Registered investment advisors are ringing in the New Year with a new rule by the Securities and Exchange Commission that will allow them to market themselves in the 21st Century.
At press time in early January, advisors still were deciphering the SEC's 400 plus-page rule — which allows advisors to use testimonials and endorsements — but largely viewed the rule as positive.
The new Investment Adviser Marketing rule creates a single rule that replaces the current Advertising and Cash Solicitation Rules. The advertising rule was adopted in 1961 and the solicitation rule in 1979.
"On balance, the new rule as adopted is a huge improvement over the current framework as well as what was proposed in 2019 — both from a compliance standpoint but also from a business marketing point of view," said Sanjay Lamba, associate general counsel at the Investment Adviser Association, during an early January webcast. The new rule moves away "from the patchwork regulation of no-action letters" and creates a rule that is "evergreen and can adapt and change with the times."
One immediate question among advisors: will the incoming Biden administration let the rule stand?
Valerie Mirko, a partner at Baker McKenzie in Washington, said during an early January webcast that she doesn't expect a Biden SEC to have an impact on the ad rule. "It is unusual that this rule and others were finalized after the election — 2020 was unprecedented as well," Mirko said. "The SEC is also an independent commission. This rule was the subject of a unanimous vote" when it passed in late December.
Former SEC Chairman Jay Clayton said in a late December statement that the "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, Clayton said, "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."
James Lundy, partner at Faegre Drinker in Chicago, called the revamped ad rule "positive." The old rule "was archaic and proscriptive, and no longer really appropriate for the way firms do business and communicate in the 21st century."
Added Lundy: "We'll all need to wait and see how [SEC] examines for compliance with and enforcement investigates potential violations of the new rule, but overall this is positive for the industry."
In a note to IAA's members Karen Barr, president and CEO, said that "over the years, the SEC added hundreds of pages of piecemeal guidance to the rule — making its requirements a nightmare for compliance-minded advisers to sift through, sort out, and interpret."
The SEC has achieved a "Herculean task," Barr said by "collecting all of that guidance, accounting for all of the information technology, social media, and marketing practice advancements over more than half a century, and fusing them into a modern, principles-based, evergreen, workable framework."
Advisors, Barr said, "will be able to better engage on social media, share their clients' experiences with prospects, and use specific examples to illustrate their investment process. The new, 400-plus-page rule provides advisers with plenty of new opportunities, as well as new requirements, some of which may be challenging or require more clarity."
The SEC also is expanding the books and records rule to reflect the final marketing rule. Investment advisors "must make and keep records of all advertisements they disseminate," IAA explained. "If an adviser's disclosures with respect to a testimonial or endorsement are not included in the advertisement, then the adviser must retain copies of such disclosures provided to investors."
Registered investment advisors will have 18 months after the effective date (60 days after publication in the Federal Register) to comply with the amendments. Advisors, Barr said, "have much to learn and put into practice during the rule's 18-month implementation period."
However, in early January, the rule had yet to show up in the federal register.
