When fiduciaries want to advertise theperformance of client portfolios in advertisements, they would beprohibited from the following under the proposal. (Photo:Shutterstock)

The Securities and Exchange Commission's proposalto modernize rules that would make it easier for fiduciary advisersto advertise client testimonials could help RIAs distinguishthemselves 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 clienttestimonials. Investment advisers may be able to leverage theseclient testimonial changes to help distinguish their standard ofconduct from brokers," added Thompson.

The Investment Advisers Act governs how fiduciaries canadvertise their services under a rule that was established in1960.

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

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

Replacing "limitations" with "provisions"

The SEC's proposed amendments to its so-called Advertising Rulewould replace the current rule's "broadly drawn limitations" withmore "principles-based provisions," according to a fact sheet fromthe Commission.

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

Importantly, the proposed changes would allow RIAs to usetestimonials and endorsements, as long as advisers disclose if thetestimonial is from a client and whether the adviser paid for theendorsement.

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

Prohibited claims

"The SEC still puts conditions in the proposal to make sureperformance claims are representative of all a fiduciary'sclients—you can't just cherry-pick performance claims," heexplained.

"The basic rule of thumb is that you can't have communicationsthat are misleading or omit material information. That has notchanged in the proposal, but they have streamlined it," saidThompson.

When fiduciaries want to advertise the performance of clientportfolios in advertisements, they would be prohibited from thefollowing under the proposal:

• Gross performance results unless it provides (or offers toprovide promptly) a schedule of fees and expenses deducted tocalculate net performance;
• Any statement that the calculation or presentation ofperformance results has been approved or reviewed by theCommission;
• Performance results from fewer than all portfolios withsubstantially similar investment policies, objectives, andstrategies as those being offered or promoted in the advertisement,with limited exceptions;
• Performance results of a subset of investments extracted from aportfolio, unless it provides or offers to provide promptly theperformance results of all investments in the portfolio; and
• Hypothetical performance, unless the adviser adopts andimplements policies and procedures reasonably designed to ensurethat the performance is relevant to the financial situation andinvestment objectives of the recipient and the adviser providescertain specified information underlying the hypotheticalperformance.

The changes to the Advertising Rule, and a proposal to amend howfiduciaries can pay third parties for client recommendations, isopen to public comment for 60 days, closing in the first week ofJanuary next year.

READ MORE:

• Reg BI applies to rollover, accountrecommendations
• How SEC Chair Clayton answered 7 criticisms of RegBI, IA fiduciary guidance
• Do states have standing to sue SEC over RegBI?