Updated Advertising and Cash Solicitation Rules Proposed for Investment Advisers (Part 1 of 3)

The Securities and Exchange Commission (“SEC”) has announced that it is releasing proposed amendments to the advertising and cash solicitation rules impacting investment advisers.  The proposed amendments are to the rules that prohibit certain investment adviser advertisements and payments to solicitors, respectively, under the Investment Advisers Act of 1940 (the “Act”).

Neither rule has been amended significantly since their adoption in 1961 and 1979, respectively. Since that time, those industry practices have obviously evolved significantly, including both advancements in technology and the changes within the portfolio management industry and its investor base.

The proposed amendments are intended to update these rules to address these changes in technology, investor expectations regarding advisory services and the evolution of industry practices.

Proposed Amendments to the Advertising Rule

The proposed amendments to the advertising rule would replace the  broadly drawn limitations inherent in the current rule, with principles-based provisions.  The proposed approach would also permit the use of testimonials, endorsements, and third-party ratings, and while the proposed rules would be subject to certain conditions, they would include tailored requirements for the presentation of performance results based on an advertisement’s intended audience.

Proposed Amendments to Solicitation Rule

The proposed amendments to the current cash solicitation rule would expand the current rule to cover solicitation arrangements involving all forms of compensation, rather than only cash, and would include a new de minimis threshold.  The SEC also proposes to update who is disqualified from acting as a solicitor under the rule.  With that said, the proposed amendments to the rule would largely make refinements in scope, written agreement content and disclosure requirements.

Proposed Amendments to the Books and Records Rule and to Form ADV

The SEC has also proposed amendments to (i) Advisers Act Rule 204-2, to address the proposed amendments to the Advertising Rule and Solicitation Rule; and (ii), to Form ADV, to provide additional information regarding advisers’ advertising practices to help facilitate practices to help facilitate the SEC’s inspection and enforcement capabilities.

Comment Period

The SEC encourages investors and investment advisers to provide comments on the proposed changes  once the proposed amendments are published in the Federal Register.  The public comment period will remain open for 60 days after publication in  the Federal Register.

To make Comments, you can (1) utilize the SEC’s Internet comment form (http://www.sec.gov/rules/proposed.shtml); or (2) send an email to rule-comments@sec.gov (and include File Number S7-21-19 on the subject line).

Additional Information Forthcoming

We will follow-up on this notice with a discussion of the specific proposed revisions to both the advertising and the solicitation rule.   Hopefully, this will provide you with information that will allow you to start analyzing the impact of the proposed rules on your advisory activities.  In the interim, should you have any questions regarding this matter, please feel free to contact us.