SEC changes to the advertising rule
An overview of the SEC’s advertising rules
In 1940 the SEC set forth Advertising rules for investment advisors. Now, 80 years later, they have provided an updated ruling to govern advertising for SEC-registered investment advisors. The purpose of the 1940’s advertising rule was to ensure that the public did not fall prey to unscrupulous marketing and advertising tactics by registered investment advisers. In 1979, the most recent amendment (the cash amendment) was added to the advertising rules… and there had been no further updates since the late 1970s until this new set of rules.
The new rules went into effect in May 2021 and will be enforced for all advisors after Nov. 2022. In the interim, advisors and advisory firms have the option of adhering to the old rules fully, or the new rules fully. What advisors cannot do is cherry-pick regulations. All firms must keep written records of all marketing and advertising efforts and which regulations those efforts were constrained by.
What is changing with the updated SEC advertising rules?
In question is the use of testimonials, third-party ratings, and performance statistics as part of unsolicited communication for SEC-registered advisors.
So much has changed in the world of investments, advertising, and marketing, and communications that the SEC has at long last amended the rules for investment advisor communications. The challenge is in reading legalese for advisors, marketers, advertising firms, and investment bankers who are registered with the SEC but do not have advanced law degrees.
Here, we’ll attempt to translate the legalese into plain English. Please refer to the SEC ruling here https://www.sec.gov/investment/investment-adviser-marketing for the actual rules and regulations:
A list of the activities that are prohibited under the new SEC advertising rules
The changes to the advertising rule still prohibit certain activities the following are our interpretations in order of the list of prohibited activities:
PROHIBITED
- Deliberately misleading statements
- Wild statements of fantasy
- Leading statements or suggestions that lead to a false conclusion
- Unsupported performance statistics
- Opinions stated as facts
- Old or misleading performance stats
A list of the activities that are now allowed under the SEC advertising rules (with stipulations)
The new rules from the SEC allow the following (again, these are restated in plain English to help clarify the SEC ruling):
ALLOWED
1: The use of testimonials and endorsements in an advertisement, if:
There are clearly and prominently disclosures around the person making the statement: are they a client? Were they paid to say this? Do they have any conflicts of interest? Are they staff or referral partners?
Advisers must have a written agreement with promoters, except where the promoter is an affiliate of the adviser or the promoter receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
You cannot use people who are already designated as bad actors in advertising*
2: The use of third-party ratings can be used if:
These can be used as long as they are put in context as to how they were compiled and who performs the ratings.
3: Performance information may be used if:
The data is recent and supported with documentation to ensure it is accurate. The data should be from the previous 12 months or the closest 3 quarters available in cases of delayed reporting.
The Commission must approve or review any calculation or presentation of performance results.
You can’t use performance results for one type of investment to advertise another different type of portfolio or investment.
You can’t pull out only the good stuff and say it is a performance result of a whole portfolio.
You can’t tell a story that isn’t real about how well someone did.
You can’t rely on Bob’s performance after Bob leaves the firm.
You have to have a lot of small print disclaimers.
(*this does not include poorly rendered performances in badly directed rom-coms)
Our take on the new rules
As investment bankers, we at Solis Advisory are subject to SEC rulings. We pride ourselves on telling the truth and not over-promising. Reach out to us to find out how we can help you raise capital for acquisitions or growth initiatives in 2022 (and beyond!).