SEC Modernizes Advertising and Solicitation Rules 206(4)-1 and 206(4)-3 – Major Changes RIAs Need to Know

The SEC recently unanimously approved a Final Rule that significantly modernizes the current advertising and cash solicitation rules for registered investment advisers...

SEC Modernizes Advertising and Solicitation Rules 206(4)-1 and 206(4)-3 – Major Changes RIAs Need to Know

SEC Modernizes Advertising and Solicitation Rules 206(4)-1 and 206(4)-3 – Major Changes RIAs Need to Know

<strong>The SEC recently unanimously approved a Final Rule that significantly modernizes the current advertising and cash solicitation rules for registered investment advisers</strong>...

Author: Paul A. Lieberman|January 27, 2021

The Securities and Exchange Commission (SEC) recently unanimously approved a Final Rule that significantly modernizes the current advertising and cash solicitation rules for registered investment advisers (RIAs). Neither rule had changed much since the Advertisement Rule was adopted in 1961, and the Solicitation Rule was adopted in 1979.

“The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” Chairman Jay Clayton said in a press statement. “This comprehensive framework for regulating advisers’ marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors. The new rule provides for an extended compliance period intended to provide advisers with a sufficient transition period, including to enable consultation with the Commission’s expert staff.”  (Emphasis added).

This article is based on the unmistakable premise in the Discussion section that the Advertising Rule amendments “review and pre-approval requirements’ obligate RIAs, regardless of size, to have a robust review compliance process in place that will assure investor protection and comply with the SEC’s evolving examination methods.  The potential enormity of this resource burden and professional liability exposure cannot be doubted even with an 18-month period until the effectiveness date.  While commentators advanced the analysis relating to issues involved in pre-dissemination review and approval and whether the current Compliance Rule effectively addresses the SEC’s goals of ensuring Advertising Rule compliance, RIAs will be left to establish and implement flexible, effective and cost-effective compliance measures.[1]

As the SEC notes in its Final Rule, a lot has changed since the advertising and solicitation rules were adopted more than 40 years ago. Among the most significant developments, technology used for communications has advanced, the expectations of investors shopping for advisory services have changed, and the profiles of the investment advisory industry have diversified.[2] In light of these changes, the new Marketing Rule contains principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice. As described by the SEC, below are the key components of the Final Rule:

New Unified “Marketing Rule” for RIAs is Principles-Based

The Marketing Rule expressly prohibits the following advertising practices:

  • Making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading;
  • Making a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
  • Including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
  • Discussing any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
  • Referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
  • Including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
  • Including information that is otherwise materially misleading.

Key Components of the Final Advertising Rule

  1. Definition of Advertisement

The amended definition of “advertisement” contains two prongs:

  • First, the definition includes any direct or indirect communication an investment adviser makes that: (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions.
  • Second, the definition generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (e.g., directed brokerage, awards or other prizes, and reduced advisory fees).
  • Testimonials and Endorsements

The Marketing Rule prohibits the use of testimonials and endorsements in an advertisement unless the adviser satisfies certain disclosure, oversight, and disqualification provisions:

  • Disclosure: Advertisements must clearly and prominently disclose whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest. There are exceptions from the disclosure requirements for SEC-registered broker-dealers under certain circumstances. The Amended Rule eliminates the current Rule’s requirement that the adviser obtain from each investor acknowledgments of receipt of the disclosures.
  • Oversight and Written Agreement: An adviser that uses testimonials or endorsements in an advertisement must oversee compliance with the Marketing Rule. An adviser also must enter into a written agreement with promoters, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
  • Disqualification: The Amended Rule prohibits certain “bad actors” from acting as promoters, subject to exceptions where other disqualification provisions apply. 
  • Third-Party Ratings 

The Amended Rule prohibits the use of third-party ratings in an advertisement unless the adviser provides disclosures and satisfies certain criteria pertaining to the preparation of the rating.

  • Performance Information Generally

The Amended Rule prohibits including any of the following in any advertisement:

  • Gross performance, unless the advertisement also presents net performance;
  • Any performance results, unless they are provided for specific time periods in most circumstances;
  • Any statement that the Commission has approved or reviewed any calculation or presentation of performance results;
  • Performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;
  • Performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
  • Hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance; and
  • Predecessor performance, unless there is appropriate similarity with regard to the personnel and accounts at the predecessor adviser and the personnel and accounts at the advertising adviser. In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement. 

Amendments to the Books and Records Rule and Form ADV

The SEC also amended the Books and Records Rule to reflect the new Marketing Rule.  Changes include:

  • Maintenance of each advertisement disseminated; number of recipients irrelevant;
  • Retention of all written approvals of advertisement;
  • Broadcast/recording of certain communications;
  • Hypothetical performance calculations, risks/limitations.

Additionally, the SEC amended Form ADV to require advisers to provide additional information regarding their marketing practices to help facilitate its inspection and enforcement capabilities.

Compliance With New Rule Under a Transition Period

The Final Rule will take effect 60 days after publication in the Federal Register. However, RIAs will have additional time to comply with the changes. To give advisers a transition period to comply with the amendments, the compliance date will be 18 months after the effective date. Given the extent and significance of the changes, we encourage RIAs to work with knowledgeable counsel to make sure you and your staff understand how required changes will impact your operations, as well as how to update your policies and procedures to comply with the new Marketing Rule by implementing a comprehensive compliance program. 


  • New Marketing Rules are not prescriptive.  The burden placed on RIA management/members/principals to maintain a compliance program is principles-based.  Adviser must not mislead investors.
  • New Marketing Rules compliance implicates amending ADV disclosures for 2022:  Item 5 of Part 1A adding Section L, “Advertising Activities”.
  • RIAs regardless of size will face a daunting task of “modernizing” their compliance programs to meet the new Rules’ requests.
  • SEC has eliminated its previous complex history of No-Action Letters and interpretive guidance on specific advertising situations.
  • Marketing Rules recognize distinction between retail and sophisticated investors and types and amount of information expected by each category. 
  • RIAs should monitor developments issued by the SEC during 2021 based on Chairman’s Gensler’s past enforcement record!!!

If you have questions, please contact us

We will monitor developments involving these Rules and provide future updates or alerts.  These materials are provided for guidance purposes only and are not intended to be substitutes for specific legal advice. If you have any questions or if you would like to discuss these issues further,
please contact Paul A. Lieberman or the Scarinci Hollenbeck attorney with whom you work, at (201) 896-4100.

[1] See Rule 206(4)-7 and Proposing Release at 7, which would replace current rules with principles-based provisions.

[2] The “Discussion” section describes the six decades of changes in the industry and technology, the later of which has improved the quality and quantity of information available to investors and advisers.

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About Author Paul A. Lieberman

Paul A. Lieberman

Paul A. Lieberman has a distinguished legal practice devoted to client-centric representation in the financial services industry, including broker-dealers, investments advisers, public and private investment companies, insurance companies, registered representatives, financial advisers, agents and associated staff.

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