Statement on the New Marketing Rule for Investment Advisers

I am grateful to the staff of the Division of Investment Management (the “Division”) for working so hard to develop this final rule governing the way investment advisers advertise and market their investment advisory services and products.[1]  I would also like to extend my thanks to our staff in the Division of Economic and Risk Analysis and the Office of the General Counsel, as well as to the many others at the agency who informed and contributed to this effort.  Additionally, let me express my gratitude to the commenters who engaged with this agency on just about every aspect of this rulemaking.  Your input has been invaluable to me as I have considered the Division’s recommendation.  Indeed, it reminds me of just how important the notice and comment process is to our rulemaking efforts.

I support this final marketing rule for several reasons, which I will discuss in turn.  While I also harbor some questions about how it might be implemented over time, I appreciate that it is an overdue and thoughtful modernization of this important area of regulation.

I. Commendations

With credit to our hardworking staff and the many commenters I mentioned, this final rule has improved significantly over the proposed advertising rule we issued a year ago.  The proposal’s one-size-fits-all “pre-review” requirement, which commenters generally flagged as unworkable with respect to every advertisement, is not present in this final rule.[2]  Instead, this rule will allow advisers to implement its requirements in ways that are reasonable and appropriate for their own firms.

To note another improvement: the definition of “advertisement” in this final rule—which determines the scope of activity the rule purports to cover—is much better tailored to the rule’s objective.  Specifically, I am happy that the definition encompasses only communications that “offer” services, explicitly rejecting the inclusion of communications that merely “promote” the adviser or “seek to obtain” new clients.[3]  In another positive change, this final rule only governs such offers made for investment advisory services “with regard to securities.”[4]  While the proposed rule’s definition might have applied to advertising of services outside the context of securities, I believe this component of the final definition eliminates any confusion that the rule will only apply to offers of securities-related products and services.  In sum, I appreciate that this final rule stays within this agency’s remit and expertise, which should help us with oversight and enforcement.  Also, it hews closely to the scope of activity covered by the current rule, which should help advisers with implementation.

I also support this final rule because it is a true modernization.  Unlike our current rule, it will apply to advisers’ communications, regardless of the media or technology through which they are conveyed.  Also, this rule will allow advisers to advertise using testimonials and endorsements, unlike the current rule.  While their ability to use such tools will not be unlimited, this change should bring the advisory industry more in line with the many other industries that do not prohibit companies from facilitating their customers “telling a friend” or showing that they “like” a company on social media.

Third, I support this final rule because all 400+ pages of it come from the Commission.  The current rule has been augmented by roughly 200 letters of guidance from the SEC staff.[5]  No part of this guidance, which was issued over a long period of time, was developed in as rigorous a process as that required by the Administrative Procedures Act for Commission rulemakings.  To develop this final rule, the Division staff reviewed all of the existing guidance and received feedback by commenters to determine which parts of the guidance would be superseded by this new marketing rule.[6]

My special thanks to Division Director [Dalia] Blass for undertaking this momentous effort.  It was a difficult endeavor, which she knew before tackling it, but—as has been the case in the many other rules she has led the Division in reviewing and updating—she knew the Commission and the markets would be better for it.  I am happy that this final product has bipartisan support and reflects the input of investors and market participants across the financial sector.

II. Reservations

Along with my praise, I will note that there are certain aspects of this final rule that give me pause.  One that I would be remiss not to mention is that, unlike the current advertising rule, this rule will explicitly extend to communications made by private funds advisers to private fund investors.  The rule sets forth prescriptive requirements for how such advisers must describe their funds’ performance, including potentially in private placement memoranda (“PPMs”).[7]  Several commenters noted that PPMs are not advertisements, but legal documents reviewed by sophisticated and well-resourced parties.  While the final rule carves out offering information discussed in PPMs, other information in a PPM may be captured.  So, to me, this aspect of our rule goes beyond its purported focus on advertising.

I am not sure how this aspect of the rule will change the dynamics of private fund investing in practice.  From the comment file, it’s clear that some institutional investors are interested in having access to more information from private fund advisers managing potential investments for the institutions.[8]  Yet, it does not seem intuitive that adopting rules which may make it more expensive and difficult for private fund managers to communicate with potential limited partners will encourage them to do so broadly.

III. Conclusion

Having expressed that concern, I will conclude by thanking our staff again for their tireless work to develop this rulemaking and provide so much information to my team and me along the way.  And again, thank you to Director Blass for rising to this challenge.