The Advertising Rule Policy Guidance
Many of you are aware of the impending deadline for the new Advertising Rule (“the new rule”). As of November 4, 2022, all registered investment advisers must be prepared to comply with all aspects of the new rule. Thankfully, many of the changes brought by the rule are not going to drastically change our existing policies and procedures, but some impact will be felt.
WHAT IS THE NEW ADVERTISING RULE?
The new rule is an effort to merge the current Advertising Rule (adopted 1961) and Cash Solicitation Rule (adopted 1979) into one unified rule. It is also an effort to consolidate decades of staff opinion letters, no action letters and other guidance materials into one. Since the Advertising Rule was originally adopted in 1961, technology has completely reshaped the way that advisors interact with the public. As a result, the SEC determined it was time to overhaul the two rules into one, updating them with an eye toward the future. The primary update to the advertising rule is what is considered “advertising”. Advertising is now defined in two parts:
1) Direct or indirect communication that: (excluding one-on-one communication1)
a. Offers the advisor’s services with regard to securities to prospective clients
OR
b. Offers new services regarding securities to current clients
2) Compensated testimonials2 or endorsements3
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1. One-on-one communication is excluded from the first prong definition of advertising, unless it contains hypothetical performance
2. Testimonials is defined as a statement by a current client
3. Endorsement is defined as a statement by someone who is not a current client
HOW DOES THIS IMPACT YOU?
The way in which this is going to be most impactful is defining advertising as any communication designed for more than one client or prospect that offers advisory services. Previously, retail communication vs correspondence thresholds were simply based on number of recipients (25 or more in a 30-day period). Now, if the communication contains any reference to or offer of services or securities, it will require pre-approval, even if it is only intended to be distributed to two or three clients or prospects. Educational pieces that do not reference services or securities will be expected to adhere to the existing 25 or more in a 30-day period.
Beyond the expanded definition of what qualifies as advertising vs correspondence (ex. pre-approval vs post-review), the other primary impact will be updating disclosures for various systems, including any proposal generation systems you may use outside Mutual’s core tech stack. We will provide required disclosure language in October with the expectation that it is updated by November 4th.
SPECIFIC POLICY UPDATES
Proposal Tools
Many proposal tools, including Hidden Levers, Riskalyze, Morningstar, and others utilize back tested or hypothetical performance. The new advertising rule generally prohibits the use of hypothetical performance in advertising unless very specific conditions are met.
However, the SEC does recognize that there are certain “interactive analysis tools” that are used by advisors to provide clients or prospects with some indication of what they would recommend against their current portfolio. Therefore, these individualized proposals that include this hypothetical performance information can continue to fall under the definition of correspondence and not require pre-approval for every report ONLY IF the proposed portfolio is being presented as a comparison against the client’s (or prospective client’s) existing holdings.
If the client or prospect does not provide you with their current holdings, hypothetical performance from these proposal systems is not allowed to be presented to prospects or clients. (NOTE: You can take a client or prospects verbal indication of what assets they have – there is no requirement for the information to come from a statement.)
Performance Advertising
The new rule will not affect our policy here. We will continue to require that any advisor who wishes to market his/her performance must have a minimum of three years of composite history built in the system. We will continue to prohibit the marketing of back tested or hypothetical performance.
Testimonials (from current clients)
YES! Starting November 4, 2022, advisors are allowed to use testimonials in advertising. Compensated testimonials will not be allowed. This means that advisors cannot offer discounts, rebates, or any other non-cash compensation in exchange for a testimonial. Any testimonials will have to clearly disclose the fact that the person is a current client, any material information about the facts and circumstances of the testimonial (ex. Touting an advisor’s great performance but have only been a client for a month), and any potential material conflicts of interest arising from the relationship with the advisor (ex. an advisor’s brother, assistant, etc.).
Endorsements (from non-clients)
Compensated endorsements will fall under our current Solicitor or Referrer policy. Our policy and procedures for these arrangements will not change under the new Rule. Solicitors or Referrers will still be required to provide copies of our CRS and ADV to prospective clients. They will also still be required to obtain a signed disclosure statement from the prospect that will disclose the compensation and relative material conflicts to the prospective client. Non-compensated endorsements will follow the same policy for non-compensated testimonials.
HOW DOES THIS EFFECT SOCIAL MEDIA?
The handling of social media and other dynamic posting sites (such as Google Reviews and others) will not substantially change. Any page you wish to link to/market/control/on which you hold yourself out as a financial professional will have to be archived through our archive and review software (currently Smarsh).
Can advisors delete content they don’t like? Ultimately, the answer to that is still no. The SEC has never approved of “cherry-picking” commentary from the public to only show an unbalanced view of positive commentary while trying to suppress any negative commentary. However, they also recognize that there are times where people post obscene, unrelated, or inaccurate information—and advisors do have a right to remove those posts. To ensure a fair and balanced approach to the curation of content on any of these dynamic reporting sites, Mutual will require that an advisor submit a request for approval of any comments they wish to remove, detailing why they wish it to be removed. We will provide pathways for these types of submissions through our case management system starting in November.
As we continue to prepare for the various aspects of this rule, we’ll continue to provide updates as necessary, but the above outlines the most significant impacts to our current policies and procedures.
If you have any questions or concerns, please reach out to Compliance and schedule time with us.
Thank you,
The Mutual Compliance Team