Investment Adviser Advertisements; Compensation For Solicitations

disclosures solicitors would provide to investors. The proposed rule would also refine theexisting provisions regarding disciplinary events that would disqualify a person or entity fromacting as a solicitor.Finally, we are proposing related amendments to Form ADV that are designed to provideadditional information regarding advisers’ advertising practices, and amendments to the AdvisersAct books and records rule, rule 204-2, related to the proposed changes to the advertising andsolicitation rules.A.Advertising Rule BackgroundAdvertisements are a useful tool for investment advisers seeking to obtain new investorsand to retain existing investors. 4 Investment advisers disseminate advertisements about theirservices to inform prospective investors and to persuade them to obtain and pay for thoseservices or to learn more about the advisers. Similarly, advertisements can provide existinginvestors with information about new or revised services. Accordingly, advertisements canprovide existing and prospective investors with useful information as they choose amonginvestment advisers and advisory services. At the same time, advertisements present risks ofmisleading existing and prospective investors because the investment adviser’s interest inattracting or retaining them may conflict with their interests, and the adviser is in control of thedesign, content, format, media, timing, and placement of its advertisements with a goal ofobtaining or retaining business. This goal may create an incentive for advertisements to misleadexisting and prospective investors about the advisory services they would receive, includingindirectly through the services provided to pooled investment vehicles.4As discussed below, we are proposing to apply the rule to advertisements disseminated by investmentadvisers to their clients and prospective clients as well as to investors and prospective investors in pooledinvestment vehicles that those advisers manage. For purposes of this release, we refer to any of theseadvertising recipients as “investors,” unless we specify otherwise.8

The Commission recognized the potential harm to investors from misleadingadvertisements when it adopted the current advertising rule in 1961. 5 The Commissionexplained when it proposed the current rule that investment advisers generally must adhere to astricter standard of conduct in advertisements than that applicable to “ordinary merchants”because securities “are intricate merchandise,” and investors “are frequently unskilled andunsophisticated in investment matters.” 6 These concerns have motivated the Commission toadopt other rules on advertising investment services and products, including for registeredinvestment companies (“RICs”). 7In adopting the current rule, the Commission used its authority under section 206(4) ofthe Advisers Act to target advertising practices that it believed were likely to be misleading byimposing four per se prohibitions.8 First, the current rule prohibits testimonials concerning theinvestment adviser or its services. 9 Second, the current rule prohibits direct or indirect referencesto specific profitable recommendations that the investment adviser has made in the past (“pastspecific recommendations”). 10 Third, the current rule prohibits representations that any graph or5Advertisements by Investment Advisers, Release No. IA-121 (Nov. 1, 1961) [26 FR 10548 (Nov. 9, 1961)](“Advertising Rule Adopting Release”).6Investment Advisers Notice of Proposed Rulemaking, Release No. IA-113 (Apr. 4, 1961) [26 FR 3070,3071 (Apr. 11, 1961)] (“Advertising Rule Proposing Release”).7See 17 CFR 230.482 (regulating advertising with respect to securities of RICs and business developmentcompanies (“BDCs”)); 17 CFR 230.156 (regulating investment company sales literature).8See Section 206(4) of the Advisers Act (authorizing the Commission to define and prescribe “meansreasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, ormanipulative”).9Rule 206(4)-1(a)(1) (prohibiting publication, circulation, or distribution of any advertisement “whichrefers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerningany advice, analysis, report or other service rendered by such investment adviser”).10Rule 206(4)-1(a)(2) (prohibiting publication, circulation, or distribution of any advertisement “whichrefers, directly or indirectly, to past specific recommendations of such investment adviser which were orwould have been profitable to any person” but providing that an advertisement may set out or offer tofurnish a list of all recommendations within the immediately preceding period of not less than one yearunder certain conditions).9

other device being offered can by itself be used to determine which securities to buy and sell orwhen to buy and sell them. 11 Fourth, the current rule prohibits any statement to the effect thatany service will be furnished free of charge, unless such service actually is or will be furnishedentirely free and without any condition or obligation. 12In addition to the four per se prohibitions, the current rule prohibits any advertisementwhich contains any untrue statement of a material fact, or which is otherwise false ormisleading. 13 This prohibition operates more generally than the specific prohibitions to addressadvertisements that do not violate any per se prohibition but still may be fraudulent, deceptive,or manipulative and, accordingly, be misleading.The concerns that motivated the Commission to adopt the current rule still exist todayand are echoed in the rules adopted under other regulatory and self-regulatory regimes governingthe use of communications by financial professionals. 14 However, in the nearly 60 years since11Rule 206(4)-1(a)(3) (prohibiting publication, circulation, or distribution of any advertisement “whichrepresents, directly or indirectly, that any graph, chart, formula or other device being offered can in and ofitself be used to determine which securities to buy or sell, or when to buy or sell them; or which representsdirectly or indirectly, that any graph, chart, formula or other device being offered will assist any person inmaking his own decisions as to which securities to buy, sell, or when to buy or sell them, withoutprominently disclosing in such advertisement the limitations thereof and the difficulties with respect to itsuse”).12Rule 206(4)-1(a)(4) (prohibiting publication, circulation, or distribution of any advertisement “whichcontains any statement to the effect that any report, analysis, or other service will be furnished free orwithout charge, unless such report, analysis or other service actually is or will be furnished entirely free andwithout any condition or obligation, directly or indirectly”).13Rule 206(4)-1(a)(5).14For example, the Financial Industry Regulatory Authority’s (“FINRA”) rule 2210 governs broker-dealers’communications with the public, including communications with retail and institutional investors, andprovides standards for the content, approval, recordkeeping, and filing of communications with FINRA.See Advertising Regulation, available at on. TheCommodity Futures Trading Commission likewise regulates certain types of advertising by commoditypool operators, commodity trading advisors, and their respective principals. 17 CFR 4.41 Advertising byCommodity Pool Operators, Commodity Trading Advisors, and the Principals Thereof (prohibiting, in part,any advertisements that employ any device, scheme or artifice to defraud any client or prospective client).The Municipal Securities Rulemaking Board regulates advertisements concerning the products or servicesof certain brokers, dealers, and municipal securities dealers, and, beginning in 2019, will regulateadvertisements by municipal advisers. Self-Regulatory Organizations; Municipal Securities Rulemaking10

the current rule’s adoption, issues and questions have arisen about the current rule’s application,particularly the application of the prohibitions of testimonials and past specificrecommendations. Additionally, some of the most common questions related to the current rule(and the anti-fraud provisions of the Advisers Act) relate to the appropriate presentation ofperformance in advertisements, which the current rule does not explicitly address. The breadthof the current rule’s prohibitions, as well as the lack of explicit prescriptions related to thepresentation of performance in the rule, can present compliance challenges and potentially have achilling effect on advisers’ ability to provide useful information in communications that areconsidered advertisements.Moreover, changes that have occurred since the current rule’s adoption lead us to believeproviding a more principles-based approach would be beneficial. Specifically, in ourdevelopment of the proposed rule, we have considered changes in the technology used forcommunications, the expectations of investors shopping for advisory services, and the nature ofthe investment advisory industry, including the types of investors seeking and receivinginvestment advisory services. These changes have informed not only how we propose to updatethe rule to address current technology, expectations, and market practice but also our generalapproach of proposing principles-based rules in order to accommodate the continual evolutionand interplay of technology and advice. 15Board; Order Granting Approval of a Proposed Rule Change, Consisting to Amendments to Rule G-21, onAdvertising, Proposed New Rule G-40, on Advertising by Municipal Advisers, and a TechnicalAmendment to Rule G-42, on Duties of Non-Solicitor Municipal Advisers, Release No. 34-83177 (May 7,2018) [83 FR 21794 (May 10, 2018)]. MSRB Rule G-40 became effective on August 23, 2019.15See, e.g., Modernization of Regulation S-K Items 101, 103, and 105, Release No. 33-10668 (Aug. 8, 2019)[84 FR 44358 (Aug. 23, 2019)] (discussing the role of “principles-based” disclosure requirements inarticulating a disclosure concept rather than a specific line-item requirement).11

Advances in Technology. Advances in technology have altered the ways in which serviceproviders, including advisers, interface with consumers generally, including with existing andprospective investors. These advances have also changed the manner in which those consumersevaluate products and services. In the decades since the current rule was adopted, the use of theinternet, mobile applications, and social media 16 has become an integral part of businesscommunications. These advances in technology have led to significant growth in the nature andvolume of information available to individuals and businesses, 17 for example, by allowing themto access and share user reviews. However, websites and social media can create challenges incomplying with the current rule’s prohibition on testimonials, particularly for advisers that relyheavily on electronic platforms to communicate with existing and prospective investors. 18Expectations of Consumers Shopping for Services. Consumers today often rely on theinternet to obtain information when considering buying goods and services across the world,including advisory services and those of other financial professionals. Many websites allowpotential buyers to compare and contrast the goods and services being offered, including throughreviews and ratings provided by those who have previously bought the relevant goods and16“Social media” is an umbrella term that encompasses various activities that integrate technology, socialinteraction, and content creation. Social media may use many technologies, including, but not limited to,blogs, microblogs, wikis, photos and video sharing, podcasts, social networking, and virtual worlds. Theterms “social media,” “social media sites,” “sites,” and “social networking sites” are used interchangeablyin this release.17See Report on the Review of the Definition of “Accredited Investor” (Dec. 18, 2015) (“Accredited InvestorStaff Report”), available at 8-2015.pdf, at 5 (noting “increased informational availability” and “changes in theway investors communicate” since adoption of the “accredited investor” definition in 1982).18See also Guidance on the Testimonial Rule and Social Media, Division of Investment ManagementGuidance Update No. 2014-04 (Mar. 2014) (“IM Staff Social Media Guidance”), in which our staffdiscussed its views on application of the current rule to various situations involving social media. Any staffguidance or no-action letters discussed in this release represent the views of the staff of the Division ofInvestment Management. They are not a rule, regulation, or statement of the Commission. Furthermore,the Commission has neither approved nor disapproved their content. Staff guidance has no legal force oreffect; it does not alter or amend applicable law, and it creates no new or additional obligations for anyperson.12

services. We believe that consumers’ ability to seek out reviews and other information, as wellas their interest in doing so, when evaluating products and services has changed since theadoption of the current rule.Profiles of the Investment Advisory Industry. The variety of advisers subject to theadvertising rule has changed since the current rule’s adoption. Specifically, the type of advisoryservices provided by advisers generally has changed over time, from impersonal investmentadvice distributed to many prospective investors in the form of newsletters and other periodicalsto more personalized advisory services. The ways advisers and investors interact and engage ha

Similarly, advertisements can provide existing investors with information about new or revised services. Accordingly, advertisements can provide existing and prospective investors with useful information as they choose among investment advisers and advisory services. At the same time, advertisements present risks of