use of hypothetical performance; and

  • necessitate written approval from a designed employee before an advertisement is distributed.

The proposal would amend the Advisers Act Rule 206(4)-3 ("Cash Payments for Client Solicitations") to:

  • make clear that the rule is applicable regardless of the form of compensation received by the solicitor (though exceptions would be provided for de minimis compensation and for solicitation by certain nonprofit programs);

  • provide that the rule applies to the solicitation of investments in a private fund, including solicitations by a broker-dealer;

  • specify provisions that must be included in a written agreement between the solicitor and the adviser;

  • supplement current solicitor disclosures to require disclosures of any conflicts of interest on the part of the solicitor; and

  • require an adviser to have a reasonable basis to believe that a solicitor has complied with a written agreement and made the required disclosures.

Additionally, the proposal would revise Form ADV to require additional information concerning advisers' advertising practices in order to support SEC inspection and enforcement procedures.

SEC Commissioner Allison Herren Lee stated that while she has several concerns, she voted in favor of the proposal due to its "balanced approach" to protect investors and because it allows flexibility for investment advisers.

Comments must be submitted within 60 days after the proposal is published in the Federal Register.


There is quite a lot here that must be considered not only by advisers, but also by funds that engage with them, and by broker-dealers selling securities issued by managed funds.

Among the more significant requirements are those related to the advertisement of performance information. Notably, the rule would impose conditions on the use of related performance information, but not provide any safe harbor as to when the use of related performance information is allowed. This is something that advisers should consider carefully, as the SEC and FINRA have historically discouraged or limited the use of related performance information, while the CFTC in some instances mandates the disclosure of related performance information.

Likewise, firms should review the conditions imposed upon the use of hypothetical performance information, particularly as to whether the required disclosures are sufficiently clear.

Perhaps the most significant aspect of the proposal has to do with the expanded regulation of "solicitors." Under the proposal, a person who markets investments in a private fund would be considered a solicitor subject to the Advisers Act. In particular, the SEC advised that it would be reconsidering the no-action letter, previously issued to Mayer Brown in 2008, which provided that entities marketing investments in a fund would not be considered "solicitors," presumably on the theory that such entities would be regulated as broker-dealers or be exempt from such registration as banks. In short, broker-dealers would be regulated as solicitors.

In addition, the proposal provides that firms are potentially disqualified from acting as solicitors if the SEC, any self-regulatory organization or the CFTC has issued a final order based on a violation of any law or rule that prohibits "fraudulent, manipulative, or deceptive conduct." Depending on how broadly that latter term is interpreted, a lot of broker-dealers could be deemed to be ineligible solicitors. For example, would a violation of the rule requiring that firms act in compliance with "just and equitable principles" be within scope because that violation is an add-on in numerous FINRA enforcement actions? Either the SEC will spend much of its resources over the next several years considering exemptive requests or there may not be very many firms left to market investment funds. Further, the SEC has indicated that it could reconsider, and effectively withdraw, 98 previously issued waiver letters (see page 303 of the release). The expanded imposition of collateral punishments for misconduct that are already the subject of a direct punishment is problematic.

On the positive side, the SEC provided an easy means for retail investors to provide feedback on certain aspects of the rule (see page 485). This should serve to elicit more meaningful comments from retail investors than the receipt of thousands of identical form letters.

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