SEC Adopts Amendments to Investment Adviser Marketing Rule

The SEC adopted amendments under the Advisers Act for the advertising and cash solicitation rules, the books and records rule, and Form ADV. Existing IAA Rule 206(4)-3 ("Cash payments for client solicitations") will be eliminated and its substance will be merged into an amended and expanded IAA Rule 206(4)-1 ("Advertisements by investment advisers").

Consistent with the original proposal (see previous coverage here), the final rule will:

• prohibit fraudulent or misleading claims;

• permit 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; and

• require the adoption of procedures and impose other requirements around the use of hypothetical performance.

The final rule does not impose a number of more onerous conditions contained in the proposal:

• while the final definition of "advertisement" will expand on the existing definition to encompass "investment advisory services with regard to securities," it will exclude both "extemporaneous, live, oral communications" and one-on-one communications, except when such communications include hypothetical performance;

• the final rule will not add more conditions for performance advertising directed at a retail audience; and

• the final rule will not require advisers to designate specific employees to review and approve advertisements prior to dissemination.

Additionally, the SEC amended Form ADV and IAA Rule 204-2 ("Books and records to be maintained by investment advisers") to increase available data to support SEC inspection and enforcement procedures.

The final rule will go into effect 60 days after publication in the Federal Register.

Commissioner Statements

Commissioners Allison Herren Lee and Caroline A. Crenshaw noted the improvements to the "outdated and patchwork" advertising regime. Ms. Lee and Ms. Crenshaw stated that the rule should have included a requirement for the pre-review of advertisements, especially considering that, in the context of broker-dealers, pre-review is "well-established." With regard to hypothetical performance, Ms. Lee and Ms. Crenshaw found the "carve-outs" for unsolicited requests from retail investors and one-on-one communications to be "unjustifiable."

Commissioner Elad L. Roisman commended the final rule for its removal of the "one-size-fits-all 'pre-review' requirement." Mr. Roisman expressed reservation with regard to the rule's explicit extension - potentially beyond its "purported focus on advertising" - to communications such as private placement memoranda.