Two major rules are being over- hauled by the Securities and Exchange Commission — theCustody and Advertising rules — andshould be nearing the finish line.
Each year, the Investment AdviserAssociation and National RegulatoryServices provide a snapshot of the registered investment advisor universe viatheir Evolution Revolution report. Aspart of the report, IAA and NRS provideupdates on critical rulemakings.
“We understand that there’s now
a dedicated team in the Division of
Investment Management that’s actively
working to update” the custody rule,
Karen Barr, president and CEO of IAA,
told me during a recent Human Capital
podcast. “We recommended a complete
review and rethink of the rule.”
As the IAA/NRS report states, the reg-
ulatory framework under the Advisers
Act Custody Rule “is overly complex,
unduly burdensome, and has caused
unnecessary confusion for advisors.”
Barr told me she expects the SEC to
release its proposed changes to the Custody
rule in the first quarter. The SEC’s Division
of Investment Management is considering
recommending that the Commission pro-
pose amendments to existing rules and/or
propose new rules under the Investment
Advisers Act of 1940 to improve and mod-
ernize the regulations around the custody
of funds or investments of clients by advi-
sors, the report explains.
“The common sense use of the word
‘custody’ is not matching up to how the
SEC defines it,” Barr told me. “There are
a lot of instances where the SEC is using
the rule to try to get at identity theft
rather than using identity theft rules.
There are a lot of different ways that theSEC could make this rule more commonsense and easier to apply in practice.”
SEC PLANS
The SEC’s regulatory agenda said theagency planned to recommend adopting amendments to the advertising andsolicitation rules for RIAs in October.That didn’t happen. Barr sees the changes to the ad rule, however, happening byyear-end.
The Division of InvestmentManagement plans to recommend thatthe commission adopt amendments torules 206( 4)- 1 and 206( 4)- 3 under theInvestment Advisers Act of 1940 regarding marketing communications andpractices by investment advisors.
While the Evolution Revolutionreport found that advisors with at leastone social media platform or websitecontinued to increase, going to 12,047 in2020 from 11,538 in 2019, the advertising rule has hampered advisors’ use ofsocial media to attract clients.
“Almost all social media posts aresubject to the SEC’s stringent” advertising rule, which hasn’t been materiallychanged since being adopted in 1961, thereport states.
As it stands now, the Advertising ruleprohibits or restricts client testimonials, references to past specific profitableinvestment recommendations, and portfolio performance without substantialdisclosure, according to IAA.
The confusion surrounding the custody rule stems from the fact that whileadvisors, in general, are prohibited from
THE PLAYING FIELD
Updates to Custody, Ad Rules Nearing
the Finish Line
The custody rule is confusing, and the outmoded ad rule hampers
advisors’ ability to use social media.
As the IAA/NRSreport states,Advisers Act CustodyRule “is overlycomplex, undulyburdensome, and hascaused unnecessaryconfusion foradvisors.”
