Advisors, industry officials and compliance pros are hailing the Securities and Exchange Commission's plan to modernize its outdated 50-year-old Advertising Rule as a game changer for the industry, with some arguing that the proposed changes are poised to put the advisory profession on equal footing with others.
"This is BIG news!" Lisa Kirchenbauer, president of Omega Wealth Management in Arlington, Virginia, exclaimed in a mid-November email message. "I have never understood why people like realtors, also dealing with money and client trust, could have testimonials but we couldn't. There has been a weird double standard for many years."
The SEC's proposed updates would let advisors use testimonials, endorsements and third-party ratings to solicit clients, subject to certain conditions. The reforms also include tailored requirements for the presentation of performance results, based on an ad's intended audience.
"Whew, it's about time!" stated advisor and Nerds Eye View blogger Michael Kitces, in a mid-November email to me. "I understand the fundamental purpose of the anti-testimonial rule as originally written — to prevent advisors from inappropriately touting returns and cherry-picking the happiest clients. But in practice, financial advisors do so much more than 'just' manage portfolios for an investment return, including the full gamut of financial planning advice."
Kitces said he's "glad to see the SEC has recognized that there can be a more reasonable balance between still controlling the terms by which investment performance can be shared, while also allowing consumers to share their experiences with their advisor (and for the advisor to share those experiences with others)."
In releasing the plan in early November, which is out for a 60-day comment period, SEC Chairman Jay Clayton said "the advertising and solicitation rules provide important protections when advisors seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago."
The changes, Clayton added, "are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices." The changes aim to replace the current rule's "broadly drawn limitations with principles-based provisions," the agency said.
With the industry still digesting the 507-page plan, Gail Bernstein, general counsel for the Investment Adviser Association, said that "based on an initial take, the proposal appears to address several of the specific themes we'd raised with Commission staff."
Most notably, Bernstein added, "it appears to take a principles-based, evergreen, approach to the rule in contrast to the per se prohibitions that currently exist. It also appears to distinguish between retail and institutional investors, and would no longer prohibit the use of testimonials. These would all be extremely welcome changes."
The plan "is a significant step in the right direction," said Karen Barr, IAA's president and CEO, adding the rule hasn't been substantively amended since 1961 — "long before social media, long before the internet, even before fax machines."
IAA, she continued, has been "urging the SEC to update the rule for nearly 20 years." Because of the "badly outdated rule, investment advisors are generally prevented from using communications and marketing methods that long ago became standard business practice elsewhere in the economy."
The IAA has been pushing the Commission "to take a principles-based approach to modernizing the rule that is flexible enough to adapt as technology and business practices continue to evolve."
Definition of 'Advertising' Altered
The securities regulator's plan would define "advertisement" to include communications "disseminated by any means," which would replace the current rule's requirement that an ad be a "written" communication or a notice or other announcement "by radio or television."
Todd Cipperman of Cipperman Compliance Services noted in a recent alert that the SEC draft "would dramatically" alter current advisor marketing practices. The proposed Rule 206(4)-1 changes the definition of "advertising," Cipperman said, as well as "applies different standards to retail-directed advertisements" and requires "a responsible employee to review and approve all materials."
(Listen to Cipperman as he breaks down the SEC's new Advertising Rule proposal in the latest Human Capital podcast.)
The agency explained that the proposed revision "would change the scope of the rule to encompass all promotional communications regardless of how they are disseminated," with certain exceptions.
