Having qualified for its AARP card nearly a decade ago, the advertising rule was long overdue for amendment.  Rule 206(4)-1 takes positive steps toward aligning how investment advisers will be able to advertise with modern means of communication and, more importantly, with how today’s investor takes in information when deciding how to invest and with whom. 

An important goal of this rulemaking was to create a regulatory framework flexible enough to accommodate the dynamism of technology.  The definition of advertisement no longer references “any notice, circular, letter or other written communication … or any notice or other announcement in any publication or by radio or television.”[1]  Score one for the digital revolution.

An even more technology-neutral approach would have been to replace the rule with . . . nothing.  Rather than supplanting the antiquated advertising rule with another rule, we instead could have relied on existing fiduciary duties and anti-fraud rules.  The fiduciary standard and antifraud rules are broad principles designed to cover all situations; they empower advisers to use their judgment.  The new rule is billed as being principles-based, but it is very specific in some places, such as its prescriptions regarding the presentation of performance data.  Although advisers often find comfort in specifics that provide a roadmap to compliance, specificity can usurp advisers’ ability to exercise judgment about how best to communicate with investors.

In other areas, the rule may not be clear enough, which could cause advisers, erring on the side of caution, to curtail their communications with investors.  What falls within the scope of “advertisement”?  What exactly does it mean to provide a “fair and balanced treatment of any material risks or material limitations associated with the potential benefits” of services being advertised?  How can an adviser meet the parameters of the rule without producing a muted, watered-down communication of little value to investors?  How can an adviser be confident that required disclosures are as “clearly and prominently” displayed as a testimonial or endorsement? 

The release accompanying rule 206(4)-1 is replete with examples and attempts to guide advisers in applying the rule’s requirements, but I anticipate a steady flow of requests for interpretation and clarification as advisers work to implement the rule.  If we are not careful, we could find ourselves right back where we started: regulatory obligations understood as much or more by reading the swelling corpus of staff interpretations than by reading the regulatory text itself. 

My reservations aside, we are adopting a better rule than the one we proposed.  In response to overwhelming comment, the definition of advertisement will no longer include all communications between an adviser and one person (with the exception of many, but not all, communications referencing hypothetical performance).  Further positive refinements to the definition are the removal of “promoting” and the explicit limitation to offers of investment advisory services that are “with regard to securities.”  Again, thanks to some very thoughtful comments, the final rule does not include a pre-review requirement.  With the increase of the de minimis compensation amount from $100 to $1,000, as well as the broader set of exemptions we are adopting, advisers should be freer to make use of testimonials and endorsements.

This rule, despite its flaws, is the latest in a series of worthwhile Commission efforts to update its regulations to reflect changes in industry and investor practices, to allow greater use of technology, and to cull or codify interpretive positions that have for too long taken the place of the regulations themselves.  The process of ensuring that our rules remain relevant is a never-ending one, and we need to stand ready to make changes if we see that our rules are hampering unnecessarily communication between advisers and investors.    

This rulemaking is yet another carefully crafted product of Dalia Blass and her staff in the Division of Investment Management, as well as staff in the Office of General Counsel and the Division of Economic Risk Analysis.  As we near the year’s end, I look back on the work that they have accomplished during 2020 and marvel at their productivity, their commitment, their unflagging energy, and their dedication to serving the American people.