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SEC looks to update advisor advertising rule for digital age

The SEC is moving toward an update of the rules that govern how advisors can advertise their practices, opening the door for the first time to third-party ratings, testimonials and endorsements.

The commission voted Monday to advance the first substantial updates to the advertising rule and solicitation rule in decades, billing the proposed overhaul as a needed step toward aligning the regulatory environment with the ways that advisors are promoting their practices in the digital age.

"The advertising and solicitation rules provide important protections when advisors seek to attract clients and investors, yet neither rule has changed significantly since its adoption several decades ago," SEC Chairman Jay Clayton says in a statement.

"The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices," Clayton says.

The proposed changes to the advertising rule would broaden the definition of an advertisement to include messages promoting an advisor firm "disseminated by any means," an expansion in scope that would apply broadly to the various channels advisors are using to reach prospective clients.

"We recognize that electronic media (including social media and other internet communications) and mobile communications play a significant role in current advertising practices," the SEC writes in its rule proposal.

Facebook Inc.s Instagram application is displayed in the App Store on an Apple Inc. iPhone in an arranged photograph taken in Arlington, Virginia, U.S. on Monday, April 29, 2019. Facebook's sales gains are increasingly being driven by photo-sharing app Instagram and advertising in its Stories feature, a Snapchat copycat. Photographer: Andrew Harrer/Bloomberg

The commission mentions media such as text messaging, video, podcasts, blogs "and all manner of social media" in its proposal, but opted not to name specific marketing channels in its revised definition of the term "advertisement" in favor of a "principles-based" approach that aims to keep the rule "evergreen in the face of evolving technology and methods of communication."

"While we considered including specific references to such media in the proposed definition, we believe that 'by any means' incorporates such media while better focusing the proposed rule on the goal of the communication, and not its method of delivery," the SEC writes.

The proposed updates are "a significant step in the right direction," Karen Barr, president and CEO of the Investment Adviser Association, says in a statement.

Barr calls the current regulation a "badly outdated rule," and contends that under its strictures, "investment advisers are generally prevented from using communications and marketing methods that long ago became standard business practice elsewhere in the economy."

"The SEC advertising rule hasn't been substantively amended since 1961 — long before social media, long before the internet, even before fax machines," Barr says, noting that her group has been lobbying for an update to the rule for nearly two decades.

The SEC will open a 60-day comment period on its proposal once it is published in the Federal Register.

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