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New SEC Proposed Amendments Respond to Tech Changes and Advancements

On November 4, 2019, the U.S. Securities and Exchange Commission (SEC) proposed amendments to update rules regarding investment adviser advertisements and payment agreements with solicitors. Rules 206(4)-1 and 206(4)-3 of the Investment Advisers Act of 1940 have gone largely unchanged since being adopted in 1961 and 1979, respectively.

Proposed Amendments to the Advertising Rule

The proposed amendments to Rule 206(4)-1 redefine what an advertisement is and what it can contain. Most notably, an advertisement is updated from the previous definition of a written communication dispersed in any publication or by radio or television to “any communication, disseminated by any means.”

The proposed rule includes a general prohibition on false or misleading statements and requires all claims made within advertisements be substantiated and given in proper context. Benefits of services must always be presented alongside discussion of any risks and limitations. All investment advice and performance information must be presented in a fair and balanced manner. To provide greater accountability, the proposed rule also requires that all advertisements be reviewed by a designated employee before dissemination.

To reflect the current and growing use of social media and third-party platforms to gain clients, the proposed rule indicates that advertisements include communications made “by or on behalf of advisers.” This addition is meant to address any advertising statements or content produced by a third-party or intermediary on behalf of an adviser. The rule also proposes a change from the current rule to allow testimonials, endorsements, and third-party ratings in advertisements. All of these forms of testimony and ratings would be subject to disclosures including whether or not the reviewer was a client and whether they were compensated for their review.

Performance advertising cannot be provided without proper background, including a comparison of gross and net performance for general audiences. Cherry-picking positive results from a portfolio or substantially similar portfolios would not be allowed unless all results are included or promptly produced upon inquiry. Hypothetical performance could not be provided without ensuring the advice is relevant to the financial objectives and situation of the recipient. An advertiser could not make any claims that the performance results were reviewed or approved by the SEC.

The SEC explicitly excluded four categories from the proposed definition: live oral communications that are not broadcast; responses to unsolicited requests for information about the advisers or their services; communications regarding registered investment companies or business development companies that fall under other SEC rules; and information required by statute.

Proposed Amendments to the Solicitation Rule

The proposed amendments to Rule 206(4)-3 retain the definition of “solicitor” but expand it to include not just a person who solicits clients for investment advisers but also a person who solicits investors in private funds. The proposed rule expands the applicability of the disclosure requirements from just cash-compensation agreements with solicitors to all forms of compensation.

As in the current rule, solicitors and advisers would be required to make a written agreement detailing all material information about their relationship and requiring the solicitor act in accordance with the Advisers Act. To provide greater oversight, an adviser must now have a reasonable basis to believe that a solicitor has actually complied with the arrangement. The proposed rule also adopts a reasonable care standard for judging whether an adviser should have known that a solicitor was ineligible because of misconduct or another disqualifying event. The list of disqualifying events would also be expanded.

Disclosure of the relationship, and whether it would raise the fees of the client, would still be required at the time of solicitation. But the disclosure could now be communicated in any electronic or recorded format and delivered by either party. The disclosure must include the name of the adviser, the name of the solicitor, a description of the adviser’s relationship with the solicitor, the terms of any compensation, and any potential material conflicts of interest resulting from the arrangement. The proposed rule no longer requires an adviser to obtain confirmation from the client that the disclosure was received.

The proposed rule includes benefits to solicitors including removing the requirement that they follow the adviser’s instructions in performing their duties. Additionally, solicitors receiving only de minimis compensation ($100 or less for all work done in the preceding 12 months) are exempt from the proposed rule as are certain nonprofit solicitation programs. Partial exemptions for solicitors who refer investors for impersonal advice and in-house solicitors would also apply, although both exemptions would still require some form of written agreement between the parties and in-house solicitors would still need to be disclosed to clients.

The SEC will accept comments on the proposed rule until 60 days after publication of the proposed rule in the Federal Register. 

© 2020 Schiff Hardin LLP


About this Author

Mauricio S. Beugelmans Partner San Francisco New York,Litigation and Dispute Resolution, Financial Markets and Products, Digital Currency and Blockchain Technology, Financial Markets Enforcement and Litigation

With deep experience as in-house counsel and in private practice on the east and west coasts, Mauricio represents financial institutions in securities and commercial litigation and arbitration, employment, and regulatory proceedings. Mauricio also provides compliance and regulatory counsel to numerous broker-dealers, investment advisers, and hedge funds.

For nearly 10 years, Mauricio founded and managed his own bi-coastal law firm that served financial institutions, including international and boutique brokerage firms, investment banks, private equity firms, investment advisers and...

Anne E. Mose Associate Chicago Schiff Hardin Finance, Intellectual Property, Corporate, and Real Estate Practice Groups

Annie has worked on matters spanning the Finance, Intellectual Property, Corporate, and Real Estate Practice Groups. She has experience in financing transactions, drafting memorandums, and copyright and trademark enforcement and management.

Before joining Schiff Hardin, Annie interned at the Office of the Vice President & General Counsel of Indiana University where she assisted on matters within the areas of labor and employment, Title IX, litigation and dispute resolution, IP transactions, and university regulations.