SEC Commissioner Lee Sees Trouble Spots in Ad Rule Plan

SEC Commissioner Allison Herren Lee. (Photo: Herb Pirone/IAA)

The Securities and Exchange Commission's plan to update its Advertising Rule "may rely too heavily on high-level principles," which can exacerbate the current re-energized debate over regulation by enforcement and create challenges for compliance officers, SEC Commissioner Allison Herren Lee said Thursday.

Speaking at the Investment Adviser Association's annual compliance conference in Washington, Lee stated that while she supports the agency's "first real update" to its advertising rule since 1961, "one area that merits significant thought and debate is the emphasis on a principles-based approach in certain areas."

While a principles-based approach "creates flexibility," Lee said, "that can come at the cost of certainty around compliance."

Noting her prior experience as an in-house counsel, Lee said she can relate to "how difficult it can be to translate sometimes broad legal principles into answers — straightforward answers — to everyday questions from the business side. For the most part, they need yes-or-no answers."

A "risk-averse compliance professional may default to a conservative approach that unduly restricts the substance of an advertisement" under the SEC's current plan. "If rules are too broad or vague they end up circumscribing conduct that we never intended to capture."

An example of this, she explained, is the proposal's approach "to whether a presentation of performance or specific investment advice is fair and balanced. I think we can all agree that either type of presentation should be fair and balanced, but is that guideline alone enough for you to apply that standard on a daily basis?"

Another example: "the prohibition of testimonials that are reasonably likely to cause an untrue or misleading inference to be drawn," Lee stated.

Again, "does this provide sufficient guidance to comport compliance? I know there are concerns expressed by many about what is often referred to as 'regulation by enforcement.' If the rules are too vague, though, how can we ensure compliance without raising these sorts of concerns? And if it's not enforceable, responsible advisors … may find themselves competing against advisors who use performance information that is not fair and balanced."

SEC investment management director Dalia Blass. (Photo: Herb Pirone/IAA)

A Difficult Rulemaking

Dalia Blass, director of the SEC's Division of Investment Management, stated at the IAA event that while the agency is still digesting the comments that have come in, the definition of advertising — the scope — and "the compliance review aspect of the proposal," as well as "where those two areas can present potential problems," stand out.

The comment period on the ad rule proposal expired on Feb. 10.

Blass explained that the proposal affects "a diverse community" of investment advisors and their advertising and solicitation duties. "When you look at the community that it [the ad rule] covers, it's an incredibly diverse community of advisors" with retail and institutional investors as clients as well as private funds and robo-advisors.

Putting the advertising rule changes together "was not an easy task," Blass said. "It was one of the harder proposals for us to bring together," considering the rule predated the internet as well as other market and technology developments.

SEC staffers, Blass said, are already "working hard" at moving toward a recommendation based on the feedback.

— Check out SEC Ad Rule Revamp Is a Game Changer on ThinkAdvisor.