Advocates hope reform of SEC advertising rule will ease advisers' use of social media

Ban on testimonials makes online 'likes' dangerous

Nov 6, 2018 @ 2:47 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission's review of its advertising rule is raising hopes that it will result in easing investment advisers' use of social media.

In its fall regulatory agenda, the SEC indicated it intends to propose changes to the measure by next April. The regulation, which has been on the books since the 1960s, hasn't kept up with developments in the advice industry or technology, according to compliance experts and adviser advocates.

"It's a rule that's in desperate need of refreshing," said Todd Cipperman, principal at Cipperman Compliance Services.

One of the major factors the SEC should tackle as it revises the rule is tangential areas related to the rise of social media, according to Karen Barr, president and chief executive of the Investment Adviser Association.

Currently, the broad interpretation of the SEC's ban on the use of testimonials means advisers can't let clients endorse them on LinkedIn and have to worry about whether they're getting "likes" on their Facebook pages.

"It really puts a damper on social media for investment advisers," Ms. Barr said at the recent Schwab IMPACT conference in Washington. "We're hopeful the SEC will make the rules more principles-based, a little less rigid and really let investment advisers enter the modern age."

Mr. Cipperman called social media "the marketing elephant in the room."

"People are very confused about what they can and can't do in their personal accounts and their business-related accounts," he said.

The SEC seems to be getting more serious about updating the advertising rule. It first appeared as a long-term item on its fall 2017 agenda. This year, it is at the proposed rule stage.

"Barring other developments, I think there's a good chance we could see it by April," Ms. Barr said in an interview.

For the last several years, the SEC has issued no-action letters and risk alerts to provide guidance about interpreting the advertising rule. Now that it is going to propose a rule change, there's no shortage of areas on the wish list for clarification.

For instance, the SEC needs to sort out the fundamental issue of what is defined as an ad, Ms. Barr said. Currently, any written material that goes to more than one person can qualify.

"Everything — 100% everything — is an advertisement," she said. "We'd like to see them make the definition more of a common-sense definition of what an advertisement is."

She said the rule also bans advisers from walking clients through their decision-making process on which stocks to include in a fund.

"It's very strict," she said. "Let's say you want to talk about tech stocks. You can't say, 'I liked Apple in the past for these reasons.' That's a past-specific recommendation. It's not intuitive."

The SEC also should put into rule form advertising tactics it doesn't like, as made clear through examinations and enforcement, according to Mr. Cipperman.

"The SEC frowns upon back testing and hypothetical data," he said. "Perhaps they should codify that."


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