The Securities and Exchange Commission (SEC) has voted to amend rules regarding the way investment advisers are permitted to advertise and how they pay their solicitors.
This is because the regulations have not been amended since 1961 and 1979, respectively, and the industry has faced many changes since.
“The advertising and solicitation rules provide important protections when advisers seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago,” said SEC chairman Jay Clayton.
“The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices.”
Advertising
The updated definition of advertising will include any form of communication, by any means, and by or on behalf of a financial adviser.
The only exceptions are live and not broadcast communications, responses to unsolicited requests, adverts within the SEC regulatory scope, and information required to be in a statutory or regulatory notice, filing or other.
The amendments would allow testimonials and endorsements, but they must include whether the person they are coming from is a client, and if they have been compensated by or on behalf of the adviser.
A similar change was proposed for third-party ratings, as long as it complies with regulatory criteria.
Prohibited from adverts
The SEC has also banned a series of advertisement practices, such as:
- Making untrue statements, or omission of material facts;
- Unsubstantiated claims;
- Making untrue of misleading implications about a “material fact” related to an adviser;
- Disclosing or implying potential benefits without clear discussion of risks and limitations;
- Referring to specific advice provided and not presented in a fair and balanced manner;
- Including or excluding performance results, or presenting them in an unfair and unbalanced manner; and,
- Being materially misleading.
When it comes to general performance information, the US watchdog is also looking to prohibit:
- The presentation of only gross performance unless alongside a schedule of fees and expenses to calculate the net performance;
- Stating that the calculation or presentation of performance has been approved by the SEC;
- Providing performance results from fewer than all portfolios;
- Performance results of a subset of investments within a portfolio, unless it provides “promptly” the performance results of all investments in the same portfolio; and,
- Hypothetical performance, if it is not relevant to the client’s financial situation and investment objectives.
Solicitation rule
In addition to advertisements, the regulator intends to refine the relationship between financial advisers and solicitors.
Under the proposed rules, an adviser has to enter into a written agreement with a solicitor, applicable to all forms of compensation from cash to awards, prizes, discounted and free services.
The written agreement would have to include a description of the activities and its related compensation, a requirement bounding the solicitor to perform its activities according to the Adviser Act and a clause which will see the solicitor disclosure delivered to all investors.
The disclosure would need to highlight the “solicitor’s financial interest in the client’s choice of an investment adviser”, the SEC said.
The responsibility to check that the solicitor has complied with the written agreement would be on the adviser.
The amendments will now be subject to a public comment period of 60 days starting from their publication in the Federal Register.
