New SEC Marketing Rule Codifies Best Practices for Advisors, Allows Testimonials and More

Lore becomes law and what was once banned is now legal.

(Zach Gibson/Bloomberg)

(Zach Gibson/Bloomberg)

The Securities and Exchange Commission on Tuesday approved new rules governing how investment advisors can market themselves, codifying long-standing recommendations from the regulator and legalizing practices previously banned.

In November last year, the SEC proposed the first substantial changes to the Investment Advisers Act of 1940 related to advertisements since 1961. The proposal also included plans to amend a separate rule pertaining to advisors and cash solicitations adopted in 1979.

A single rule to replace those was finalized by the SEC on Dec. 22 that will “comprehensively and efficiently regulate investment advisers’ marketing communications,” the SEC said in a statement.

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The new rule redefines what qualifies as an advertisement and what advisors are prohibited from doing — both things that the SEC has long given guidance on. It also allows advisors to use testimonials and third-party ratings in advertisements, under certain conditions, which was previously illegal. (Their use might also disorder the internet as advisors know it.)

“Generally speaking, not a ton of surprises,” Adam Kanter, a partner at law firm Mayer Brown, said about the new rules.

Regulators and the industry agreed that the marketing rules needed to be modernized and Kantor and other attorneys told RIA Intel that was accomplished. The clarifications about marketing might especially help small advisory firms that lack in-house compliance professionals, or law firms on retainer, to help them navigate the previously opaque guidelines (assuming they are willing to tackle the 430-page rule on their own).

“More guidance from the SEC on any topic is always a better thing for the industry,” Tanya Lambrechts, associate at Bressler Amery and Ross, said.

Lambrechts, who is part of the RIA practice group formalized at Bressler Amery and Ross in July, said even small choices might not have been worth the regulatory headaches in the past. One of her RIA clients was fearful that allowing comments on their Facebook page would be a violation, which effectively no other type of business has to worry about.

“That is going to make a big change in the industry,” Lambrechts said about testimonials suddenly being allowed.

Replacing the old broad limitations with “principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice” is a double-edge sword.

Robert Rabinowitz, a partner at Becker, commended the rule but noted that more detailed rules mean more specific infractions. “It also cuts the other way too. It gives the inspection department more to go on in terms of looking at alleged violators. It gives them another arrow in the quiver, in terms of enforcement actions, but that’s OK.”

Marketing strategies at RIAs might evolve in response to the new rules, but it won’t be disruptive to businesses like other regulation. “The rule doesn’t require people to set up whole new technology systems. The nice thing about this rule is that in many ways, it’s codifying best practices. It’s not really imposing some new regime,” Phillip Gillespie, senior counsel at WilmerHale said.

Since the final rule was released, it’s been business as usual for Lambrechts, unlike after the revival of the Department of Labor’s so-called fiduciary rule in June. “We were inundated with calls from our clients,” she said.

Today was Jay Clayton’s last day as SEC chairman.

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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