I had my coffee ready and headphones on to listen to Tuesday morning’s Securities and Exchange Commission open meeting for Item 3: “Investment Adviser Advertisements; Compensation for Solicitations.” After cancelling a appointment to watch it, I discovered that Item 3 had been taken off the meeting agenda. The SEC voted on Monday to propose amendments to modernize the rules under the Investment Advisers Act addressing investment adviser advertisements and payments to solicitors.
The proposed rule would replace Rule 206(4)-1, first adopted in 1961. It will be a dramatically different approach to advertising restrictions.
Specifically, we are proposing a restructured and more tailored rule that: (i) modifies the definition of “advertisement” to be more “evergreen” in light of ever-changing technology; (ii) replaces the current four per se prohibitions with a set of principles that are reasonably designed to prevent fraudulent or misleading conduct and practices; (iii) provides certain additional restrictions and conditions on testimonials, endorsements, and third-party ratings; and (iv) includes tailored requirements for the presentation of performance results, based on an advertisement’s intended audience. The proposed rule also would require internal review and approval of most advertisements and require each adviser to report additional information regarding its advertising practices in its Form ADV.
In addition to modifying the advertising rule, the SEC is including a revision to the cash solicitation rule, Rule 206(4)-3. The premise of that rule was to male sure clients were aware that paid solicitors have a conflict of interest.
We are proposing to expand the rule to apply to the solicitation of current and prospective investors in any private fund, rather than only to “clients” (including prospective clients) of the investment adviser. Our proposal would require solicitor disclosure to investors, which alerts investors to the effect of this compensation on the solicitor’s incentive in making the referral. In addition, we are proposing changes to eliminate: (i) the requirement that solicitors provide the client with the adviser’s Form ADV brochure; and (ii) the explicit reminders of advisers’ requirements under the Act’s special rule for solicitation of government entity clients and their fiduciary and other legal obligations. Our proposal would also eliminate the requirement that an adviser obtain a signed and dated acknowledgment from the client that the client has received the solicitor’s disclosure, and instead would afford advisers the flexibility in developing their own policies and procedures to ascertain whether the solicitor has complied with the rule’s required written agreement.
There is a lot to digest in the 500 pages of the release. Since it appears the Commissioners all agreed to proposed rules, this is likely to be very close to final rule.
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