Navigating the Advertising Rules Applying to Investment Adviser and Broker-Dealer Advertising

Transcription

1 177 ALI-ABA Course of Study The Financial Services Regulatory Revolution: Navigating the New World of Broker-Dealer and Investment Adviser Regulation, Supervision, and Sales Practices October 21-22, 2010 Washington, D.C. Navigating the Advertising Rules Applying to Investment Adviser and Broker-Dealer Advertising By John Munch SEI Investments Distribution Company Oaks, Pennsylvania Clifford E. Kirsch Sutherland Asbill & Brennan LLP New York, New York

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3 179 Navigating the Advertising Rules Applying to Investment Adviser and Broker-Dealer Advertising Clifford Kirsch Sutherland 1114 Avenue of the Americas 40 th Floor New York, NY John Munch SEI Investments Company 1 Freedom Valley Drive Oaks, PA JMunch@seic.com I. Introduction Both the investment adviser and the broker-dealer regulatory regimes control registered entities ability to advertise their services. However, the advertising rules for broker-dealers and investment advisers are inconsistent, which poses a compliance challenge for dual investment adviser/broker-dealer registrants. This outline begins by introducing the legal frameworks surrounding investment adviser and broker-dealer advertising and then examines forms of advertising that have received special regulatory scrutiny. Next, it addresses how compliance personnel may approach designing an effective compliance infrastructure. The outline concludes by discussing current issues related to electronic advertising. A. Legal Frameworks At the outset, it should be noted that investment adviser advertising is governed primarily by the Investment Advisers Act of 1940 (the Advisers Act ) and other guidance promulgated by the Securities and Exchange Commission ( SEC ). Broker-dealer advertising, on the other hand, is governed primarily by rules issued by the Financial Industry Regulatory Authority ( FINRA ) (f/k/a the NASD) and its related guidance. 1. Legal Framework - Definitions a) Definition of Advertisements Under the Advisers Act Rule 206(4)-1(b) states: As used in the Rule an advertisement shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television which offers: any analysis, report or publication concerning securities; any graph, chart, formula or other device to determine securities to be bought or sold; or any other investment advisory service with respect to securities

4 180 Examples 1 Advertising Marketing Brochures Paid advertising in periodicals Internet Websites Form Letters / Mass Mailings messages to multiple recipients Audio / video tapes of marketing presentations Reprints of 3rd party publications Questionnaires from independent rating services -- Internal material that reaches clients -- RFPs (not advertisements per se, but treated in a similar fashion) 2 Not Advertising In person, telephone or other 1-on-1 conversations Written communication that does no more than respond to an unsolicited request by a client, prospective client, or consultant for specific information Regular account statements and reports sent only to existing clients (where statements do not seek to solicit new business) Academic articles that discuss portfolio management methodology, but do not offer advisory services b) Definition of Advertisements Under FINRA Rules FINRA advertising rules define six general types of communications: Advertisements are materials that are published or used in any electronic, printed or other public media. Typically, a broker or firm has little control over who views, reads or listens to advertisements. Examples include newspaper and magazine advertisements, billboards, and television and radio commercials. Sales Literature is any written or electronic communication with the public that does not meet the other definitions (advertisements, correspondence, institutional sales materials, public appearances and independently prepared reprints). Unlike advertisements, the broker or member has control regarding who has access to sales literature. Examples include brochures, shareholder reports and newsletters. Correspondence is defined as any written letter, or instant message sent to one or more current retail customers and/or fewer than 25 prospective retail customers within a 30-day period. Institutional Sales Materials are distributed or made available only to institutional investors, such as banks, broker-dealers, registered investment advisers or retirement plans with more than 100 participants. 1 With thanks to Steven A. Yadegari; Senior Vice President, General Counsel, Cramer Rosenthal McGlynn, LLC for use of the following chart. 2 See, e.g., In re CapitalWorks Investment Partners, LLC, et al, Advisers Act Release No. 2520, June 6,

5 181 Public Appearances are defined as an individual s unscripted participation in seminars, forums (including interactive electronic forums such as chat rooms), radio or television interviews, question and answer sessions, public appearances and other public speaking activities. Independently Prepared Reprints are reprints of article and publicly available registered investment company reports that are issued by an independent publisher that are neither solicited nor changed by the broker or firm. c) Practical Advice Is the advertisement for advisory services or broker-dealer services? o Relevant from a regulatory standpoint, but unclear if the distinction has meaning to retail investors. (See, e.g., Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, Rand Institute for Civil Justice, 2008, noting general retail investors lack of understanding of the regulatory distinctions between advisers and broker-dealers.) o As discussed later, certain broker-dealer materials need to be filed with FINRA. Thus, this determination is fundamental to both content requirements and administrative and compliance requirements. For example, this determination impacts permissible content requirements (e.g., testimonials), level and process for supervisory reviews, record-keeping requirements, SRO filing requirements, etc. If advertising/sales materials are used by a dual registrant, it will be difficult to establish that Advisers Act versus FINRA rules apply, unless it is clear that the solicitation is solely for advisory services and any corresponding securities trades will not be executed through the broker-dealer. o But see, NASD Interpretive Letter to FSC Securities Corporation, Re: Clarification of NASD Rules as to Certain Advisory Activity of Registered Persons, July 30, 1998, NASD Conduct Rule 2210 governs all member communications with the public.in administering the rule, however, NASD Regulation has not required the filing of marketing materials that are used exclusively to solicit on behalf of an advisory business. (emphasis added) Broker-dealer advertisements are not subject to the Advisers Act merely because the firm is also registered as an investment adviser. (E.F. Hutton & Co., Inc., SEC No-Action Letter, Feb. 2, 1979). From an in-house perspective, there is a critical on-going educational process to make sure that marketing, servicing and portfolio management personnel know what materials may be considered advertising