SEC Proposes Overhaul of Advertising and Solicitation Rules

The Securities Exchange Commission (SEC) has proposed a major change to the rules governing investment advisers. Under the proposed rule, advisers would be empowered to post testimonials, endorsements and third-party ratings on social media, ending a decades-long ban on many types of communication that are commonplace in other industries.

The rule would also permit advisers to present their investment-performance results, under certain conditions. Specifically, advisers would be allowed to post their investment results over one-year, five-year and ten-year periods, but only if the net results were presented alongside the gross results. For example, if an adviser is going to tout that it has generated an annual gross return on investment (ROI) of 5%, it would also have to disclose that the ROI was 3.25% after fees and expenses are deducted.

SEC Chair Jay Clayton explained the purpose behind the proposed rule changes: “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. 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 proposed rules will now be out for comment for sixty days, and depending on how they are received, the new rules or some amended version of them may be enacted in early 2020. If that happens, the head of the Financial Industry Regulatory Authority (FINRA), Robert W. Cook, told Investment News that FINRA will likely revisit its own rules: “It might well be appropriate for us to consider our rule and whether and how it should be comparable to the SEC’s.”

If FINRA ends up harmonizing its rules to those of the SEC—as is likely—then compliance officers at the 3,600-plus FINRA-member broker-dealers will have plenty of work ahead of them. It will fall to them to ensure that their firms communicate lawfully with the millions of prospective clients to whom they might direct advertising and solicitation communications.

Included in the SEC’s proposed rule is a new set of guidelines for how investment advisers may pay so-called “solicitors.” Rules governing these payments to solicitors have not been amended since 1979. These are the subject of deep interest to many investment advisers and non-employees who would like to be compensated for their efforts in driving prospective clients to the firms providing financial advisory services, but want to be sure they do not run afoul of regulators.

The proposed new rules would expand the current rule to cover solicitation arrangements involving all forms of compensation, not just cash. They would also have a new de minimis threshold, and would update other aspects of the rule, including an expanded list of who is disqualified from acting as a solicitor.

A short summary of the proposed rule changes can be found in the SEC’s press release, which includes a helpful “fact sheet.”

Since these proposed rules are crucial to the lawful operation of many of our clients’ businesses, we will continue to analyze these issues in more detail, and will share our key observations here.

If you are a registered investment adviser, broker-dealer, solicitor or individual financial services professional, and you have a question about how the SEC’s current and proposed rules on advertising and solicitation may affect you, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.