business man holding sign saying Client Testimonials

The Securities and Exchange Commission's proposal to modernize rules that would make it easier for fiduciary advisers to advertise client testimonials could help RIAs distinguish themselves from brokers after the implementation of Regulation Best Interest.

"There's no question about it, when Reg BI goes into effect, that's only going to confuse investors," said Duane Thompson, senior policy analyst at Fi360.

Distinguish RIAs from brokers

"The SEC's proposal relaxes restrictions on using client testimonials. Investment advisers may be able to leverage these client testimonial changes to help distinguish their standard of conduct from brokers," added Thompson.

The Investment Advisers Act governs how fiduciaries can advertise their services under a rule that was established in 1960.

As recently as 2014, the SEC issued guidance intended to relax restrictions from using testimonials from third-party websites—think YELP—but with limited practical impact on RIAs.

"There were so many hoops for RIAs to jump through to use that most have shied away from it," said Thompson.

Replacing "limitations" with "provisions"

The SEC's proposed amendments to its so-called Advertising Rule would replace the current rule's "broadly drawn limitations" with more "principles-based provisions," according to a fact sheet from the Commission.

The rule's definition of advertisement would be formally updated to include social media communications.

Importantly, the proposed changes would allow RIAs to use testimonials and endorsements, as long as advisers disclose if the testimonial is from a client and whether the adviser paid for the endorsement.

The advertisement rule is designed to protect retail investors from misleading claims. That would not change under the proposal, said Thompson.

Prohibited claims

"The SEC still puts conditions in the proposal to make sure performance claims are representative of all a fiduciary's clients—you can't just cherry-pick performance claims," he explained.

"The basic rule of thumb is that you can't have communications that are misleading or omit material information. That has not changed in the proposal, but they have streamlined it," said Thompson.

When fiduciaries want to advertise the performance of client portfolios in advertisements, they would be prohibited from the following under the proposal:

Gross performance results unless it provides (or offers to provide promptly) a schedule of fees and expenses deducted to calculate net performance;
Any statement that the calculation or presentation of performance results has been approved or reviewed by the Commission;
Performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered or promoted in the advertisement, with limited exceptions;
Performance results of a subset of investments extracted from a portfolio, unless it provides or offers to provide promptly the performance results of all investments in the portfolio; and
Hypothetical performance, unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the financial situation and investment objectives of the recipient and the adviser provides certain specified information underlying the hypothetical performance.

The changes to the Advertising Rule, and a proposal to amend how fiduciaries can pay third parties for client recommendations, is open to public comment for 60 days, closing in the first week of January next year.

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SEC proposes easing restrictions on client testimonials for RIAs

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