The Securities and Exchange Commission has proposed revising its advertising rules for investment advisers for the first time in nearly 60 years, allowing them to post testimonials, endorsements and third-party ratings on social media.
Under an SEC proposal released Monday night, the SEC also would allow the presentation of investment performance results as long as the ads met certain requirements.
"This is a big deal," said Karen Barr, chief executive of the Investment Adviser Association. "This is a complete overhaul of the advertising rules. There are communications practices that every other business can employ that investment advisers can now employ. Advisers will be able to engage in communications that are expected by consumers."
The biggest change is in the definition of advertising itself. The SEC proposal says an advertisement is "any communication, disseminated by any means ... that seeks to obtain or retain advisory clients or investors."
That's a major overhaul of the current definition, which is limited to written communications, TV and radio ads.
"They've taken a principles-based approach to the rule, which will make it more adaptable as technology and business practices change," Ms. Barr said. "Now, the SEC has used language that will work over time."
"What they're proposing is earth-shattering in a positive way," said Michael Caccese, a partner at K&L Gates. "It's nice to see the regulators listening to the concerns of the industry and trying to address them."
One of the major changes that would be ushered in under the SEC proposal is the standardization of performance information. For instance, the results of any portfolio or investment strategy would have to be illustrated over 1-, 5-, or 10-year periods. Gross performance results would be prohibited unless they are accompanied by net performance that factor in fees and expenses.
"It's going to create a very level playing field among advisers, especially when they present their investment performance," Mr. Caccese said.
Allowing the use of testimonials will help clear up confusion that exists over endorsements on social media as well as other types of client comments. For instance, Ms. Barr pointed to an SEC enforcement case that involved a client testimonal in a video celebrating the anniversary of an advisory firm.
"We like that the SEC has modernized certain areas (e.g., testimonials) and has clarified how to present performance information," Todd Cipperman, principal at Cipperman Compliance Services, wrote in an analysis. "We believe that clearer rules help compliance professsionals and reduce the likelihood of enforcement cases resulting from subjective standards."
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The agency also included in the 507-page proposal an update to rules related to investment adviser payments to solicitors, which haven't been amended since 1979.
"The advertising and solicitation rules provide important protections when advisers seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago," SEC Chairman Jay Clayton said in the statement. "The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices."
The Financial Industry Regulatory Authority Inc. will be watching how the SEC revises adviser advertising rules to see how they align with broker marketing rules.
"It might well be appropriate for us to consider our rule and whether and how it should be comparable to the SEC's," Finra chief executive Robert W. Cook said in an interview on the sidelines of a securities conference at Georgetown University Tuesday.
The SEC's proposed amendments to the advertising and solicitation rules will be open for public comment for 60 days after they are published in the Federal Register. After reviewing the comments, the SEC could modify the proposal and release final rules.
Over the years, the SEC staff has issued no-action letters and other guidance to help advisers interpret the rules.
"The staff is reviewing these letters to determine whether any should be withdrawn in connection with any adoption of the proposed amendments," the agency said in a statement.
Instead of following no-action letters, investment advisory firms will have to develop their own written policies and procedures based any any new final rules the SEC approves.
"What [the SEC] has created is the advertising compliance officer," Mr. Caccese said.