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FYI: Amendments Proposed to IA Advertising and Cash Solicitation Rules

FYI: Today the SEC voted to propose amendments to the Advisers Act Advertising Rule (Rule 206(4)-1) and the Cash Solicitation Rule (Rule 206(4)-3). Both of these rules have been largely unchanged for decades and the proposals are aimed at updating the rules and incorporating no-action and other interpretive positions that IAs have been relying on for years governing these areas.

A summary Fact Sheet included the following among the many interesting proposals:

Advertising Rule

  • Jettisoning the oddly technical, outdated prohibitions in the current Advertising Rule, the proposed Rule amendments would take a principles-based approach, including a broad definition of “advertisement” that aims to be flexible enough to remain relevant and effective in the face of technological advances.
  • In short, the amended definition of “advertisement” would include any communication that offers or promotes an IA’s advisory services. It would also include communications that seek to obtain or retain clients or investors in a pooled vehicle advised by the IA, although specific exclusions would exist for advertisements about a registered investment company or business development company that are within the scope of other SEC rules.
  • Many of the other proposed Rule provisions are reflected in the many no-action letters and interpretations that have been issued over the years about IA advertising, addressing areas such as the use of gross versus net performance, presentation of hypothetical performance, including all similar portfolios in performance calculations, and so on.
  • Subject to certain conditions, the proposed provisions would permit the use of testimonials, endorsements, and third-party ratings, which are currently either prohibited in IA advertisements or strictly limited by interpretation.
  • The proposed amendments would wrap into the Rule directly a compliance requirement that advertisements be reviewed and approved in writing by a designated employee before dissemination, with certain limited exceptions.

Solicitation Rule

  • No longer limited to only “cash” compensation, the proposed amended Solicitation Rule would apply regardless of whether the compensation paid to the solicitor is “cash” or “non-cash,” which could include such items as directed brokerage, awards or other prizes, and free or discounted services.
  • The proposed rule would also apply to the solicitation of current and prospective investors in private funds, rather than only to the solicitation of current and prospective IA clients. (Of course, broker-dealer registration issues would also have to be considered by solicitors who solicit investors into private funds or in other circumstances involving a “security.”)
  • While employee/affiliate solicitors would still be covered by the Rule, the partial exemption for employee/affiliate solicitors would be retained, and employee/affiliate solicitor arrangements would no longer be subject to a written agreement requirement.
  • IAs using solicitors under the amended Rule would continue to be required to have a reasonable basis for believing the solicitor has complied with the Rule’s written agreement, including complying with the solicitor disclosure requirement. The amended Rule would eliminate the current requirement that the IA obtain a signed and dated acknowledgment from the client that the client has received the solicitor’s disclosure, which would give IAs the flexibility to develop their own solicitor oversight policies and procedures.

It will likely take some time for interested commenters to digest the 507-page Proposing Release, but the comment period will be open for 60 days following publication of the release in the Federal Register.

Fact Sheet summarizing the amendments: https://www.sec.gov/news/press-release/2019-230.

Proposing Release: https://www.sec.gov/rules/proposed/2019/ia-5407.pdf.

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