SEC Proposes to Modernize Advertising and Solicitation Rules for Investment Advisers

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On November 4, 2019, the Securities and Exchange Commission (“SEC”) issued a proposal1 to modernize the rules under the Investment Advisers Act of 1940 (“Advisers Act”)2 addressing SEC-registered investment adviser advertisements (“Advertising Rule”)3 and payments to solicitors (“Cash Solicitation Rule”).4 The proposal seeks to update the existing advertising framework governing investment advisers to reflect advances in technology and ways of communication, as well as changes in industry practices related to investment advisory services. Short of a comprehensive overhaul, the SEC’s proposal constitutes a welcomed attempt to address existing challenges, gray areas, and novel issues faced by investment advisers and not otherwise easily addressed under the current regulatory framework.

Notably, the proposal would provide more flexibility in advertising by replacing the Advertising Rule’s current per se prohibitions with more “principle-based” provisions and allowing the use of testimonials, endorsements, and third-party ratings, subject to certain conditions. The proposal would also introduce tailored requirements for the presentation of performance results based on an advertisement’s intended audience, distinguishing between retail investors and non-retail investors. Additionally, the SEC is seeking to expand the scope of the Cash Solicitation Rule to cover all forms of compensation for client referrals, including non-cash compensation (such as awards, prizes and discounted services), subject to a new de minimis threshold as well as expanding the scope of the types of activities covered by the rule. Lastly, the proposal includes corresponding amendments to the Advisers Act’s recordkeeping requirements (“Books and Records Rule”),5 as well as to Form ADV to provide the SEC with additional information regarding advisers’ advertising practices. Interested parties may submit comments to the SEC within 60 days following publication of the proposal in the Federal Register.



Section 206 of the Advisers Act prohibits misstatements or misleading omissions of material facts and other fraudulent acts and practices in connection with the conduct of an investment advisory business. As fiduciaries, investment advisers owe investors undivided loyalty, and may not engage in certain activities that may conflict with a client’s interest without such client’s consent. In addition to the general anti-fraud provisions in Section 206, the Advertising Rule and the Cash Solicitation Rule, adopted by the SEC in 1961 and 1979, respectively, further restrict registered investment advisers’ advertising practices in an effort to further protect investors from misleading advertisements and conflicts of interest related to the offering of investment products and services.

Advertising Rule. Under the Advertising Rule, registered investment advisers are prohibited from making any fraudulent, deceptive, or manipulative “advertisement” to existing and prospective investors. “Advertisement” broadly includes any written communication addressed to more than one person, or any publication or a radio or television announcement, which offers any investment advisory service with regard to securities. The current Advertising Rule sets forth four specific per se prohibitions relating to the use and content of “advertisements” by investment advisers. Specifically, the Advertising Rule prohibits publishing, circulating, or distributing any advertisement that:

  1. Refers to any testimonial concerning the investment adviser or any advice, analysis, report, or other service rendered by such investment adviser;
  2. Refers to past specific recommendations of the investment adviser that were or would have been profitable unless the investment adviser complies with certain conditions;
  3. Represents that any graph, chart, formula or other device offered can in and of itself be used to make trading decisions without prominently disclosing in the advertisement any limitations or difficulties in its use; or
  4. Contains any statement to the effect that any report, analysis, or service is free unless it really is free.

The Advertising Rule also includes a “catch-all” prohibition, which restricts an investment adviser from publishing, circulating, or distributing any advertisement that “contains any untrue statement of a material fact” or that is “otherwise false or misleading.”

Cash Solicitation Rule. The Cash Solicitation Rule generally prohibits registered investment advisers from paying a cash fee for solicitation activities, directly or indirectly, to third parties (i.e., “solicitors” or “finders”) who solicit clients on the adviser’s behalf unless the arrangement complies with certain mandated disclosures and requirements. Notably, the Cash Solicitation Rule requires that any referral fee be paid pursuant to a written agreement between the investment adviser and the solicitor, which, among other provisions, requires the solicitor to provide the client with a current copy of the investment adviser’s Form ADV brochure and a separate written disclosure alerting the client of the solicitor’s financial interest in the referral. The Cash Solicitation Rule also imposes certain other obligations on cash compensation arrangements, such as requiring an investment adviser to receive a signed and dated client acknowledgment of receipt of the required disclosures and prohibiting cash payments to solicitors who are subject to certain disciplinary actions.

The Advertising Rule and the Cash Solicitation Rule have not been substantively updated since their adoption, although the SEC has issued no-action letters and provided interpretative guidance in the interim. Meanwhile, advancements in technology and changes in marketing and solicitation practices have evolved significantly, making compliance with the rules’ restrictions challenging in light of today’s standard business practices. For instance, the common use of certain modern means of communication to attract and engage with clients and prospective clients, including through the internet and social media, may constitute per se violations under the current regulatory framework.6 The SEC’s proposal is intended in part to address these changes.


Proposed Amendments to the Advertising Rule

The first part of the SEC proposal seeks to modernize the Advertising Rule by expanding the definition of “advertisement” and replacing the rule’s current broad per se limitations with a more “principle-based” approach:

  1. Definition of “advertisement.” The proposal would update and expand the definition of “advertisement” to align with technology developments and the “changing profiles” of investment advisers. According to the SEC, “advertisement” should broadly 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 investment adviser.”

    Specifically carved out from this definition are (1) live oral communications that are not broadcast on radio, television, the internet or other similar medium; (2) responses by an investment adviser to certain unsolicited requests for specified information; (3) advertisements and other sales material or literature that are about a registered investment company or a business development company subject to other SEC rules; and (4) any information required to be contained in a statutory or regulatory notice, filing, or other communication.

  1. General prohibitions on certain advertising practices. The proposal would redefine the scope of prohibited advertising and marketing practices by codifying existing SEC guidance. Notably, the SEC would not need to demonstrate that an investment adviser acted with intent in order to establish a violation of the proposed rule. The revised general prohibitions would include: 
    • 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;
    • Making a material claim or statement that is unsubstantiated;
    • 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;
    • Discussing or implying any potential benefits of an adviser’s service without clear and prominent discussion of associated material risks or other limitations associated with the benefits;
    • Referring to specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
    • Including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced (the “anti-cherry picking provisions”); and
    • Being otherwise materially misleading as contemplated in the current rule.
  1. Restrictions and conditions on certain advertising practices. Subject to certain conditions, the proposal would permit investment advisers to use testimonials, endorsements, and third-party ratings, which are either prohibited or not addressed under the current Advertising Rule. Such advertising practices would require investment advisers to comply with specified disclosures in order to reduce risks of misleading retail investors.

    The use of performance information in advertisements remains, however, subject to various restrictions. Notably, the proposal would generally prohibit:

    • Including gross performance results, unless the advertisement provides (or offers to promptly provide) a schedule of fees and expenses deducted to calculate net performance;
    • Including any statement that the calculation or presentation of performance results has been approved or reviewed by the SEC;
    • Presenting performance results from some but not all portfolios with substantially similar investment policies, objectives and strategies as those being offered or promoted in the advertisement;
    • Presenting performance results of a subset of investments extracted from a portfolio, unless it provides (or offers to promptly provide) the performance results of all investments in that portfolio; and
    • Presenting hypothetical performance, unless the investment adviser adopts and implements policies and procedures designed to reasonably ensure the performance is relevant to the financial situation and investment objectives of the recipient, among other specified information.

Performance information targeting retail investors would be subject to additional restrictions. When addressing a retail audience, the SEC would specifically require investment advisers (1) to present net performance alongside any presentation of gross performance, as well as (2) to generally show performance over specified time periods. 

  1. Internal review and approval. The proposal would also require investment advisers to designate an  employee to review and approve, in writing, all advertisements prior to dissemination, except for advertisements that are (1) communications directed to a single investor or household; or (2) live oral communications broadcast on radio, television, the internet, or any other similar medium.
  2. Amended Form ADV. Finally, the SEC intends to amend Form ADV to enhance publicly available information about investment advisers’ advertising practices.


Proposed Amendments to the Cash Solicitation Rule

The second part of the SEC proposal focuses on amending the rules surrounding compensation arrangements between registered investment advisers and solicitors. Notably, the proposal would expand the types of activities and compensation subject to the Cash Solicitation Rule and revise certain compliance requirements under the Advisers Act:

  1. Forms of compensation. The SEC proposes to expand the scope of the Cash Solicitation Rule to cover all forms of compensation paid to a solicitor, including cash and non-cash compensation (including directed brokerage, awards, prizes, and free or discounted services). The proposal would significantly extend the rule’s coverage, which currently only applies to cash arrangements while aintaining the rule’s existing partial exemptions for (1) solicitors that refer investors for impersonal investment advice, and (2) solicitors that are employees or affiliated with the investment adviser. The SEC also proposes to introduce two new full exemptions for (1) solicitors receiving compensation below a de minimis compensation threshold,7 and (2) investment advisers that participate in certain nonprofit referral programs.
  2. Written agreement. The proposal would eliminate the rule’s current requirement that a solicitor deliver the investment adviser’s Form ADV brochure to investors and conduct solicitation activities in a manner consistent with the investment adviser’s instructions.
  3. Disclosure requirements. The proposal would revise the existing requirement that a solicitor separately disclose to investors certain specified information at time of solicitation. The SEC is seeking comments on whether to expand such disclosure to include additional information regarding any potential material conflict of interest on the part of the solicitor stemming from the investment adviser’s relationship with the solicitor and/or direct or indirect compensation received for referrals. While the SEC intends for that disclosure to remain separate, written delivery would no longer be required to accommodate current market practices, subject to recordkeeping requirements. Further, the proposal would eliminate investment advisers’ obligation to obtain from each investor a written acknowledgment of receipt of the disclosure.
  4. Restrictions on the use of certain solicitors. The proposal would also expand the list of disciplinary events for which a person would be disqualified from acting as a solicitor and receiving, directly or indirectly, compensation from an investment adviser, subject to a limited exception.

We note that this does not affect any state laws related to the registration or conduct of investment advisers or representatives engaged in solicitor activities, and advisers and representatives will need to continue to comply with applicable state requirements.


Other Changes

Finally, the proposal contains corresponding amendments to the Books and Records Rule to conform existing recordkeeping requirements with the SEC’s proposed revisions to the Advertising Rule and the Cash Solicitation Rule. The SEC further indicated it is currently reviewing previously issued no-action letters and guidance to determine whether any such interpretations should be withdrawn as a result of this proposal.


Considerations for Investment Advisers

The SEC’s proposal constitutes a much-needed revamp of the current regulatory framework governing the marketing and advertising of investment advisory services. Notably, the proposed rules would provide more clarity and flexibility for registered investment advisers’ use of online communications to engage with existing and prospective investors, such as by posting testimonials, endorsements, and third-party ratings on social media. The SEC’s proposal to distinguish between retail and institutional investors would permit greater latitude in the use of certain performance information in advertisements targeting an institutional audience. In addition, proposed revisions to the definition of “advertisement” would increase flexibility in the implementation of the Advertising Rule going forward by capturing modern methods of communications and anticipating future changes in technology.

Short of a comprehensive overhaul, the SEC’s proposal constitutes a welcomed attempt to address existing challenges, gray areas, and novel issues faced by investment advisers and not otherwise contemplated under the current regulatory framework. Registered investment advisers may now benefit from updated advertising guidelines more accurately in line with common ways of communications and industry practices. Interested stakeholders should consider submitting feedback to the SEC on any aspect of the proposal.


1 SEC, Investment Adviser Advertisements; Compensation for Solicitations, RIN:3235-AM08 (Nov. 4, 2019), available at
2 15 USC. §§ 80b-1 et seq.
3 17 C.F.R. 275.206(4)-1.
4 Id. 275.206(4)-3.
5 Id. 275.206(4)-2.
6 In 2012, the SEC reminded registered investment advisers that the use of a “like” or similar feature on a social media  website may be considered a “testimonial” prohibited under the Advertising Rule. See Office of Compliance Inspections and Examinations, Investment Adviser Use of Social Media (Jan. 4, 2012), available at
7 Specifically, the Cash Solicitation Rule would not apply if the solicitor has performed solicitation activities for the investment adviser during the preceding 12 months and the investment adviser’s compensation payable to the solicitor for those solicitation activities is $100 or less (or the equivalent value in non-cash compensation).

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