20 Dec Reformation: A Modernized Advertising and Cash Solicitation Rule May Be In Effect
Out with the old and in with the new? Reforms are designed to update rules to reflect changes in technology, the expectations of investors seeking advisory services and the evolution of industry practices. The SEC has proposed to modify communications that would qualify as “advertisements” to improve the quality of information available to investors, enabling them to make more informed decisions. The proposed reformation would permit the use of testimonials, endorsements and third-party ratings subject to certain conditions.
However, don’t get too excited. The new rule will come with prohibitions. This new rule will prohibit certain performance advertisements and any misleading statements. Any performance advertisements targeted to retail investors must present net performance alongside gross performance, and show performance results across one-, five- and 10-year periods. Other prohibitions will continue to include untrue or misleading statements, omissions, references, unsubstantiated material claims, advertisements that imply any potential benefits and “Cherry-picking” advertisements that are otherwise materially misleading.
Cash Solicitations under Rule 206(4)-3
Advertising isn’t the only thing up for a change, the Cash Solicitation rule has also been proposed for an amendment. The Cash Solicitation rule applies to solicitors by investment advisors and investors of private funds. It would enhance the current rule to cover solicitation arrangements involving all forms of compensation, not just cash. The proposed amendments also offer clarification on who is disqualified from acting as a solicitor and you will no longer need signed written acknowledgment of receipt of disclosure statement from each client or investor. The new rule would also eliminate the requirement that a solicitor delivers the advisor’s brochure to a prospective client.
If the proposed rules are adopted, the SEC intends to offer a one-year transition period for advisors to continue with the current rules while preparing for the switch.