RIA Compliance and Practice Management Blog

SEC Proposes Significant Changes to Advertising and Solicitation Rules

Posted by RIA in a Box

Nov 6, 2019 11:27:43 AM

SEC Registered Investment AdvisorsOn November 4, 2019, the Securities and Exchange Commission ("SEC") issued a release announcing "it has voted to propose amendments to modernize the rules under the Investment Advisers Act addressing investment adviser advertisements and payments to solicitors." Rule 206(4)-1, commonly referred to as the "Advertising Rule" has not been modified since its adoption in 1961 and Rule 206(4)-3, commonly referred to as the "Cash Solicitation Rule" has not been modified since its adoption in 1979. In recent years, the SEC Office of Compliance Inspections and Examinations ("OCIE") has issued registered investment adviser ("RIA") regulatory risk alerts related to the Advertising Rule and Cash Solicitation Rule. Despite this more recent guidance, the SEC notes that much has changed since the rules were initially adopted. As such, "the proposed amendments are intended to update these rules to reflect changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices."

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In this post, we take a closer look at the SEC's proposed rule changes regarding the Advertising Rule, Cash Solicitation Rule, and related proposed amendments to the Form ADV and Rule 204-2, commonly referred to as the "Books and Record Rule." The combined proposed rule changes encompass over 500 pages and are subject to a 60 day public comment period. Some key highlights of the proposed rule changes include:

Advertising Rule

Definition of Advertisement

The definition of an advertisement would be updated to include "any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advised by the adviser." However, there would a number of exclusions including live oral communications that are not broadcast.

General Prohibitions

The rule proposal would generally prohibit the following types of advertising:

  1. making an untrue statement of a material fact, or omission of a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading; 
  2. making a material claim or statement that is unsubstantiated; 
  3. making an untrue or misleading implication about, or being reasonably likely to cause an untrue or misleading inference to be drawn concerning, a material fact relating to the investment adviser; 
  4. discussing or implying any potential benefits without clear and prominent discussion of associated material risks or other limitations; 
  5. referring to specific investment advice provided by the adviser that is not presented in a fair and balanced manner; 
  6. including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and 
  7. being otherwise materially misleading.

Testimonials and Endorsements

In one of the most significant proposed changes to the rule, testimonials and endorsements, subject to specified disclosures, would be permitted.

Third-Party Ratings

Similar to testimonials and endorsements, the proposed rule would permit the use of third-party ratings, subject to specified disclosure and certain criteria.

Performance Information

The following types of performance advertising would be prohibited:

  • Gross performance results unless it provides (or offers to provide promptly) a schedule of fees and expenses deducted to calculate net performance; 
  • Any statement that the calculation or presentation of performance results has been approved or reviewed by the Commission; 
  • Performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered or promoted in the advertisement, with limited exceptions; 
  • Performance results of a subset of investments extracted from a portfolio, unless it provides or offers to provide promptly the performance results of all investments in the portfolio; and 
  • Hypothetical performance, unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the financial situation and investment objectives of the recipient and the adviser provides certain specified information underlying the hypothetical performance.

In addition, the rule proposal would add additional restrictions related to performance information marketed to retail clients and prospects.

Internal Pre-Use Review and Approval

With a few limited exceptions, RIA firms would now be required to have all advertising materials reviewed and approval in writing by a designated employee before distribution.

Solicitation Rule


As proposed, the rule would be updated to include all forms of compensation including cash or non-cash compensation paid to a solicitor. Non-cash compensation would include items such as awards, prizes, free or discounted services, and directed brokerage.

The rule would also now apply to private funds solicitors, but still retain most of the current rule's partial exemptions. However, the proposal would now include two new full exemptions for de minimis compensation to solicitors and firms that utilize certain nonprofit programs.

Furthermore, there would be a larger list of disciplinary events which would exclude a person from acting as a solicitor.

Written Agreement

Unless an exemption applies, an RIA firm would be required to enter into a written agreement with a solicitor that includes:

  1. a description of the solicitation activities and compensation,
  2. a requirement that the solicitor perform its solicitation activities in accordance with certain provisions of the Advisers Act, and
  3. a requirement that solicitor disclosure be delivered to investors.

Disclosure Requirements

The rule would now require additional disclosure about the the solicitor's conflict of interest but would no longer require the RIA firm to obtain investor acknowledgements of receipt of the disclosures. 

Oversight of Solicitors

In regards to oversight, the rule would remain generally unchanged.

New Form ADV Part 1A "Advertising Activities" Disclosure

The SEC is proposing amendments to Item 5 of Part 1A of the Form ADV. In particular, the SEC proposes, "to add a subsection L (“Advertising Activities”) to require information about an adviser’s use in its advertisements of performance results, testimonials, endorsements, third-party ratings, and its previous investment advice." In particular, RIAs would be required to disclose whether any advertisements:

  • Contain performance results and if so, whether the performance results have been verified or reviewed by a third-party [Item 5.L(1)]
  • Include testimonials, endorsements, or a third-party rating, and if so, "whether the adviser pays or otherwise provides compensation or anything of value, directly or indirectly, in connection with their use." [Item 5.L(2) and (3)]
  • Include a reference to specific investment advice provided by the firm [Item 5.L(4)]

Books and Records Rule Changes

Advertising Rule-Related

  1. The SEC is "proposing to amend the current rule (Rule 204-2) to require investment advisers to make and keep records of all advertisements they disseminate to one or more persons." Presently, the Books and Record Rule requires RIA firms to keep a record of advertisements sent to 10 or more persons.
  2. In addition, the SEC is "proposing to add a provision to the books and records rule that would explicitly require investment advisers to maintain records related to third-party questionnaires and surveys, as applicable." In particular, the updated rule "would require investment advisers that use third-party ratings in an advertisement to make and keep a record of any questionnaire or survey used to create the third-party rating."
  3. The updated Books and Records Rule would also require RIA firms to "maintain a copy of all written approvals of advertisements by designated employees." 
  4. RIA firms would also be required to "maintain communications containing any performance or rate of
    return in their advertisements."
  5. In regards to performance advertising, "we are proposing to require investment advisers to make and keep all supporting records regarding the calculation of the performance or rate of return of any or all 'portfolios,' in addition to the managed accounts and securities recommendations already addressed in the provision." Furthermore, the SEC is "proposing to amend the provision to clarify that such supporting records must include copies of all information provided or offered pursuant to the hypothetical performance provisions of the proposed advertising rule."

Solicitation Rule-Related

The SEC is proposing to modify the Books and Records rule "to make and keep records of: (i) copies of the solicitor disclosure delivered to investors pursuant to rule 206(4)-3(a)(1)(iii), and, if the adviser participates in any nonprofit program pursuant to rule 206(4)-3(b)(4), copies of all receipts of reimbursements of payments or other compensation the adviser provides relating to its inclusion in the program; (ii) any communication or other document related to the investment adviser’s determination that it has a reasonable basis for believing that (a) any solicitor it compensates under rule 206(4)-3 has complied with the written agreement required by rule 206(4)-3(a)(1), and that such solicitor is not an ineligible solicitor, and (b) any nonprofit program it participates in pursuant to rule 206(4)-3(b)(4) meets the requirements of rule 206(4)-3(b)(4); and (iii) a record of the names of all solicitors who are an adviser’s partners, officers, directors or employees or other affiliates, pursuant to rule 206(4)-3(b)(2)."

Next Steps

This rule proposal has been long anticipated by the industry and the SEC deserves credit for attempting to update these two significant RIA rules. Given the significance of these proposed changes, we advise all investment advisory firm principals to carefully review this rule proposal and considering submitting comments as outlined beginning on page 464 of the rule proposal.

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Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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