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'Vague' SEC advisor ad rule proposal needs a rethink, official says

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WASHINGTON -- An SEC commissioner is warning that the long-awaited revamp of the rules governing how RIAs can advertise might inadvertently stifle legitimate and important ways that advisors promote themselves, and could even tilt the playing field in favor of unscrupulous firms that make dubious claims about investment performance.

Commissioner Allison Herren Lee argued that the SEC's proposal, while long overdue, does not provide specific enough guidance for advisors to act upon.

"I know from my own prior experience as in-house counsel how difficult it can be to translate sometimes broad legal principles into straightforward answers to everyday questions from the business side," Lee said in an address at the Investment Adviser Association's annual compliance conference.

"For the most part, they need yes or no answers, and a risk-averse compliance professional may default to a conservative approach that unduly restricts the substance of an advertisement," she said. "If rules are too broad or vague, we may end up circumscribing conduct that we never intended to capture."

The commission voted in November to begin updating the advertising rule, which, though it has been subject to numerous sets of interpretive guidance over the years, has not been substantially amended since it was first adopted in 1961.

Lee supported the proposal to update the rule, and, though she has serious reservations about the shape those reforms have taken, still views the update as a "meaningful improvement" over the current environment of widespread industry confusion about how advisors can make promotional claims about core issues like their track record of investing.

Lee takes issue with the commission's "principles-based" approach that refrains from explicitly barring certain types of advertising practices in favor of more thematic guidance.

"This creates flexibility, but that can come at the cost of certainty around compliance," she said.

"I know from my own prior experience as in-house counsel how difficult it can be to translate sometimes broad legal principles into straightforward answers to everyday questions from the business side," said SEC Commissioner Allison Herren Lee.

Lee cites the proposed requirement that firms which include a presentation of performance or specific investment advice in advertising materials ensure that those statements are "fair and balanced." While that standard is hard to argue with, without more prescriptive guidance it could leave firms wondering if they are in fact complying with the letter of the rule.

"I think we can all agree that either type of presentation should be 'fair and balanced,' but is that guideline alone enough for you to apply that standard on a daily basis?" she said.

So too with the use of testimonials, which would be permitted under the revised rule, but still subject to the general prohibition on advertising materials that "cause an untrue or misleading inference to be drawn."

That language might simply be too vague to put into practice, and invites the prospect of "regulation by enforcement," where the determination of what conduct is impermissible under the rule takes shape through the enforcement actions that the commission initiates. That could be enough to convince risk-averse firms simply to avoid certain types of advertising altogether, which runs counter to the spirit of the rule revision.

On the other hand, if the muscle of enforcement isn't behind the rule, then how effective will it be in cracking down on irresponsible advertising practices?

"[I]f it's not enforceable," Lee said, "responsible advisors like the people in this room may find themselves competing against advisors who use performance information that is not fair and balanced."

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