United States: SEC Modernizes Decades-Old Investor Marketing Rules To Address Evolution Of Markets And Technology

Seyfarth Synopsis: The Securities and Exchange Commission ("SEC") adopted a new investor marketing rule to replace and modernize its current advertising and cash solicitation rules. Neither of these rules has been meaningfully amended in several decades. The new rule is designed to provide flexibility and guidance in light of continuing advancements in technology and changes to the markets.

On December 22, 2020 the SEC announced that it had adopted a new, single rule to replace its current advertising and cash solicitation rules—neither of which had been significantly changed since their adoption several decades ago.¹ The new final rule (the "Rule"), which will become effective sixty days after its publication in the federal register, is, among other things, "designed to accommodate the continual evolution and interplay of technology and advice."²

In particular, the Rule amends the existing advertising rule (rule 206(4)-1), adopted in 1961 to target potentially misleading advertising practices, and solicitation rule (rule 206(4)-3), adopted in 1979 to help ensure clients were aware that solicitors who refer them to advisers may have conflicts of interest.³ As explained by the SEC, "[t]he concerns that motivated the Commission to adopt the advertising and solicitation rules still exist today, but investment adviser marketing has evolved with advances in technology," including the widespread reliance on consumers on the internet, mobile applications, and social media to obtain information.⁴ For example, the SEC noted the rise of "robo-advisers," which provide advice to investors through algorithmic-based programs⁵—industry-disruptive technology that would have hardly been imaginable in the 1960s and 70s.

The Rule makes several important changes, including:

• Modifying the definition of "advertisement" to capture both communications traditionally covered by the current advertising rule and those that had been covered by the solicitation rule. Unlike under the existing framework, the new Rule explicitly extends to communications made by private fund advisers to private funds investors;
• Setting forth seven principles-based general prohibitions that will apply to all such advertisements, drawn from historic fiduciary duty and anti-fraud principles (including prohibitions on untrue statements or omissions of a material fact, unsubstantiated material claims or statements, untrue or misleading implications or inferences, and failure to provide fair and balanced treatment of material risks or limitations);
• Setting forth various conditions to including testimonials and endorsements in an advertisement;
• Adopting a prescriptive approach to the use of performance advertisements and requiring presentation of net performance information when gross performance is presented, as well as other requirements that advisers display certain other performance metrics including showing performance results for prescribed time periods, prohibiting that any statement (express or implied) that the SEC has approved a performance calculation, and prohibiting the use of "hypothetical" performance unless certain conditions are met; and
• Amending the record-keeping rule and Form ADV to enhance the data available to the SEC.⁶

The Rule addresses the evolution of technology and markets in various ways. For example, the revised definition of advertising references any direct or indirect communication by an advertiser, with the goal of encompassing communications through emails, texts, instant messages, podcasts, social media, and more, and to "help the definition remain evergreen in the face of evolving technology and methods of communication."⁷ Some modifications, such as relying on principles-based prohibitions to fraudulent conduct (e.g. not permitting untrue statements or omissions of material facts) are designed to provide, among other things, more flexibility in enforcement.⁸ Other requirements, such as increasing transparency of paid testimonials and endorsements are, among other things, designed to address new communications methods, with the SEC giving an example of "a blogger or social media influencer" that is "endorsing and referring clients" to an adviser.⁹

Key Takeaways

The SEC's adoption of the Rule reflects that technology and the markets have changed over the past several decades and will continue to evolve going forward. Anyone involved in marketing securities or advising services—from the most traditional institutions to social media influencers providing testimonials—should familiarize themselves with the Rule.

Footnotes

1 Press Release, "SEC Adopts Modernized Marketing Rule for Investment Advisers," 2020-334 (Dec. 22, 2020), https://www.sec.gov/news/press-release/2020-334.

2  Id. The text of the Rule (along with additional commentary and information ("Commentary")) can be found at: https://www.sec.gov/rules/final/2020/ia-5653.pdf.

3 Commentary at 6.

4  Id. at 8.

5  Id. at 9.

6  Id. at 12-14; 64-65.

7  Id. at 17.

8  Id. at 66.

9  Id. at 104.

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