Prospective clients could soon begin browsing for RIA firms via a host of third-party ratings sites, just as they would shop for a plumber or landscaper, as advisors begin to promote their practices under the SEC’s long-awaited new advertising rules.
Outgoing commission Chairman Jay Clayton describes the update of the decades-old regulation as a long-overdue, principles-based modernization intended to allow advisors to incorporate new technologies into their advertising programs as they emerge.
But although the revamped regulation opens the door for advisors to advertise their practices on social media and clears the way for them to incorporate Yelp-like endorsements and testimonials, firms should be aware that those new marketing channels will come with significant compliance obligations, according to GJ King, president of RIA in a Box, a compliance consulting firm.
King predicts that the rule is "likely to spawn a dizzying array of new third-party advisor ratings websites," which firms will be allowed to use in their advertising, provided they make certain disclosures and meet other compliance requirements related to the preparation of the rankings. But he cautions that the SEC will likely be taking a close look at how advisors are marketing around testimonials or endorsements.
"RIA firms should be careful as there is no free lunch here, as firms that decide to utilize these new forms of advertising will have to carefully follow the rule's requirements and also be prepared for an increased likelihood of audit — and additional scrutiny during the audit — based on the firm's responses to the new [Form ADV sections],” King says.
The Investment Adviser Association hailed the SEC's new rule, praising the commission for limiting the scope of the regulation while opening the door to social media advertising.
"Today's rulemaking represents a significant improvement over the current regulatory regime," IAA CEO Karen Barr said in a statement.
Clayton, who left the commission the day after the rule was approved, praised the rule as reflecting "important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” he said in a statement. "This comprehensive framework for regulating advisors' marketing communications recognizes the increasing use of electronic media and mobile communications and will serve to improve the quality of information available to investors."
The regulation permits more exemptions from fiduciary duties, but may itself be replaced by the incoming Biden administration.
Approved, with reservations
While the vote at the commission was unanimous, the four commissioners, apart from Clayton, each issued statements offering a mix of praise and criticism of the new rule. All agreed that the old rule needed an update, though Commission Hester Peirce, a Republican,
Elad Roisman, the other Republican on the panel who this week was named acting chairman of the commission, expressed reservations about the impact on private fund investing, noting that the rule could be interpreted to extend to the private placement memorandum that private fund advisors issue to describe fund performance, but that those materials are legal documents, not advertisements.
"From the comment file, it's clear that some institutional investors are interested in having access to more information from private fund advisers managing potential investments for the institutions," Roisman said in a
Commissioners Allison Herren Lee and Caroline Crenshaw issued a joint statement in partial support of the rule, but also lamented that several provisions in the final package "retreat from commonsense elements" that SEC staff had included in the proposed rule last year.
Among their objections was the abandonment of a requirement for advisors to put all advertising materials through a compliance review before making them public, a provision IAA had lobbied against.
"Pre-review is the best and most logical way to reduce the risk of advisors' using advertisements that could mislead clients and prospective clients," Herren Lee and Crenshaw said in a
"These new sites will likely be a positive development for consumers, but are going to be a new marketing challenge for many RIA firms to navigate," King says.
In the rule, the SEC also added a new component to advisors' ADV registration form to describe their marketing practices.
The new rule will take effect 60 days after its publication in the Federal Register, with a compliance deadline set 18 months beyond that date.
