On November 4, 2019, the Securities and Exchange Commission (Commission) voted seriatim to issue proposed amendments to the rules under the Investment Advisers Act that prohibit certain investment adviser advertisements offering a more flexible principles-based approach, permitting, notably, testimonials and endorsements under certain circumstances. The proposed amendments, if adopted, would likely be welcomed relief to the industry, which has clamored for modernization of the advertising rules for years. The Commission also proposed amendments that would broaden the current cash solicitation rule to apply regardless of whether an adviser pays a solicitor cash or non-cash compensation and would apply to the solicitation of current and prospective investors in private funds.
Investment adviser advertisements
The proposed advertising rule: (i) modifies the definition of “advertisement,” including adding to the types of communications to cover broadcasts that are not live (e.g. webinars); (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 the sophistication of the intended audience (i.e. includes a new category of “non-retail” investors comprised of qualified purchasers and knowledgeable employees). The proposed rule also would require internal review and approval of most advertisements by a “designated employee.” It also would require each adviser to report additional information regarding its advertising practices in its Form ADV, which appears largely designed to assist examination staff.
Replacing the current strict prohibitions with a more flexible principles-based approach will be gratifying to the industry, which has requested such modernization for years. Under the proposal, for example, testimonials and endorsements would be permitted so long as the advertisement meets general anti-fraud type prohibitions, subject to certain disclosures about the person giving the testimonial or endorsement and any cash or non-cash compensation paid by or on behalf of the adviser. Similarly, the proposed rule replaces the prohibition on past specific recommendations with a “fair and balanced” approach, which also incorporates the sophistication of the intended audience. This should be welcomed by private fund advisers, particularly in the private equity context, where case studies are particularly helpful in explaining the adviser’s investing approach. Less welcomed for private fund advisers is that the proposal would specifically include private fund adviser advertising in scope despite the acknowledged “overlap” with current rule 206(4)-8.
Payments to solicitors
The proposed amendments would broaden the current cash solicitation rule to apply regardless of whether an adviser pays a solicitor cash or non-cash compensation (including free or discounted services, directed brokerage and awards or other prizes) and would apply to the solicitation of current and prospective investors in private funds. The Commission recognized that the broader rule could have unintended consequences. For example, to avoid capturing investors who participate in “refer-a-friend” programs, the proposed rule would add an exemption for certain de minimis compensation (i.e. $100 or the equivalent in non-cash compensation in a 12-month rolling period). The proposed amendments eliminate certain process and disclosure requirements but include additional disclosure about a solicitor’s conflict of interest.