Compliance November 26, 2019

New SEC Advertising Regulations Warrant Caution

The new principles-based approach to advertising regulations may allow advisers to better tell their stories to prospective clients, but it still requires careful recordkeeping and accurate statements.
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Art by David Huang


The U.S. Securities and Exchange Commission (SEC) voted in early November to propose a set of amendments meant to modernize the advertising rules and restrictions applying to advisers under the Investment Advisers Act. 

The extensive rule amendments are detailed in summary form on the SEC’s website and available in full on the Federal Register. At a high level, the proposed amendments to the advertising rule would replace the current rule’s broadly drawn limitations with principles-based provisions. The proposed approach would also “permit the use of testimonials, endorsements, and third-party ratings, subject to certain conditions, and would include tailored requirements for the presentation of performance results based on an advertisement’s intended audience.”

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Early industry interpretations of the proposal have broadly been positive. According to Ted Angus, an executive vice president and general counsel at AssetMark, the new proposed rule “flips the advertising standard on its head,” from one that was all about a list of strict prohibitions to a more modernized, principles-based approach to how you do advertising in a compliant manner.

The Old Way

“Historically, I think the broad prohibitions on advertising and testimonials had a lot to do with assumptions about an unsophisticated marketplace and unsophisticated investors,” Angus says. “But as the markets and the information economy in general have developed, we have reached a point where the old rules started to seem really clunky and overly restrictive from the perspective of many advisers.”

Under the current system, Angus says, it is a serious challenge for even very skilled advisory firm legal departments to find their way through the broad list of blanket prohibitions against performance-based advertising and testimonials. The result is that, oftentimes, firms have defaulted to not doing any marketing or advertising whatsoever. And when they have done advertising, they have been very cautious.

“The other thing that has happened over time is that the advisory and brokerage worlds have come closer together from the perspective of consumers—there is more direct competition across the channels,” Angus says. “This has created a situation where there are two very different sets of advertising rules applying to both groups. With the new rule, there are still some important differences, but the standards for advisers and brokers are more rationally coordinated in terms of the types of advertising you can do.”

Investment Adviser Association President and CEO Karen Barr commends the SEC for its proposal, calling it “a significant step in the right direction.”

“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. “We’ve been urging the SEC to update the rule for nearly 20 years. Advancements in technology and communications have drastically changed the ways that every service provider in our economy engages with clients and prospective clients.”

Angus agrees with that assessment, pointing to the rise of the Internet as a game-changer for this conversation.

“Back in the 1960s, there was almost a lack of information about advisers and investment performance [that could] be accessed by consumers, so there was naturally more caution about permitting single testimonials or performance-based advertisements,” he explains. “It was harder for consumers to compare and contrast information to draw solid conclusions. Today we are in basically the opposite position. There is so much information out there, and consumers are in a much better place to evaluate information coming from their advisers.”

New System Is Not a Free-For-All  

Barr, Angus and other commentators stress that the SEC, while freeing advisers to do more advertising, is by no means eliminating all its compliance expectations in this area—far from it.

“The rule permits testimonials, endorsements, and the use of third-party ratings, and that is a big step forward for the industry,” Angus says. “At the same time, firms still have to pay careful attention to the advertising they are doing, and keep accurate and comprehensive records. Furthermore, you still can’t make untrue statements or permit the use of any misleading communications. You have to make sure that whatever advertising you are doing meets the new standards. It’s not a free-for-all, and the new rules don’t significantly change the recordkeeping requirements.”

According to Angus, the recordkeeping requirements remain fairly burdensome, especially when it comes to the management and oversight of social media marketing.

“It is easier than advisers might think to find themselves making an untrue statement in an advertisement, especially when it comes to things like performance data,” Angus adds. “Unsubstantiated claims, for example, can catch you up. Say you have a client do a testimonial, and they make superlative claims about your practice or services. How do you make sure that’s accurate and not at all misleading or overstated?”

Preparing for Compliance

Now that they have had some time to digest the SEC proposal, a team of attorneys with Stradley Ronon have shared their detailed take on the changes advisers can expect under the new system as proposed.

According to the attorneys, the proposed amendments relating to the advertising rule “are numerous and substantive, and go well beyond mere updates.” For example, the proposed rule significantly expands the definition of “advertisement” to include online communications, third-party communications disseminated “by or on behalf of” an adviser, and private fund marketing materials. As noted, the updated advertising rule also permits the use of client testimonials, non-client endorsements and third-party ratings, subject to certain enumerated conditions.

The attorneys say the new rule imposes substantive conditions on advertisements that present actual or hypothetical investment performance—including model, target and projected performance.

“In certain instances, such as the presentation of gross-of-fee investment performance, [the new rule] imposes regulatory conditions on advertisements distributed to retail investors that are more extensive than those provided solely to non-retail investors,” the attorneys warn. “[The new rule] requires a designated employee of an adviser to review and approve each advertisement, other than certain excluded communications, prior to distribution.”

The Stradley Ronon attorneys also feel the separate proposed amendments to the solicitor rule are also significant. Most notably, the attorneys explain, the new solicitor rule encompass non-cash compensation arrangements; it applies to private fund investor solicitation arrangements; it eliminates the current requirement that the solicitor provide a copy of the adviser’s Form ADV Part 2A to solicited prospects; it eases the solicitor’s brochure delivery requirement in connection with certain mass solicitations; and it revises and expands the list of disciplinary events that disqualify a solicitor from receiving compensation.

Client Service November 22, 2019

Limited 529 Plan Knowledge Holds Savers (and Advisers) Back

Educating people about the plans is important, as a recent Edward Jones survey found that only 29% of Americans know what the purpose of these plans are.
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Art by Cristina Spanò


While investment firms that service 529 college savings plans say they have been growing in popularity, a recent survey conducted by The Harris Poll on behalf of TD Ameritrade found a lack of knowledge about the plans.

Only 32% of people know that withdrawals from 529 plans for qualified educational purposes are tax free, and only about half know that the funds can be used for expenses other than tuition. Only 59% know the funds can cover textbooks. Just 48% know it can cover school supplies, and only 51% know it can cover housing.

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Educating people about the plans is important, as a recent Edward Jones survey found that only 29% of Americans know what the purpose of these plans are, says Russ Tipper, senior vice president at Capital Group, home of American Funds.

“They should be an important part of advisers’ practices, since, after retirement, saving for a child’s college education is often the second priority for clients,” Tipper says. “Americans are increasingly concerned about growing student loan debt, and the problem will only exacerbate with the cost of higher education continually increasing.”

When establishing a 529 college savings account, a parent should first consider purchasing one offered in their state, as 34 states and the District of Columbia allow either a full or partial deduction of contributions from their state taxes, says James Sullivan, vice president at Essex Financial.

The most attractive feature of 529 plans is that the money grows tax free and withdrawals are not taxed if they are used for a qualified educational expense, Sullivan says. Those withdrawals are federally tax exempt and almost always state tax exempt, he says.

Qualified expenses include not just tuition but also room and board and school supplies, Tipper says. The funds can also be used for K-12 private school tuition or for classes to learn a new skill, Sullivan says.

If the money is used for K-12 private education, parents can only withdraw $10,000 a year, but there is no limit on what can be withdrawn for a college expense, Sullivan says. In terms of how much parents can contribute a year, each parent can contribute $15,000 a year, and the plans even allow for parents to front-load five years’ worth of contributions, meaning that would be a contribution of $75,000 per parent, or $150,000 for a couple, he says.

However, states do have contribution caps, Tipper says. American Funds runs a number of 529 college savings plans, and the states sponsoring them have contribution caps ranging from $150,000 to $250,000, he says.

In addition, anyone can contribute to the 529 plan, so a parent can tell their friends and family about its existence and potentially receive help with funding the plan, says Mike Lynch, vice president, strategic markets, at Hartford Funds.

Another benefit of 529 college savings plans over custodial accounts is that parents are always in charge on the money, Sullivan says, whereas in a custodial account, when the child turns 18, they can direct how the money is used. “And while the money is counted as a parental asset, it impacts financial aid much less than if the assets were in the kid’s name,” he says.

However, the year following the first year that 529 assets are used, if they are owned by someone other than the parent, such as a grandparent or uncle, their use is counted as a child’s asset, Sullivan says. “One way around that is using the 529 funds in the junior or senior year, so that they do not negate financial aid,” he says. And another point to consider is that 529 plans cannot be jointly owned by parents, so if a couple gets divorced, the ex-spouse in charge of the funds may not use them as intended, Sullivan says.

Should a child decide not to go to college, the funds can be used for another child or even a grandchild, so 529 plans offer a lot of flexibility, Sullivan says. If the funds are not used for educational purposes, the principal contributions won’t be taxed, but the earnings will be subject to both federal and state taxes, plus a 10% penalty, he says.

That is why, says Matt Rogers, director of financial planning at eMoney Advisor, parents considering a 529 plan should be “reasonably sure their child will be attending college.”

The states also offer investment options with glide paths much like target-date funds, Rogers says. As the child approaches college, the equity exposure is dialed down while the bond exposure increases, he says. The preset glide path is also a good feature, as 529 plans limit trades that account owners can make to only two a year, Tipper says.

Finally, if a child receives a scholarship from a college, a parent can withdraw whatever that amount is from their 529 plan and be charged federal and state taxes, but not the 10% penalty, Sullivan says.

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