SEC Releases Proposal to Revamp RIA Advertising and Solicitation Rules

On November 4th, the SEC released for public comment proposed replacements to its decades-old advertising and cash solicitation rules. The proposed rules, which are accompanied by almost 500 pages of explanatory text, are now subject to the SEC’s “notice and comment” process, whereby interested persons will have 60 days to file comments to the SEC, after which time the SEC will likely issue final versions of the new rules. While the content of the final rules ultimately adopted by the SEC may differ substantially from the versions now being circulated, the current proposals are the most likely outcome at this point in time and offer valuable insight into the SEC’s thinking in this area.

According to the SEC, both the advertising and cash solicitation rules are ripe for updates and modernization as a result of “changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.” Notably, the advertising rule (Advisers Act Rule 206(4)-1) has been largely untouched since its adoption in 1961. Likewise, the cash solicitation rule (Advisers Act Rule 206(4)-3) has not been amended since its adoption in 1979. In this installment of our blog, we will outline some of the more salient points of the SEC’s proposal to replace the advertising rule. Look for our discussion of the proposed cash solicitation rule amendment in an upcoming post.

Proposed Amendments to the Advertising Rule

As noted, the advertising rule was first adopted in 1961, long before the advent of the Internet, online shopping, social media, and mobile applications, and at a time before dramatic growth in the investment advisory industry itself. The SEC’s primary response to these developments is a shift in focus from the current largely “per se prohibitions” to a “more principles-based approach” to advertising regulation. The SEC characterizes the current framework as “per se” in the sense that it was designed to target specific advertising practices believed likely to be misleading, by setting up four strict liability prohibitions on: (i) testimonials; (ii) past specific recommendations; (iii) representations that a graph or other device can by itself be used to determine which securities to buy and sell; and (iv) statements that a service will be furnished free of charge, unless such service actually is entirely free. The new “principles-based approach,” in turn, replaces the four per se prohibitions with “a set of principles that are reasonably designed to prevent fraudulent or misleading conduct and practices.”

These guiding principles are articulated in section (a) of the proposed rule by means of a set of “general prohibitions” against advertisements that:

  1. make any untrue statements of a material fact, or omit material facts necessary to make the statement made, not misleading;
  2. make material claims or statements that are unsubstantiated;
  3. make untrue or misleading implications or cause untrue or misleading inferences to be drawn about material facts;
  4. imply potential benefits without clearly and prominently discussing any associated material risks or other limitations associated with the implied benefits;
  5. refer to specific investment advice provided by the RIA where such advice is not presented in a manner that is “fair and balanced”;
  6. include or exclude performance results or time periods in a manner that is not “fair and balanced”; and
  7. otherwise are materially misleading.

Paramount to the application of these general prohibitions is a modified definition of “advertisement” that is “more evergreen in light of ever-changing technology.” Specifically, the new definition of “advertisement” encompasses “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes” the RIA or its services or that “seeks to obtain or retain” advisory clients or investors in any pooled investment vehicle advised by the RIA. Material exclusions to this definition are as follows: (i) live oral communications not broadcasted on radio, TV or the Internet; (ii) responses by the RIA to unsolicited requests for information; (iii) marketing/sales material for mutual funds that are covered by other SEC rules; and (iv) required information in a regulatory filing/communication.

An additional aspect of the proposed rule—and one that has garnered significant attention in the press—is that it permits testimonials, endorsements, and third-party ratings subject to certain restrictions and conditions. Specifically, section (b) of the proposed rule allows testimonials and endorsements in RIA advertising so long as the advertising “clearly and prominently” discloses: (i) whether the person giving the testimonial or endorsement is or is not a client; and (ii) whether compensation has been given to that person for the testimonial/endorsement. Additionally, the use of third-party ratings in RIA advertising is permitted so long as the RIA reasonably believes that the rating was constructed and implemented in a non-biased fashion so as to not ensure any specific pre-determined results. Advertising containing third-party ratings must also have robust disclosures as to the identity of the third-party, whether that third-party was compensated by the RIA and the dates upon which the rating is based.

The proposed rule also contains significant codification relating to performance advertising, again reflecting a “principles-based approach” as opposed to mandating specifically-worded disclaimers or legends across the board. Notably, section (c) of the proposed rule prohibits RIAs from including any of the following in performance advertising:

  1. gross performance results, unless a schedule of fees and expenses deducted to calculate net performance are commensurately provided or offered to be provided;
  2. performance results of one or more related portfolios, unless it includes all related portfolios;
  3. performance results of a subset of investments extracted from a portfolio, unless the advertisement provides or offers to provide the performance of all investments in the portfolio from which the performance was extracted; and
  4. hypothetical performance, unless the performance is relevant to the financial situation and investment objectives of the recipient, and the RIA also provides sufficient information to enable such recipient to understand the criteria used and assumptions made in calculating the performance.

Additionally, the proposed rule provides added protections for RIA performance advertising targeted at retail investors, including requirements that:

  1. any gross performance be presented side-by-side with net performance; and
  2. all performance be shown over standardized 1, 5, and 10 year periods.

Finally, section (d) of the proposed rule sets up a new mandate that all advertising be reviewed and approved by a designated employee. Communications to a single client or investor, and live radio, TV and web broadcasts are exempted from this requirement.

As previously noted, the proposed rules are at present just that—proposals. While the SEC’s public comment period is a fixed 60 days from the release, any ultimate adoption or effectiveness date is wholly uncertain. While the release has in its early days received a good amount of support, we will watch as comments begin to come in. One potential criticism of the SEC’s preference for “principles-based” regulation is that in adopting subjective definitions of improper conduct—as opposed to black letter per se prohibitions—the ultimate arbiters will likely be the SEC enforcement staff.


Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.