Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comAuthor: Scarinci Hollenbeck, LLC|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:
The Marketing Rule expressly prohibits the following advertising practices:
The amended definition of “advertisement” contains two prongs:
The Marketing Rule prohibits the use of testimonials and endorsements in an advertisement unless the adviser satisfies certain disclosure, oversight, and disqualification provisions:
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.
The Amended Rule prohibits including any of the following in any advertisement:
The SEC also amended the Books and Records Rule to reflect the new Marketing Rule. Changes include:
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.
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.
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.
The Firm
201-896-4100 info@sh-law.comThe 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:
The Marketing Rule expressly prohibits the following advertising practices:
The amended definition of “advertisement” contains two prongs:
The Marketing Rule prohibits the use of testimonials and endorsements in an advertisement unless the adviser satisfies certain disclosure, oversight, and disqualification provisions:
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.
The Amended Rule prohibits including any of the following in any advertisement:
The SEC also amended the Books and Records Rule to reflect the new Marketing Rule. Changes include:
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.
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.
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.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.