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How Proposed Advertising Rules for Advisors Set the SEC Up for Criticism: Commissioner

The agency should try to avoid “regulation by enforcement,” according to Allison Herren Lee.

The rules governing advertisements for financial advisors haven’t been updated in decades and need to be modernized. But one regulator is worried that changes proposed by the Securities and Exchange Commission are too vague, setting up the agency for criticism.

In November, the SEC proposed substantial changes to the Investment Advisers Act of 1940 related to advisors and ads. The new rules would allow advisors to use testimonials (a practice currently illegal) as well as their performance and third-party ratings in advertisements, under certain conditions. The last time the rules were updated was 1961.

The regulator also plans to amend a separate rule pertaining to advisors and cash solicitations adopted in 1979.

SEC Commissioner Allison Herren Lee, a former enforcement attorney who filled a vacant commissioner’s seat in July of 2019, favors the changes. However, she is also concerned about a lack of specifics in the rules discussed during the Investment Adviser Association’s 2020 Compliance Conference on March 5.

Requirements of the proposed rules “rely too heavily on high-level principles,” according to Lee. A principles-based approach to rulemaking allows for some flexibility in interpretation but comes at a cost. In-house lawyers can find it difficult to translate broad legal restrictions into something clear enough that companies can use to make a decision.

“For the most part, they need yes or no answers, and, absent more substantive guidelines in the rule text, a risk-averse compliance professional may default to a conservative approach that unduly restricts the substance of an adviser’s advertisements,” Lee said.

In that case, the proposed changes might not solve one of the issues they are intended to. The current rules were written before the advent of the internet and interpretations differ greatly, Justin Barish, the vice president of Digital Marketing at Dynasty Financial Partners, told RIA Intel in November. 

“If [new] rules are too broad or vague, we may end up circumscribing conduct that we would not intend to capture,” Lee said.

As examples, the commissioner identified two parts of the new rules she thought require more attention: The mandate that the presentation of an advisor’s performance be “fair and balanced” and that testimonials be “reasonably likely to cause an untrue or misleading inference to be drawn.” Those terms are not specifically defined in the new rules. “I think we can all agree that either type of presentation should be fair and balanced, but is that guideline alone enough information from the Commission for you to apply that standard on a daily basis?” Lee asked.

Retrofitting the SEC’s rules for the 21st century while failing to construct them in a way that meaningfully helps those impacted will open the agency to criticism.

“I know there are concerns expressed by many about what is often referred to as ‘regulation by enforcement.’ If the rule’s requirements are too vague, how can the Commission ensure compliance without raising those sorts of concerns?”

In her speech, the commissioner encouraged more debate and additional input from investors and small investment advisors through a questionnaire. The hope is that questionnaires specific to investors and advisors will elicit more and better responses relative to open comment periods during rulemaking. Lee also said she supported the same strategy for other rules.

If the rules become reality, the prospect of RIAs using third-party ratings and reviews in ads could upend the internet as advisors know it. Google and other search engines prize the data from online ratings and reviews and use that to help rank businesses in their search results. An influx of those could mean that the wealth managers appearing in searches today might not in the future.



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