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SEC’s Proposed Amendments to Advertising Rule

Updated: Mar 18

Authors: Alisha Dowell & Chris Payne


On November 4, 2019, the United States Securities and Exchange Commission (the “SEC”) announced its long-promised changes to the Investment Advisers Act regulations relating to advertisements. The proposed changes seek to modernize regulations to “reflect changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.”


The changes are long overdue—the Advertising Rule has not seen substantive changes since 1961. To put that in perspective, when the Advertising Rule was first adopted, John F. Kennedy had not yet completed his first year as President, the Beatles were one year away from releasing their first single in the USA (“Love Me Do”), and a man named Leonard Kleinrock mused about multiple computers communicating with each other in a paper titled “Information Flow in Large Communication Nets.” The rule served the industry and investors surprisingly well for 50+ years, but it was designed in a pre-internet world and it was time for a facelift.

What are the Highlights of the Proposed Rule Changes?

The most important changes are the replacement of limitation-based provisions (e.g. the prohibition on testimonials with a principle-based approach, and the updating of the definition of “advertisement”.


In some ways, the proposed amendments simply codify many of the SEC’s positions taken over the last 3 decades through interpretative memorandums, guidance, no-action letters, and enforcement actions. The SEC has long relied on the “catch-all” provision of the rule that prohibits the publication of any advertisement that contains false or misleading statements of material fact rather than the citing many of the specific prohibitions (testimonials, past specific recommendations, etc.).


The definition of “advertisement” has been revised to be more evergreen and flexible. The term now includes “any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser’s investment advisory services or that seeks to obtain or retain one or more investment advisory clients or investors in any pooled investment vehicle advised by the investment adviser.” This definition allows the regulator to avoid getting tied to any particular form of media (e.g. radio or television) and will allow for new forms of communication (who could have foreseen YouTube 30 years ago?), and also clarifies that materials created by third-party firms on the investment advisers’ behalf is an advertisement of the firm.


Other significant changes include:


The proposal requires advertisements to be reviewed and approved by a Designated Employee before dissemination. The Designated Employee should be competent and knowledgeable regarding the Advertising Rule and is, therefore, most likely a person in the investment adviser’s legal or compliance department. The SEC has excluded certain communications from this requirement (e.g. communications to a single person or household or live oral communications) but it remains unclear what this means for the more interactive forms of social media such as Twitter and Instagram.


The SEC provided an updated list of general prohibitions, including:

  • Making an untrue statement of a material fact, or omission of a material fact;

  • Making a material claim or statement that is unsubstantiated;

  • Making an untrue or misleading implication about, or being reasonably likely to cause a misleading inference to be drawn concerning a material fact;

  • Discussing or implying any potential benefits without clear and prominent discussion of associated material risks;

  • Referring to specific investment advice provided by the adviser that is not presented in a fair and balanced manner;

  • Including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and

  • Being otherwise materially misleading.

These general prohibitions are essentially carryovers from the previous rule, however, the SEC has proposed new standards that advisers must adhere to, including that risks and limitations are presented clearly and prominently and that information regarding specific investment advice provided by the investment adviser must be presented in a fair and balanced manner. This language is historically associated with FINRA review of advertising, but the SEC declined to clarify exactly what these terms require for RIAs. Investment advisers will, therefore, be required to figure this out on our own unless the SEC releases additional information.


  • Investment advisers (and their marketing departments) will be happy to know that the proposed changes finally allow testimonials and endorsements, along with the specified disclosures, including whether the individual or firm making the testimonial or endorsement has been compensated by or on behalf of the adviser. The proposed rule changes will also permit third-party ratings, along with the specified disclosures.

  • With respect to the use of performance in advertising, the SEC has made clear distinctions regarding advertisements directed at retail investors and non-retail investors. Advertising directed at retail investors and which include performance must include net performance results subject to strict criteria, whereas advertisements directed at non-retail customers may include gross performance only, provided certain disclosures are used.

  • With regards to the use of hypothetical performance, which has historically be deemed misleading per se for use with retail investors, the proposed regulation appears to permit their use provided the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the financial situation and investment objectives of the recipient and the adviser provides certain specified information underlying the hypothetical performance. Although their use is not prohibited per se, we would continue to caution investment advisers from using hypothetical back-tested performance with retail clients.

What Can We Expect Next?

Once published in the Federal Register, the SEC has allowed 60 days for public comments to be submitted. If the proposed rules become official, there will be a one-year transition period for firms to come into compliance with the updated rules. If your firm does any amount of advertising, we would advise you to consider how your firm will implement the new regulations into the firm’s procedures and procedures.


Key Bridge Compliance is monitoring developments and will provide clients updates as needed. If the proposed changes are adopted, we will begin working with all of our clients to update their policies and procedures and to assist them in their implementation through the transition period.