38 INVESTMENT ADVISOR DECEMBER 2020 | ThinkAdvisor.comhaving physical custody of client assets,the IAA report explains, “advisors are alsodeemed to have custody under certainother circumstances. Many of the questions in Form ADV relate to advisors thatare deemed to have custody, although tocomplicate matters further, advisors thatare deemed to have custody for certaintypes of reasons (such as the ability todeduct fees) are not required to answercertain custody questions on Form ADV.”Custody Guidance Update.This indicates that an advisormay have “inadvertent custody” if the client’s custodyagreement contains broadauthority for the advisor toinstruct the custodian, evenwhere the advisor is not aparty to the custody agreement and that authority isinconsistent with the advisor’s agreement with the client, the IAA report states.
Also, the guidance “calls
into question the industry’s understand-
ing of the authorized trading exception to
the Custody Rule, which has significant
implications for instruments that are not
processed or do not settle on a ‘delivery
versus payment’ basis (non-DVP).”
Dalia Blass, head of the IM Division,
stated at IAA’s compliance event in early
March, that the agency was still digesting
the comments that have come in regarding
the definition of advertising — the scope —
and “the compliance review aspect of the
proposal” as well as “where those two
areas can present potential problems.”
The comment period on the ad rule
proposal ended Feb. 10.
Blass explained that the proposalaffects “a diverse community” of investment advisors and their advertising andsolicitation duties, along with retail andinstitutional investors as clients as wellas private funds and robo-advisors.
Putting the advertising rule changes
together “was not an easy task,” Blass
said. “It was one of the harder proposals
for us to bring together,” considering the
rule predated the internet as well as other
market and technology developments.
IAA’s report states that the current
regulatory framework governing adver-
tising by investment advisors “is unnec-
essarily complex, overly broad in reach,
unduly prescriptive, and involves a com-
plex maze of enforcement actions and
several decades’ worth of SEC staff no-
action letters and interpretive releases
that are difficult to decipher and apply
to evolving circumstances.”
The Advertising rule “prohibits or
restricts client testimonials, references
to past specific profitable investment
recommendations, and portfolio perfor-
mance without substantial disclosure.”
Applying the Advertising rule “to
traditional media is already a challenge,
let alone to interactive environments,”
the report states.
The proposed rule would move adver-
tising compliance “from a rules-based
model to a risk-based (or principles-
based) model, under which an advi-
sor would be required to develop and
enforce policies and procedures to pre-
vent its advertisements from being false
or misleading,” the IAA report states.
If adopted, the risk-based approach
“could make social media more attrac-
tive for advisors, although the proposed
rule also includes onerous requirements
for the review and presentation” of ads.
RIAs SOCIAL MEDIA USE IN 2020
As the IAA/NRS report found last
year, LinkedIn is the preferred social
media site for advisors, with over
44% of all advisors ( 5,976) report-
ing at least one LinkedIn page — a
16% increase since 2019, the Evolution
Revolution report found.
While LinkedIn typically is considered a business and professional networking platform, it does offermarketing and advertising services, thereport notes.
Consumer-oriented services suchas Facebook and Twitter “are by farthe next most popular platforms” among advisors, withFacebook claiming 2,869advisor users (up 15% from2019) and Twitter being usedby 2,593 advisors (up 10%from 2019).
“While these increases aremore modest than those seenin 2019, the fact that users aresteadily increasing every yearindicates that firms, while stillgenerally reluctant, are starting to embrace social mediaas a necessary element of theirmarketing strategies, despite the compliance challenges they present,” thereport notes.
Other social media platforms used byadvisors include You Tube (830, up 20%since 2019), Instagram (639, up 45%),Vimeo (84, up 25%), and SoundCloud(77, up 17%).
TOP STATES FOR ADVISORS
As to where advisors are headquartered,the IAA/NRS report found that NewYork still holds the most, with 2,512advisory firms in 2020, up from 2,449in 2019. California comes in second,with 1,630 firms versus 1,585 in 2019.Texas has 767 firms, up from 713, whileMassachusetts comes in fourth at 604firms, up from 592 last year.
Coming in fifth and sixth are Illinois,with 601 firms, up from 586 in 2019 andFlorida, with 567 firms, up from 509last year.
Washington Bureau Chief Melanie Waddell canbe reached at mwaddell@alm.com.
Putting the advertising rule
changes together “was not an
easy task. It was one of the harder
proposals for us to bring together,”
considering the rule predated the
internet as well as other market
and technology developments.
—Dalia Blass, IAA
