On November 4th, 2019, the SEC proposed certain amendments to the U.S. Investment Advisers Act of 1940-more specifically, amendments to update rule Rule 206(4)-1. Rule 206(4)-1 addresses investment adviser advertising. These amendments are designed to help modernize the rule to keep up with industry advancements like social media and internet-based services.
It is important that investment advisers apprise themselves of these new amendments and adjust their policies and procedures accordingly, says Daniel Schnapp. Otherwise, they could face SEC scrutiny and penalties for non-compliance.
An Updated Definition of "Advertisement"
The proposed advertising rule has updated the definition of advertisement, which has not been updated since 1961, says Daniel Schnapp. The new definition includes "any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advised by the adviser."
However, this new definition excludes live oral communications (so long as they are not being broadcast); advertisements about a registered investment company that fall under other SEC rules; responses to unsolicited requests for information; and information that should be contained in a statutory or regulatory communication.
An Expansion of Prohibited Advertisement Practices
The proposed rule also expands the definition of "untrue…false and misleading" material, says Daniel Schnapp. Investment advisers should pay special attention to this section of the rule to avoid being charged with unethical marketing practices. The following practices would be considered prohibited:
- Making a false statement or omitting a material fact that makes the statement misleading.
- Making an unsubstantiated claim
- Making a false statement or using misleading information to make people draw a certain, incorrect conclusion about a material fact concerning the investment adviser.
- Discussing benefits without discussing limits and risks.
- Referring to investment advice from the adviser that is not fair or balanced.
- Including or excluding performance results in a way that is misleading.
- Being in any way materially misleading.
Addition of Advertisement Content - Daniel Schnapp Explains
The proposed rule also adds certain new permitted types of content, says Daniel Schnapp. These include:
- Third-party ratings
However, warns Daniel Schnapp, investment advisers should remember that this content will be subject to certain disclosures. For instance, if you use a client testimonial as an advertising tool, you must disclose that the testimonial was given by an investor or client and whether or not compensation was provided in any form.