Does your firm or any of its associates have a LinkedIn or Facebook page? Have you ever received a “like” or an endorsement from anyone in your network? If so, you could be running afoul of the SEC Advertising Rule, according to the Investment Adviser Association’s Assistant General Counsel, Sanjay Lamba. Sanjay and the IAA’s Laura Grossman led a discussion on the current regulatory climate at the SS&C Deliver conference in Las Vegas, and a review of the Advertising Rule was on the agenda.
SEC Rule 206(4)-1, better known as the Advertising Rule, is about 60 years old. The SEC is currently considering amendments to the rule and soliciting comment. In the IAA’s view, an overhaul that brings the rule up to the era of social media is long overdue. As it stands, any written communication sent to more than one person is deemed an advertisement under the rule. That includes websites and social media postings, but it can also extend to an institutional adviser’s pitchbook for prospects. In the absence of clear guidance as to what constitutes advertising or an endorsement, many firms request “no-action” letters from the SEC for clarification.
The IAA has entered the discussion on behalf of its membership, specifically advocating for a narrower definition of advertising and no per se prohibitions on testimonials and past specific recommendations. The association also wants the SEC to address social media more explicitly and allow more flexibility on disclosures to institutional prospects. In general, the IAA calls for a “principles-based” approach to advertising rules where there is clearly no intent to deceive, which would reduce the need for no-action letters and guidance. At the very least, the numerous no-action letters and guidance in this space should be consolidated into the Advertising Rule to make it easier to comply.
Custody Confusion
Another rule on the SEC’s agenda, although on a longer timeline, is the Custody Rule. History shows that this is one of the most confusing and complex rules for RIAs. The SEC’s investment management staff has issued FAQs and updates to address issues, most recently in June 2018 to address one aspect of its inadvertent custody guidance update. The SEC staff continues to work on clarifying another aspect of the guidance involving the staff’s views on how the authorized trading exception under the Custody Rule relates to instruments that do not settle on a “delivery versus payment” (or non-DVP) basis. It is likely that the SEC staff will informally ask for public input. Many questions, however, remain unresolved until the rule is rewritten.
Other Hot Button Issues
Meanwhile, the IAA suggests firms be aware of the SEC’s current enforcement priorities. As in previous years, protection of individual retail investors, the elderly in particular, is prominent on the Commission’s radar. The SEC is also trying to get ahead of the increased activity in cryptocurrencies and assets, and anticipate the risks they may pose for investors down the line. Disclosures of the true costs of investing – fees, expenses and third-party costs – are also a hot button issue for examiners. The SEC will continue to focus on “bread and butter” issues, too, such as outright fraud and undisclosed conflicts of interest. Any firm that gets “the call” for an exam should be sure it’s prepared, has documentation in order and answers in a quick and direct manner.
The IAA is a non-profit organization that exclusively represents the interests of SEC-registered investment adviser firms before Congress, the SEC, the Department of Labor, and other federal and state government agencies. We are grateful that they shared their knowledge with the attendees at #SSCDeliver.
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