SEC Proposes to Modernize the Advertising and Solicitation Rules for Investment Advisers

November 11, 2019

Client Alert
On November 4, 2019, the Securities and Exchange Commission (the “SEC”) announced proposed amendments to Rules 206(4)-1 and 206(4)-3 under the Investment Advisers Act of 1940 (the “Advisers Act”) to address investment adviser advertisements and payments to solicitors, respectively. The proposed amendments are intended to update these rules to reflect changes in technology, expectations of investors who seek investment advisory services and the development of industry practices. The proposed amendments to the advertising rule would replace broad limitations under the current rule with principles-based provisions. The proposed approach would permit the use of testimonials, endorsements and third-party ratings, under certain conditions. The rule also includes tailored requirements for the presentation of performance results based on an advertisement’s intended audience, distinguishing between retail persons and non-retail persons.1 The proposed amendments to the solicitation rule, which governs compensation for advisory client referrals, would expand the rule’s current framework to include solicitation arrangements involving all forms of compensation, rather than only cash compensation, subject to a new de minimis threshold. The amendments would also expand the types of disqualifying acts which would prohibit an investment adviser from compensating, either directly or indirectly, a person for any solicitation activities that it knows, or in the exercise of reasonable care should have known, is an ineligible solicitor.

The full text of the proposal is available here. The following is a summary of the principal elements of the proposed amendments.

Advertising Rule Amendments

In an effort to modernize Rule 206(4)-1, the SEC has proposed to replace the current advertising rule’s broadly drawn limitations with principles-based provisions.

Solicitation Rule Amendments

The SEC’s proposed amendment to Rule 206(4)-3 largely revised the solicitation rule’s scope, written agreement content and disclosure requirements.

Transition Period and Staff’s Review of Relevant Guidance

The proposed amendments would require registered investment advisers to comply with the amended rule one year from its effective date, essentially allowing for a one-year transition period. 

The SEC’s Division of Investment Management has issued several no-action letters and other guidance relating to the application of the current advertising and solicitation rules under the Advisers Act. The SEC plans to review these letters and guidance to determine whether any should be withdrawn in connection with the adoption of any of the proposed amendments.

Books and Records

The SEC also proposed amendments to Item 5 of Part 1A of Form ADV to provide the SEC with additional information regarding advisers’ advertising practices and Rule 204-2, pertaining to books and records, to correspond to the proposed changes to the advertising and solicitation rules.

Rule 204-2 would be amended to require investment advisers to make and keep records of, among other things, (a) all advertisements they disseminate to one or more persons as opposed to the current requirement of advertisements sent to ten or more persons, (b) third-party questionnaires and surveys used to create any third-party ratings and in advertisements and (c) pre-approval of certain materials, as described above.

How to Comment

The comment period for the proposed rules will be open until 60 days after publication in the Federal Register. Comments may be submitted in paper form or through the SEC’s internet comment formor by emailing 

  1. The proposed rule defines “Retail Person” as “any person other than a non-retail person.” Whereas, “Non-Retail Person” means any one or more of the following: (i) A “qualified purchaser,” as defined in Section 2(a)(51) of the Investment Company Act of 1940 and taking into account Rule 2a51-1 under the Investment Company Act; and (ii) A “knowledgeable employee,” as defined in Rule 3c-5 under the Investment Company Act of 1940, with respect to a company that would be an investment company but for the exclusion provided by Section 3(c)(7) of the Investment Company Act and that is advised by the investment adviser.

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