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.
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