[Federal Register Volume 84, Number 237 (Tuesday, December 10, 2019)]
[Proposed Rules]
[Pages 67518-67656]
[FR Doc No: 2019-24651]

Vol. 84

Tuesday,

No. 237

December 10, 2019

Part II

 Securities and Exchange Commission

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17 CFR Parts 275 and 279

Investment Adviser Advertisements; Compensation for Solicitations;
Proposed Rule

Federal Register / Vol. 84 , No. 237 / Tuesday, December 10, 2019 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 275 and 279

[Release No. IA-5407; File No. S7-21-19]
RIN: 3235-AM08

Investment Adviser Advertisements; Compensation for Solicitations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or
the ``SEC'') is proposing amendments under the Investment Advisers Act
of 1940 (the ``Advisers Act'' or the ``Act'') to the rules that
prohibit certain investment adviser advertisements and payments to
solicitors, respectively. The proposed amendments to the advertising
rule reflect market developments since the rule's adoption in 1961. The
proposed amendments to the solicitation rule update its coverage to
reflect regulatory changes and the evolution of industry practices
since we adopted the rule in 1979. The Commission is also proposing
amendments to Form ADV that are designed to provide the Commission with
additional information regarding advisers' advertising practices.
Finally, the Commission is proposing amendments under the Advisers Act
to the books and records rule, to correspond to the proposed changes to
the advertising and solicitation rules.

DATES: Comments should be received on or before February 10, 2020.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-21-19 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-21-19. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (http://www.sec.gov/rules/proposed.shtml).
Comments also are available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change. Persons
submitting comments are cautioned that the Commission does not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make publicly
available.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Matthew Cook, Emily Rowland, or James
Maclean, Senior Counsels; or Thoreau Bartmann or Melissa Roverts Harke,
Senior Special Counsels, at<PHONE_NUMBER> or<EMAIL_ADDRESS>
Investment Adviser Regulation Office, Division of Investment
Management, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment amendments to 17 CFR 275.206(4)-1 (rule 206(4)-1), 17 CFR
275.206(4)-3 (rule 206(4)-3), and 17 CFR 275.204-2 (rule 204-2) under
the Investment Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.] (the
``Advisers Act''),\1\ and amendments to Form ADV [17 CFR 279.1] under
the Advisers Act.
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    \1\ Unless otherwise noted, when we refer to the Advisers Act,
or any paragraph of the Advisers Act, we are referring to 15 U.S.C.
80b, at which the Advisers Act is codified, and when we refer to
rules under the Advisers Act, or any paragraph of those rules, we
are referring to title 17, part 275 of the Code of Federal
Regulations [17 CFR part 275], in which these rules are published.
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Table of Contents

I. Introduction
    A. Advertising Rule Background
    B. Cash Solicitation Rule Background
II. Discussion
    A. Proposed Amendments to the Advertising Rule
    1. Structure of the Rule
    2. Scope of the Rule: Definition of ``Advertisement''
    3. General Prohibitions
    4. Testimonials, Endorsements, and Third Party Ratings
    5. Performance Advertising
    6. Portability of Performance, Testimonials, Third Party
Ratings, and Specific Investment Advice
    7. Review and Approval of Advertisements
    8. Proposed Amendments to Form ADV
    B. Proposed Amendments to the Solicitation Rule
    1. Scope of the Rule: Who is a solicitor?
    2. Expanding the Rule To Address All Forms of Compensation
    3. Compensation for the Solicitation of Existing and Prospective
Investors
    4. Solicitor Disclosure
    5. Written Agreement
    6. Adviser Oversight and Compliance; Elimination of Additional
Provisions
    7. Exemptions
    8. Disqualification for Persons Who Have Engaged in Misconduct
    C. Recordkeeping
    D. Existing Staff No-Action Letters and Other Related Guidance
    1. Letters To Be Reviewed Concerning Rule 206(4)-1
    2. Letters To Be Reviewed Concerning Rule 206(4)-3
    E. Transition Period and Compliance Date
III. Economic Analysis
    A. Introduction
    B. Broad Economic Considerations
    C. Baseline
    1. Market for Investment Advisers
    2. Market for Solicitors
    3. RIA Clients
    D. Costs and Benefits of the Proposed Rule and Form Amendments
    1. General Costs and Benefits of the Advertising Rule
    2. Specific Costs and Benefits of the Advertising Rule
    3. Costs and Benefits of the Proposed Amendments to the
Solicitation Rule
    E. Efficiency, Competition, Capital Formation
    1. Advertising
    2. Solicitation
    F. Reasonable Alternatives Considered
    1. Reduce Specific Limitations on Investment Adviser
Advertisements
    2. Not Have an Advertising Rule and Rely on Section 206
    3. Define Non-Retail Investors as Accredited Investors or
Qualified Clients
    4. Further Bifurcate Additional Requirements
    5. No Bifurcation
    6. Hypothetical Performance Alternatives
    7. Alternatives to Proposed Amendments to Rule 206(4)-3
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Rule 206(4)-1
    1. Testimonials and Endorsements in Advertisements
    2. Third-Party Ratings in Advertisements
    3. Performance Advertising
    4. Additional Conditions Related to Performance Results in
Retail Advertisements
    5. Review and Approval of Advertisements
    6. Total Hour Burden Associated With Proposed Rule 206(4)-1
    C. Rule 206(4)-3
    D. Rule 204-2
    E. Form ADV
    F. Request for Comments

V. Initial Regulatory Flexibility Analysis
    A. Reason for and Objectives of the Proposed Action
    1. Proposed Rule 206(4)-1
    2. Proposed Amendments to Rule 206(4)-3
    3. Proposed Rule 204-2
    4. Proposed Amendments to Form ADV
    B. Legal Basis
    C. Small Entities Subject to the Rule and Rule Amendments
    1. Small Entities Subject to Amendments to Advertising Rule
    2. Small Entities Subject to Amendments to Solicitation Rule
    3. Small Entities Subject to Amendments to the Books and Records
Rule 206(4)-2
    4. Small Entities Subject to Amendments to Form ADV
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    1. Proposed Rule 206(4)-1
    2. Proposed Amendments to Rule 206(4)-3
    3. Proposed Amendments to Rule 204-2
    4. Proposed Amendments to Form ADV
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    1. Proposed Rule 206(4)-1
    2. Proposed Amendments to Rule 206(4)-3
    3. Proposed Amendments to Form ADV
    F. Significant Alternatives
    1. Proposed Rule 206(4)-1
    2. Proposed Rule 206(4)-3
    G. Solicitation of Comments
VI. Consideration of Impact on the Economy
VII. Statutory Authority
IV. Appendix A: Changes to Form ADV
V. Appendix B: Investor Feedback Flyer
VI. Appendix C: Smaller Adviser Feedback Flyer

I. Introduction

    We are proposing reforms of two rules under the Advisers Act
relating to how advisers advertise to and solicit clients and
investors. First, we are proposing a rule addressing advertisements by
investment advisers that would replace the rule that we adopted in
1961, rule 206(4)-1, which we have not changed substantively since
adoption.\2\ The proposed rule would replace the current rule's broadly
drawn limitations with principles-based provisions. The proposed rule
contains general prohibitions of certain advertising practices, as well
as more tailored restrictions and requirements that are reasonably
designed to prevent fraud with respect to certain specific types of
advertisements. This approach permits the use of testimonials and
endorsements, and third-party ratings, subject to certain conditions.
This approach also permits the presentation of performance with
tailored requirements based on an advertisement's intended audience.\3\
The proposal recognizes developments in technology, changing profiles
of investment advisers registered with the Commission, and our
experience administering the current rule.
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    \2\ The current rule has been amended once, when the Commission
revised the introductory text of paragraph (a) as part of a broader
amendment of several rules under the Advisers Act to reflect changes
made by the National Securities Market Improvement Act of 1996.
Rules Implementing Amendments to the Investment Advisers Act of
1940, Release No. IA-1633 (May 15, 1997) [62 FR 28112, 28135 (May
22, 1997)].
    \3\ As discussed below, we are proposing to define clients and
investors that are ``qualified purchasers'' or ``knowledgeable
employees'' as ``Non-Retail Persons'' and to define all other
clients and investors as ``Retail Persons.'' Similarly, we are
proposing to define advertisements directed at Non-Retail Persons as
``Non-Retail Advertisements'' and all other advertisements as
``Retail Advertisements.''
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    Additionally, we are proposing to amend the Advisers Act cash
solicitation rule, rule 206(4)-3, to update its coverage to reflect
regulatory changes and the evolution of industry practices since we
adopted the rule in 1979. We are proposing to expand the rule to cover
solicitation arrangements involving all forms of compensation, rather
than only cash compensation, eliminate requirements duplicative of
other rules, and tailor the required disclosures solicitors would
provide to investors. The proposed rule would also refine the existing
provisions regarding disciplinary events that would disqualify a person
or entity from acting as a solicitor.
    Finally, we are proposing related amendments to Form ADV that are
designed to provide additional information regarding advisers'
advertising practices, and amendments to the Advisers Act books and
records rule, rule 204-2, related to the proposed changes to the
advertising and solicitation rules.

A. Advertising Rule Background

    Advertisements are a useful tool for investment advisers seeking to
obtain new investors and to retain existing investors.\4\ Investment
advisers disseminate advertisements about their services to inform
prospective investors and to persuade them to obtain and pay for those
services or to learn more about the advisers. Similarly, advertisements
can provide existing investors with information about new or revised
services. Accordingly, advertisements can provide existing and
prospective investors with useful information as they choose among
investment advisers and advisory services. At the same time,
advertisements present risks of misleading existing and prospective
investors because the investment adviser's interest in attracting or
retaining them may conflict with their interests, and the adviser is in
control of the design, content, format, media, timing, and placement of
its advertisements with a goal of obtaining or retaining business. This
goal may create an incentive for advertisements to mislead existing and
prospective investors about the advisory services they would receive,
including indirectly through the services provided to pooled investment
vehicles.
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    \4\ As discussed below, we are proposing to apply the rule to
advertisements disseminated by investment advisers to their clients
and prospective clients as well as to investors and prospective
investors in pooled investment vehicles that those advisers manage.
For purposes of this release, we refer to any of these advertising
recipients as ``investors,'' unless we specify otherwise.
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    The Commission recognized the potential harm to investors from
misleading advertisements when it adopted the current advertising rule
in 1961.\5\ The Commission explained when it proposed the current rule
that investment advisers generally must adhere to a stricter standard
of conduct in advertisements than that applicable to ``ordinary
merchants'' because securities ``are intricate merchandise,'' and
investors ``are frequently unskilled and unsophisticated in investment
matters.'' \6\ These concerns have motivated the Commission to adopt
other rules on advertising investment services and products, including
for registered investment companies (``RICs'').\7\
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    \5\ Advertisements by Investment Advisers, Release No. IA-121
(Nov. 1, 1961) [26 FR 10548 (Nov. 9, 1961)] (``Advertising Rule
Adopting Release'').
    \6\ Investment Advisers Notice of Proposed Rulemaking, Release
No. IA-113 (Apr. 4, 1961) [26 FR 3070, 3071 (Apr. 11, 1961)]
(``Advertising Rule Proposing Release'').
    \7\ See 17 CFR 230.482 (regulating advertising with respect to
securities of RICs and business development companies (``BDCs''));
17 CFR 230.156 (regulating investment company sales literature).
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    In adopting the current rule, the Commission used its authority
under section 206(4) of the Advisers Act to target advertising
practices that it believed were likely to be misleading by imposing
four per se prohibitions.\8\ First, the current rule prohibits
testimonials concerning the investment adviser or its services.\9\
Second, the current rule prohibits direct or indirect references to
specific profitable recommendations that the investment adviser has
made in the past (``past

specific recommendations'').\10\ Third, the current rule prohibits
representations that any graph or other device being offered can by
itself be used to determine which securities to buy and sell or when to
buy and sell them.\11\ Fourth, the current rule prohibits any statement
to the effect that any service will be furnished free of charge, unless
such service actually is or will be furnished entirely free and without
any condition or obligation.\12\
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    \8\ See Section 206(4) of the Advisers Act (authorizing the
Commission to define and prescribe ``means reasonably designed to
prevent, such acts, practices, and courses of business as are
fraudulent, deceptive, or manipulative'').
    \9\ Rule 206(4)-1(a)(1) (prohibiting publication, circulation,
or distribution of any advertisement ``which refers, directly or
indirectly, to any testimonial of any kind concerning the investment
adviser or concerning any advice, analysis, report or other service
rendered by such investment adviser'').
    \10\ Rule 206(4)-1(a)(2) (prohibiting publication, circulation,
or distribution of any advertisement ``which refers, directly or
indirectly, to past specific recommendations of such investment
adviser which were or would have been profitable to any person'' but
providing that an advertisement may set out or offer to furnish a
list of all recommendations within the immediately preceding period
of not less than one year under certain conditions).
    \11\ Rule 206(4)-1(a)(3) (prohibiting publication, circulation,
or distribution of any advertisement ``which represents, directly or
indirectly, that any graph, chart, formula or other device being
offered can in and of itself be used to determine which securities
to buy or sell, or when to buy or sell them; or which represents
directly or indirectly, that any graph, chart, formula or other
device being offered will assist any person in making his own
decisions as to which securities to buy, sell, or when to buy or
sell them, without prominently disclosing in such advertisement the
limitations thereof and the difficulties with respect to its use'').
    \12\ Rule 206(4)-1(a)(4) (prohibiting publication, circulation,
or distribution of any advertisement ``which contains any statement
to the effect that any report, analysis, or other service will be
furnished free or without charge, unless such report, analysis or
other service actually is or will be furnished entirely free and
without any condition or obligation, directly or indirectly'').
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    In addition to the four per se prohibitions, the current rule
prohibits any advertisement which contains any untrue statement of a
material fact, or which is otherwise false or misleading.\13\ This
prohibition operates more generally than the specific prohibitions to
address advertisements that do not violate any per se prohibition but
still may be fraudulent, deceptive, or manipulative and, accordingly,
be misleading.
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    \13\ Rule 206(4)-1(a)(5).
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    The concerns that motivated the Commission to adopt the current
rule still exist today and are echoed in the rules adopted under other
regulatory and self-regulatory regimes governing the use of
communications by financial professionals.\14\ However, in the nearly
60 years since the current rule's adoption, issues and questions have
arisen about the current rule's application, particularly the
application of the prohibitions of testimonials and past specific
recommendations. Additionally, some of the most common questions
related to the current rule (and the anti-fraud provisions of the
Advisers Act) relate to the appropriate presentation of performance in
advertisements, which the current rule does not explicitly address. The
breadth of the current rule's prohibitions, as well as the lack of
explicit prescriptions related to the presentation of performance in
the rule, can present compliance challenges and potentially have a
chilling effect on advisers' ability to provide useful information in
communications that are considered advertisements.
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    \14\ For example, the Financial Industry Regulatory Authority's
(``FINRA'') rule 2210 governs broker-dealers' communications with
the public, including communications with retail and institutional
investors, and provides standards for the content, approval,
recordkeeping, and filing of communications with FINRA. See
Advertising Regulation, available at http://www.finra.org/industry/advertising-regulation. The Commodity Futures Trading Commission
likewise regulates certain types of advertising by commodity pool
operators, commodity trading advisors, and their respective
principals. 17 CFR 4.41 Advertising by Commodity Pool Operators,
Commodity Trading Advisors, and the Principals Thereof (prohibiting,
in part, any advertisements that employ any device, scheme or
artifice to defraud any client or prospective client). The Municipal
Securities Rulemaking Board regulates advertisements concerning the
products or services of certain brokers, dealers, and municipal
securities dealers, and, beginning in 2019, will regulate
advertisements by municipal advisers. Self-Regulatory Organizations;
Municipal Securities Rulemaking Board; Order Granting Approval of a
Proposed Rule Change, Consisting to Amendments to Rule G-21, on
Advertising, Proposed New Rule G-40, on Advertising by Municipal
Advisers, and a Technical Amendment to Rule G-42, on Duties of Non-
Solicitor Municipal Advisers, Release No. 34-83177 (May 7, 2018) [83
FR 21794 (May 10, 2018)]. MSRB Rule G-40 became effective on August
23, 2019.
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    Moreover, changes that have occurred since the current rule's
adoption lead us to believe providing a more principles-based approach
would be beneficial. Specifically, in our development of the proposed
rule, we have considered changes in the technology used for
communications, the expectations of investors shopping for advisory
services, and the nature of the investment advisory industry, including
the types of investors seeking and receiving investment advisory
services. These changes have informed not only how we propose to update
the rule to address current technology, expectations, and market
practice but also our general approach of proposing principles-based
rules in order to accommodate the continual evolution and interplay of
technology and advice.\15\
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    \15\ See, e.g., Modernization of Regulation S-K Items 101, 103,
and 105, Release No. 33-10668 (Aug. 8, 2019) [84 FR 44358 (Aug. 23,
2019)] (discussing the role of ``principles-based'' disclosure
requirements in articulating a disclosure concept rather than a
specific line-item requirement).
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    Advances in Technology. Advances in technology have altered the
ways in which service providers, including advisers, interface with
consumers generally, including with existing and prospective investors.
These advances have also changed the manner in which those consumers
evaluate products and services. In the decades since the current rule
was adopted, the use of the internet, mobile applications, and social
media \16\ has become an integral part of business communications.
These advances in technology have led to significant growth in the
nature and volume of information available to individuals and
businesses,\17\ for example, by allowing them to access and share user
reviews. However, websites and social media can create challenges in
complying with the current rule's prohibition on testimonials,
particularly for advisers that rely heavily on electronic platforms to
communicate with existing and prospective investors.\18\
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    \16\ ``Social media'' is an umbrella term that encompasses
various activities that integrate technology, social interaction,
and content creation. Social media may use many technologies,
including, but not limited to, blogs, microblogs, wikis, photos and
video sharing, podcasts, social networking, and virtual worlds. The
terms ``social media,'' ``social media sites,'' ``sites,'' and
``social networking sites'' are used interchangeably in this
release.
    \17\ See Report on the Review of the Definition of ``Accredited
Investor'' (Dec. 18, 2015) (``Accredited Investor Staff Report''),
available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf, at
5 (noting ``increased informational availability'' and ``changes in
the way investors communicate'' since adoption of the ``accredited
investor'' definition in 1982).
    \18\ See also Guidance on the Testimonial Rule and Social Media,
Division of Investment Management Guidance Update No. 2014-04 (Mar.
2014) (``IM Staff Social Media Guidance''), in which our staff
discussed its views on application of the current rule to various
situations involving social media. Any staff guidance or no-action
letters discussed in this release represent the views of the staff
of the Division of Investment Management. They are not a rule,
regulation, or statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved their content. Staff
guidance has no legal force or effect; it does not alter or amend
applicable law, and it creates no new or additional obligations for
any person.
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    Expectations of Consumers Shopping for Services. Consumers today
often rely on the internet to obtain information when considering
buying goods and services across the world, including advisory services
and those of other financial professionals. Many websites allow
potential buyers to compare and contrast the goods and services being
offered, including through reviews and ratings provided by those who
have previously bought the relevant goods and services. We believe that
consumers' ability to seek out reviews and other information, as well
as their interest in doing so, when evaluating

products and services has changed since the adoption of the current
rule.
    Profiles of the Investment Advisory Industry. The variety of
advisers subject to the advertising rule has changed since the current
rule's adoption. Specifically, the type of advisory services provided
by advisers generally has changed over time, from impersonal investment
advice distributed to many prospective investors in the form of
newsletters and other periodicals to more personalized advisory
services. The ways advisers and investors interact and engage has also
changed; some investors today rely on digital investment advisory
programs, sometimes referred to as ``robo-advisers,'' for investment
advice, which is provided exclusively through electronic platforms
using algorithmic-based programs.\19\ In addition, passage of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act'') \20\ required many investment advisers to private funds \21\
that were previously exempt from registration to register with the
Commission and become subject to more provisions of the Advisers
Act.\22\
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    \19\ See, e.g., Robo-Advisers, Division of Investment Management
Guidance Update No. 2017-02 (Feb. 2017); see also Concept Release on
Harmonization of Securities Offering Exemptions, Release No. IA-5256
(June 18, 2019) [84 FR 30460 (June 26, 2019)] (``2019 Concept
Release'') (describing the use of robo-advisers as part of the broad
availability ``in recent years'' of investment advisory services to
retirement investors).
    \20\ See the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) (the
``Dodd-Frank Act'').
    \21\ See 15 U.S.C. 80b-2(a)(29) (defining a ``private fund'' as
``an issuer that would be an investment company, as defined in
section 3 of the Investment Company Act of 1940, but for section
3(c)(1) or 3(c)(7) of that Act'').
    \22\ As part of the Dodd-Frank Act, the Private Fund Investment
Advisers Registration Act of 2010 (enacted as Title IV of the Dodd-
Frank Act) repealed the ``private fund adviser exemption'' from
registration under section 203(b)(3) of the Advisers Act, on which
many advisers to private funds had relied to remain outside the
purview of the Advisers Act. As a result, the Commission saw an
increase in the number of registered investment advisers servicing
private funds. Based on a review of Form ADV data between June 2012
and August 2019, the number of investment advisers to private funds
registered with the Commission increased from approximately 4,050 to
approximately 4,856. The number of private funds advised by
registered investment advisers has increased during that same time
period, from 24,476 in June 2012 to 37,004 in August 2019. The Dodd-
Frank Act created a narrower set of exemptions for advisers that
advise exclusively venture capital funds and advisers solely to
private funds with less than $150 million in assets under management
in the United States. See section 203(l) and section 203(m) of the
Advisers Act.
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    Additionally, the diversity in types of investors seeking and
receiving advisory services has increased since the current rule's
adoption.\23\ When adopting the current rule, the Commission stated
``clients or prospective clients of investment advisers are frequently
unskilled and unsophisticated in investment matters.'' \24\ Changes in
the investor population since the current rule's adoption suggest we
should reconsider some specific provisions of the current rule and
consider how best to address new issues. For example, assets under
management for institutional clients have increased in recent
years.\25\ These types of investors often have their own teams of in-
house investment professionals to manage their assets or oversee the
retention of outside managers. They therefore often want and have the
resources to evaluate information that the current rule may restrict.
At the same time, household and individual participation in the capital
markets through intermediaries, like investment advisers, has
increased. As a result, more individuals who are not themselves
professional investors may be seeking or receiving advertisements for
these services. Accordingly, rather than the ``one-size-fits-all''
approach of the current rule, we believe it is appropriate for the rule
to reflect the intended audience of the advertisement, including
investors' access to resources for assessing advertising content for
advisory services, such as presentation of hypothetical performance.
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    \23\ We have previously indicated the diversity in types of
clients that receive investment advisory services. See, e.g.,
Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, Release No. IA-5248 (June 5, 2019) (``Standard
of Conduct Release'') (noting the large variety of clients served by
investment advisers ``from retail clients with limited assets and
investment knowledge and experience to institutional clients with
very large portfolios and substantial knowledge, experience, and
analytical resources'').
    \24\ Advertising Rule Adopting Release, supra footnote 5.
    \25\ As discussed below, see infra section III.B.1, a
substantial percentage of assets under management at investment
advisers is held by institutional clients.
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    In light of the Commission's decades of experience in administering
the current rule and the other developments described above, as well as
extensive outreach by Commission staff to investor advocacy groups,
adviser groups, legal practitioners, and others, we are proposing
significant changes to the current rule as discussed below.
Specifically, we are proposing a restructured and more tailored rule
that: (i) Modifies the definition of ``advertisement'' to be more
``evergreen'' in light of ever-changing technology; (ii) replaces the
current four per se prohibitions with a set of principles that are
reasonably designed to prevent fraudulent or misleading conduct and
practices; (iii) provides certain additional restrictions and
conditions on testimonials, endorsements, and third-party ratings; and
(iv) includes tailored requirements for the presentation of performance
results, based on an advertisement's intended audience. The proposed
rule also would require internal review and approval of most
advertisements and require each adviser to report additional
information regarding its advertising practices in its Form ADV.

B. Cash Solicitation Rule Background

    Another way that advisers attract clients and investors,\26\ beyond
advertising communications, is through compensating firms or
individuals to solicit new investors. Some investment advisers directly
employ individuals to solicit new investors on their behalf, and some
investment advisers arrange for related entities or third parties, such
as broker-dealers, to solicit new investors. The person or entity
compensated, commonly called the ``solicitor,'' has a financial
incentive to recommend the adviser to the investor. Without appropriate
disclosure, this compensation creates a risk that the investor would
mistakenly view the solicitor's recommendation as being an unbiased
opinion about the adviser's ability to manage the investor's assets and
would rely on that recommendation more than he or she otherwise would
if the investor knew of the incentive.
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    \26\ As discussed below, we are proposing to apply the rule to
compensation by investment advisers to solicitors to obtain clients
and prospective clients as well as investors and prospective
investors in private funds that those advisers manage. For purposes
of this release, we refer to any of these persons as ``investors,''
unless we specify otherwise.
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    We adopted rule 206(4)-3, the cash solicitation rule, in 1979 to
help ensure that clients become aware that paid solicitors have a
conflict of interest.\27\ The current rule makes the adviser's payment
of a cash fee for referrals of

advisory clients unlawful unless the solicitor and the adviser enter
into a written agreement that, among other provisions, requires the
solicitor to provide the client with a current copy of the investment
adviser's Form ADV brochure and a separate written solicitor disclosure
document.\28\ The solicitor disclosure must contain information
highlighting the solicitor's financial interest in the client's choice
of an investment adviser.\29\ In addition, the rule prescribes certain
methods of compliance, such as requiring an adviser to receive a signed
and dated client acknowledgment of receipt of the required
disclosures.\30\ The current rule also prohibits advisers from making
cash payments to solicitors that have previously been found to have
violated the Federal securities laws or have been convicted of a
crime.\31\
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    \27\ See Requirements Governing Payments of Cash Referral Fees
by Investment Advisers, Release No. 688 (July 12, 1979) [44 FR 42126
(Jul. 18, 1979)] (the ``1979 Adopting Release''). When we proposed
the rule, we noted that referral arrangements in the investment
advisory industry are ``fraught with possible abuses'' and we
considered prohibiting investment advisers from making referral
payments to persons not directly employed by the firm. See
Requirements Governing Payments of Cash Referral Fees by Investment
Advisers, Release No. 615 (Feb. 11, 1978) [43 FR 6095 (Feb. 13,
1978)] (the ``1978 Proposing Release''), at 6096; 1979 Adoption
Release, id., at 42126. However, we concluded that investors'
interests could be protected if the conflicts of interest are
properly disclosed to advisory clients and certain other regulatory
safeguards are met. See 1979 Adopting Release, id., at 42126.
    \28\ See rule 206(4)-3(a)(2)(iii)(A). When the Commission
proposed the solicitation rule, it did not include non-cash
compensation in the rule. However, when the Commission adopted the
rule, it noted that commenters suggested that a prohibition of cash
solicitation fees altogether might lead to use of other, possibly
undisclosed, methods of compensation, such as directed brokerage.
1979 Adopting Release, supra footnote 27, at n.6.
    \29\ 1978 Proposing Release, supra footnote 27. See rule 206(4)-
3(b)(1) through (6). The solicitor disclosure must also include
prescribed information about the cost that the client would bear in
the advisory relationship as a result of the compensated referral.
    \30\ See rule 206(4)-3(a)(2)(iii)(B). Referrals by solicitors
for impersonal advisory services and certain solicitors that are
affiliated with the adviser are exempt from these requirements. See
rule 206(4)-3(a)(2)(i) and (ii).
    \31\ See rule 206(4)-3(a)(1)(ii).
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    The current solicitation rule has not been amended since adoption
40 years ago. In this time, advisory and referral practices have
evolved, as has the regulatory framework for investment advisers. For
example, advisers use various types of compensation, including non-cash
compensation, in referral arrangements. Over time, we have gained a
greater understanding of these arrangements, causing us to re-evaluate
whether the rule should apply to all forms of compensation for
referrals. In addition, as discussed above, the passage of the Dodd-
Frank Act required many investment advisers to private funds that were
previously exempt from registration to register with the Commission and
become subject to additional provisions of the Advisers Act and the
rules thereunder. Private funds and their advisers often hire
solicitors to obtain investors in the funds.\32\
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    \32\ See Section 7.B.(1)(A).28 (Private Fund Reporting) of
Schedule D to Form ADV Part 1A (requiring advisers to private funds
to list, among other things, the name of their marketer (including
any solicitor)). As of September 30, 2019, approximately 33% of
registered investment advisers that report that they advise one or
more private funds on Form ADV also report that the private fund
uses the services of someone other than the adviser or its employees
for marketing purposes.
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    Additionally, the Commission has adopted other regulatory
requirements for advisers since the current rule's adoption that are
more principles-based. For example, the Act's compliance rule could
broadly replace some of the rule's prescriptive requirements, such as
the requirement to obtain written and signed acknowledgments of each
solicitor disclosure.\33\ In addition, the Act's brochure delivery rule
may duplicate the current cash solicitation rule's requirement that the
solicitor also deliver the adviser's brochure.\34\ Finally, we believe
it is appropriate to consider revising the solicitor disqualification
provision to address certain types of conduct.
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    \33\ See rule 206(4)-7; Compliance Programs of Investment
Companies and Investment Advisers, Release No. IA-2204 (Dec. 17,
2003) [68 FR 74714 (Dec. 24, 2003)] (``Compliance Program Adopting
Release'').
    \34\ The same year we adopted the cash solicitation rule, we
adopted for the first time the Form ADV brochure, which we have
significantly amended over time. See 1979 Adopting Release, supra
footnote 27, at n.14 and accompanying text. See Amendments to Form
ADV, Release No. IA-3060 (July 28, 2010) [75 FR 155 (Aug. 12, 2010)]
(``2010 Form ADV Amendments Release''), at section I. The Commission
noted in the 1979 adopting release that ``delivery of a brochure by
the solicitor will, in most cases, satisfy the investment adviser's
obligation to deliver a brochure to the client under Rule 204-3.''
See 1979 Adopting Release, supra footnote 27.
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    Therefore, we are proposing to expand the rule to cover
solicitation arrangements involving all forms of compensation, rather
than only cash compensation. We are proposing to expand the rule to
apply to the solicitation of current and prospective investors in any
private fund, rather than only to ``clients'' (including prospective
clients) of the investment adviser. Our proposal would require
solicitor disclosure to investors, which alerts investors to the effect
of this compensation on the solicitor's incentive in making the
referral. In addition, we are proposing changes to eliminate: (i) The
requirement that solicitors provide the client with the adviser's Form
ADV brochure; and (ii) the explicit reminders of advisers' requirements
under the Act's special rule for solicitation of government entity
clients and their fiduciary and other legal obligations. Our proposal
would also eliminate the requirement that an adviser obtain a signed
and dated acknowledgment from the client that the client has received
the solicitor's disclosure, and instead would afford advisers the
flexibility in developing their own policies and procedures to
ascertain whether the solicitor has complied with the rule's required
written agreement. We are also proposing two new exceptions to the
solicitation rule, an exception for de minimis payments (less than $100
in any 12 month period) and one for nonprofit programs designed to
provide a list of advisers to interested parties. Finally, we are
proposing to refine the rule's solicitor disqualification provision to
expand the types of disciplinary events that would trigger the rule's
disqualification provision, while also providing a conditional carve-
out for certain types of Commission actions.

II. Discussion

A. Proposed Amendments to the Advertising Rule

1. Structure of the Rule
    The proposed advertising rule is organized as follows, as a means
reasonably designed to prohibit fraudulent, deceptive or manipulative
acts: (i) General prohibitions of certain advertising practices
applicable to all advertisements; \35\ (ii) tailored restrictions or
conditions on certain practices (testimonials, endorsements, and third-
party ratings) applicable to all advertisements; \36\ (iii) tailored
requirements for the presentation of performance results, based on the
advertisement's intended audience; \37\ and (iv) a compliance
requirement that most advertisements be reviewed and approved in
writing by a designated employee before dissemination.\38\ The proposed
rule would apply to all investment advisers registered, or required to
be registered, with the Commission.\39\
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    \35\ See proposed rule 206(4) 1(a).
    \36\ See proposed rule 206(4) 1(b).
    \37\ See proposed rule 206(4) 1(c).
    \38\ See proposed rule 206(4) 1(d).
    \39\ The proposed rule would not apply to advisers that are not
required to register as investment advisers with the Commission,
such as exempt reporting advisers or state-registered advisers.
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2. Scope of the Rule: Definition of ``Advertisement''
a. Proposed Definition
    The proposed rule would define ``advertisement'' as ``any
communication, disseminated by any means, by or on behalf of an
investment adviser, that offers or promotes the investment adviser's
investment advisory services or that seeks to obtain or retain one or
more investment advisory clients or investors in any pooled investment
vehicle advised by the investment adviser.'' The proposed

definition of ``advertisement'' would not include the following four
categories of communications:
    (A) Live oral communications that are not broadcast on radio,
television, the internet, or any other similar medium;
    (B) A communication by an investment adviser that does no more than
respond to an unsolicited request for specified information about the
investment adviser or its services, other than (i) any communication to
a Retail Person that includes performance results or (ii) any
communication that includes hypothetical performance;
    (C) An advertisement, other sales material, or sales literature
that is about an investment company registered under the Investment
Company Act of 1940 (the ``Investment Company Act'') or about a
business development company (``BDC'') and that is within the scope of
rule 482 or rule 156 under the Securities Act of 1933 (the ``Securities
Act''); or
    (D) Any information required to be contained in a statutory or
regulatory notice, filing, or other communication.
    The proposed rule is intended to define ``advertisement'' so that
it is flexible enough to remain relevant and effective in the face of
advances in technology and evolving industry practices.\40\ This
proposed definition reflects several differences from the current rule.
One difference is the expansion of the types of communications
addressed to reflect evolving methods of communication, rather than the
methods that were most common when the current rule was adopted (e.g.,
newspapers, television, and radio).\41\ Second, the proposed definition
applies explicitly to advertisements disseminated to investors in
pooled investment vehicles, with a carve-out for publicly offered
investment companies. Third, the proposed definition does not retain
the current rule's ``more than one person'' element, but, consistent
with the effect of that element, does not apply to non-broadcast live
oral communications or responses to certain unsolicited requests.\42\
Finally, the rule carves out information required by existing statutory
or regulatory requirements. These differences are intended to update
the current rule to reflect modern methods of communication and to be
sufficiently flexible to address future methods of dissemination, as
well as clarify investment advisers' obligations with respect to all
communications intended to obtain or retain investors in pooled
investment vehicles. We discuss below the specific provisions of and
specific exclusions from the proposed rule's definition.
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    \40\ The proposed definition of ``advertisement'' is distinct
from a communication that would be considered general solicitation
or general advertising of an offering for purposes of Regulation D
under the Securities Act. See 17 CFR 230.502(c) (describing
limitations on the manner of offering or selling securities under
Regulation D). The proposed definition would also be distinct from a
communication that would be considered a public offering for
purposes of section 4(a)(2) of the Securities Act. See 17 U.S.C.
77d(a)(2). However, in determining whether a communication would
constitute a general solicitation, the Commission has historically
interpreted the term ``offer'' broadly, and has explained that ``the
publication of information and publicity efforts, made in advance of
a proposed financing which have the effect of conditioning the
public mind or arousing public interest in the issuer or in its
securities constitutes an offer.'' See Securities Offering Reform,
Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)], at
n. 88. Thus an advertisement under the proposed rule would need to
be assessed to determine whether it may be a communication that is
considered a general solicitation, advertising, or a public offering
for purposes of Regulation D or section 4(a)(2).
    \41\ See proposed rule 206(4)-1(e)(1) (defining
``advertisement'' as, in part, ``any communication, disseminated by
any means''). In contrast, the current rule defines
``advertisement,'' in part, to 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.'' Rule 206(4)-1(b).
    \42\ See proposed rule 206(4)-1(e)(1) (defining
``advertisement'' as, in part, any communication ``that offers or
promotes the investment adviser's investment advisory services or
that seeks to obtain or retain one or more investment advisory
clients or investors in any pooled investment vehicle advised by the
investment adviser''). In contrast, the current rule defines
``advertisement,'' in part, to include ``any notice, circular,
letter or other written communication addressed to more than one
person.'' Rule 206(4)-1(b).
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    We request comment generally on the proposed rule's definition of
``advertisement,'' with more specific requests on particular elements
of the proposed definition in the sections that follow.
     Generally, does the proposed rule's definition of
``advertisement'' sufficiently describe the types of communications
that should be subject to the requirements of the proposed rule? Are
there types of communications that should be subject to the
requirements of the proposed rule but are excluded from the proposed
definition?
     Conversely, does the proposed rule's definition of
``advertisement'' include communications that should not be subject to
the requirements of the proposed rule?
b. Specific Provisions
i. Dissemination by Any Means
    The proposed rule would define ``advertisement'' to include
communications ``disseminated by any means.'' This would replace the
current rule's requirement that it be a ``written'' communication or a
notice or other announcement ``by radio or television.'' This proposed
revision would change the scope of the rule to encompass all
promotional communications regardless of how they are disseminated,
with the exception of certain communications discussed below.
Communications may be disseminated through emails, text messages,
instant messages, electronic presentations, videos, films, podcasts,
digital audio or video files, blogs, billboards, and all manner of
social media, as well as by paper, including in newspapers, magazines
and the mail. We recognize that electronic media (including social
media and other internet communications) and mobile communications play
a significant role in current advertising practices. While we
considered including specific references to such media in the proposed
definition, we believe that ``by any means'' incorporates such media
while better focusing the proposed rule on the goal of the
communication, and not its method of delivery. We also believe this
revision will help the proposed definition remain evergreen in the face
of evolving technology and methods of communication.
    We request comment on the proposed definition's inclusion of a
communication disseminated by any means.
     Would the proposed definition's approach have our intended
effect of being evergreen in the face of changing technologies? Is
there an alternative approach that would better produce this intended
effect?
     The proposed rule's restrictions would not distinguish
between, for example, a print advertisement and a social media post. Is
our approach in this respect appropriate or should we treat
communications differently depending on the medium? If so, how should
we reflect that treatment? Would additional definitions be appropriate
or useful? If we adopt a definition that lists specific media, how
should we address our goal of having the definition apply to new media
in the future?
     The proposed definition would capture advertisements that
are nominally directed at one person but in fact widely disseminated
(such as robo-calls or emails), in order to prevent any evasion of a
rule covering communications ``addressed to'' one person. Would the
proposed rule's approach have this intended anti-evasion effect? Is
there an alternative approach to the proposed definition that would
better produce this intended effect?

     Should we have different requirements for advertisements
depending on how broadly the adviser disseminates them? For example,
the FINRA communications rule differentiates between ``retail
communications,'' which are those available to more than 25 investors,
and ``correspondence,'' which are those available to 25 or fewer
investors. Would this kind of differentiation be useful or appropriate
in rule 206(4)-1?
ii. By or on Behalf of an Investment Adviser
    The proposed rule would define ``advertisement'' to include all
communications ``by or on behalf of an investment adviser.'' \43\ We
understand that investment advisers often provide to intermediaries,
such as consultants and solicitors, advertisements for
dissemination,\44\ and the proposed rule would treat those as
communications ``by or on behalf of'' the advisers.\45\ Communications
disseminated by an affiliate of the investment adviser would similarly
be treated as communications ``by or on behalf of'' the adviser. For
example, a communication prepared by the adviser to an affiliated
private fund but disseminated for the adviser by the private fund
through its consultants would be a communication ``by or on behalf of''
the adviser for purposes of the proposed rule. If an advertisement were
disseminated without the adviser's authorization, however, such an
unauthorized communication would not be ``by or on behalf'' of the
adviser.\46\
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    \43\ Proposed rule 206(4)-1(e)(1).
    \44\ See, e.g., Investment Company Institute, SEC Staff No-
Action Letter (Sept. 23, 1988) (``ICI Letter'') (staff stated that
it would not recommend enforcement action regarding an investment
adviser's provision of performance information to consultants for
advisory clients under certain conditions).
    \45\ See infra section II.B for a discussion of the proposed
solicitation rule. In many cases, a compensated testimonial or
endorsement would be subject to both the proposed advertising rule
and the proposed solicitation rule. This could be the case even if
the adviser does not give the adviser's advertising content to the
person providing the testimonial or endorsement. See infra section
II.B.
    \46\ That is, we intend ``by or on behalf of'' to require
affirmative steps by the adviser.
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    We believe communications that investment advisers use to offer or
promote their services have an equal potential to mislead--and should
be subject to the proposed rule--regardless of whether the adviser
disseminates such communications directly or through an intermediary.
Including communications ``on behalf of'' an investment adviser also is
intended to reflect the application of the current rule to
communications provided by investment advisers through
intermediaries.\47\ Accordingly, we believe that investment advisers
should be able to comply with this element of the proposed rule through
the practices they currently use in communicating with prospective
clients through intermediaries.\48\
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    \47\ See, e.g., In re Profitek, Inc., Release No. IA-1764 (Sept.
29, 1998) (settled order) (the Commission brought an enforcement
action against an investment adviser, asserting that it directly or
indirectly distributed materially false and misleading
advertisements, including by submitting performance information in
questionnaires submitted to online databases that were made
available to subscribers nationwide and by providing misleading
performance information to newspaper that reported the performance
in article); see also ICI Letter.
    \48\ The Commission has previously indicated an expectation that
an adviser's policies and procedures, at a minimum, should address
certain issues to the extent they are relevant to that adviser,
which may include marketing advisory services, including the use of
solicitors. See Compliance Program Adopting Release, supra footnote
33.
---------------------------------------------------------------------------

    Additionally, content created by or attributable to unaffiliated
third parties, such as investors, could be considered by or on behalf
of an investment adviser, depending on the investment adviser's
involvement. Whether a communication is ``by or on behalf of'' an
investment adviser when the communication involves content from an
unaffiliated third party would require a facts and circumstances
analysis. We believe that whether third-party information is
attributable to an adviser under the ``by or on behalf of'' standard
depends upon whether the adviser has involved itself in the preparation
of the information or explicitly or implicitly endorsed or approved the
information.
    This issue may commonly arise in the context of an adviser's use of
its website or other social media. For example, an adviser might
incorporate third-party content into the adviser's communication by
including a hyperlink to an independent web page on which third-party
content sits in the adviser's communication. Or an adviser might allow
third parties to post commentary on the adviser's website or social
media page. In both cases, the third-party content may be a
communication ``by or on behalf of'' the adviser, and therefore an
``advertisement'' subject to the restrictions in the proposed rule.
    We believe third-party content is ``by or on behalf of'' an adviser
when the adviser takes affirmative steps with respect to the third-
party content. For example, third-party content could be by or on
behalf of the investment adviser if the investment adviser: (i) Drafts,
submits, or is otherwise involved substantively in the preparation of
the content; (ii) exercises its ability to influence or control the
content, including editing, suppressing, organizing, or prioritizing
the presentation of the content; or (iii) pays for the content. If an
investment adviser helps draft comments that an investor posts on a
third-party website or social media page, the comments could be an
advertisement under the proposed definition, and the proposed rule's
requirements could apply. For instance, if the adviser edits a third
party's discussion of the adviser on a third-party website, then the
content could be a communication by or on behalf of the adviser. As
noted above, if the adviser pays for the content--including if the
adviser provides non-cash compensation such as rewards or other
incentives for a third party to provide content--the content could be
considered to be by or on behalf of the adviser.\49\ Such incentives
could include, for example, compensated advisory services and cross-
referrals (e.g., the adviser refers investors to the third-party site).
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    \49\ For many advertisements, paid content also may be
considered a paid testimonial or endorsement, which would be subject
to specific disclosure requirements (see proposed rule 206(4)-
1(b)(1)). See infra section II.A.4.b.
---------------------------------------------------------------------------

    On the other hand, there are several circumstances in which we
generally would not view third-party content as by or on behalf of an
adviser, and therefore the content would not be within the proposed
rule's scope. For example, an adviser's hyperlink to third-party
content within the adviser's press release generally would not, by
itself, make the hyperlinked content part of the advertisement,
provided that the third party, and not the adviser or its affiliate,
drafted the hyperlinked content and is free to modify it.\50\ At the
same time, an adviser's hyperlink to third-party content that the
adviser knows or has reason to know contains an untrue statement of
material fact or materially misleading information would be fraudulent
or deceptive under section 206 of the Act.
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    \50\ We previously stated that an adviser should consider the
application of rule 206(4)-1, including the prohibition on
testimonials, before including hyperlinks to third-party websites on
its website or in its electronic communications. See Interpretive
Guidance on the Use of Company websites, Release No. IC-28351 (Aug.
1, 2008) [73 FR 45862 (Aug. 7, 2008)]. The proposed rule would
provide an approach that is more flexible than our 2008 interpretive
guidance to evaluating the use of hyperlinks to third-party content,
as the proposed rule would not prohibit testimonials.
---------------------------------------------------------------------------

    Content regarding the investment adviser on third-party hosted
platforms that solicit users to post information, including positive
and negative reviews of the adviser, generally would not be

``by or on behalf of'' the investment adviser unless the adviser took
affirmative steps to influence the content of those reviews or posts,
such as providing a user with wording to submit as a review or editing
the content of a post.\51\
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    \51\ The provision of investment advisory services would not
constitute such affirmative steps.
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    Determining whether content posted by third parties on an adviser's
own website or social media page is by or on behalf of the investment
adviser will thus turn on the extent to which the adviser has involved
itself in the presentation of such content.\52\ For example, the fact
that an adviser permits all third parties to post public commentary to
the adviser's website or social media page would not, by itself, render
such content attributable to the investment adviser, so long as the
adviser does not selectively delete or alter the comments or their
presentation. We believe such treatment for third-party content on the
adviser's own website or social media page is appropriate even if the
adviser has the ability to influence control over the commentary but
does not exercise it.\53\ Likewise, we would not consider an adviser
that merely permits the use of ``like,'' ``share,'' or ``endorse''
features on a third-party website or social media platform to implicate
the proposed rule.
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    \52\ Other content on an adviser's own website or social media
page would likely meet the definition of ``advertisement'' in the
proposed rule.
    \53\ For example, if the social media platform allows the
investment adviser to sort the third-party content in such a way
that more favorable content appears more prominently, but the
investment adviser does not actually do such sorting, then the
ability to sort content would not render such content attributable
to the adviser.
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    Conversely, if the investment adviser took affirmative steps to
involve itself in the preparation of the comments or to endorse or
approve the comments, those comments could be communications ``by or on
behalf of'' the adviser. For example, if an adviser substantively
modifies the presentation of comments posted by others by deleting
negative comments or prioritizing the display of positive comments,
then we believe the adviser is exercising sufficient control over
third-party comments with the goal of promoting its advisory business
that the content would be ``by or on behalf of'' the investment adviser
and would likely be considered an advertisement under the proposed
rule. We request comment on the proposed definition's inclusion of
communications ``on behalf of'' an investment adviser, including our
views above on when third-party content would be considered a
communication by or on behalf of an investment adviser.
     Is the ``on behalf of'' element of the proposed definition
sufficiently clear based on our description above? Should we further
clarify any specific indicia to determine when a communication is
disseminated ``on behalf of'' an investment adviser, particularly
circumstances when an adviser might have exercised sufficient influence
over third-party content? Should we use a different standard such as,
for example, the prohibition in rule 156 under the Securities Act of
``directly or indirectly'' using sales literature?
     Should the proposed rule explicitly define or provide
examples when third-party content would be considered an advertisement
for which the investment adviser is responsible and when it is not? How
should we incorporate such provisions?
     Do investment advisers routinely use intermediaries or
other third parties to disseminate communications to the advisers'
clients and prospective clients? How do investment advisers to private
funds and other pooled investment vehicles currently use
intermediaries, for example through capital introduction programs, to
advertise those vehicles? Do commenters agree that investment advisers
would be able to comply with the ``on behalf of'' element through
practices they currently use in communicating through intermediaries?
     Should the proposed rule apply specific criteria to
circumstances where investment advisers provide information to third-
party news organizations? Are there circumstances under which
investment advisers interact with third-party news organizations under
the current rule that should be addressed specifically in the proposed
rule? Are there specific challenges that investment advisers have
encountered under the current rule in providing information to third-
party news organizations? To what extent do investors rely on
information provided by third-party news organizations in assessing the
capabilities and experience of investment advisers that may be hired?
     In our view, if an adviser were to modify the presentation
of third-party comments, such an action would likely make the
communication by or on behalf of the adviser. Should we consider
providing additional guidance to allow an adviser to edit third-party
content solely on the basis that it is profane or unlawful without such
editing causing the content to be ``by or on behalf'' of the adviser?
If so, how should we define profane or unlawful content? Would it be
necessary to give an audience notice that such third-party content had
been edited in such a way, and if so, how would such notice best be
provided? Would such guidance have the effect of evading the intent of
the proposed rule, considering that comments with profane content may
indicate negative views of the adviser?
     Should we provide that editing the presentation of third-
party comments pursuant to a set of neutral pre-established policies
and procedures would not make such content ``by or on behalf of the
adviser''? For example, should we allow an adviser to determine in
advance that it will delete all comments that are older than five
years, or that include spam, threats, personally identifiable
information, or demonstrably factually incorrect information? If so,
should we require advisers to publically disclose the pre-established
criteria for editing such comments?
iii. Offer or Promote Advisory Services or Seek To Obtain or Retain
Clients or Investors
    The proposed rule would define ``advertisement'' to include
communications that are disseminated ``to offer or promote'' the
investment adviser's investment advisory services or that seek to
``obtain or retain'' investors.\54\ The ``offer or promote'' clause is
meant to focus the proposed definition on the goal of the communication
and on communications that we believe are commonly considered
advertisements. The ``offer or promote'' clause reflects the current
rule's application, which has excluded communications that do not
``offer'' advisory services from advertisements under rule 206(4)-
1.\55\ Such communications are still subject to the anti-fraud
provisions in sections 206(1), (2), and (4) and rule 206(4)-8.
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    \54\ See supra footnote 4.
    \55\ For example, our staff has indicated that it would not
recommend enforcement action under the current rule with respect to
written communications by an adviser to an existing client about the
performance of securities in the client's account because such
communications would not be ``offers'' of advisory services, and
instead are ``part of'' those advisory services (unless the context
in which the communication is provided suggests otherwise). See
Investment Counsel Association of America, Inc., SEC Staff No-Action
Letter (Mar. 1, 2004) (``ICAA Letter'').
---------------------------------------------------------------------------

    Unlike the ``offer'' clause, the ``promote'' clause is not included
in the text of the current rule. We believe that it is appropriate to
include in the proposed definition communications that promote advisory
services because we believe that advertisements are generally
considered to be promotional materials, even if the communication

does not explicitly ``offer'' services.\56\ Other rules governing
financial firms similarly regulate ``promotional'' communications.\57\
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    \56\ See SEC v. C.R. Richmond & Co., 565 F.2d 1101, 1105 (9th
Cir. 1977) (``SEC v Richmond'') (``Investment advisory material
which promotes advisory services for the purpose of inducing
potential clients to subscribe to those services is advertising
material within [the current rule].''); see also Denver Investment
Advisors, Inc., SEC Staff No-Action Letter (July 30, 1993)
(indicating the staff's view that a communication provided to
consultants, but not necessarily to prospective clients, to allow
the consultants to evaluate the adviser as part of the consultants'
own services to their own clients is an ``advertisement'' under the
current rule because the communication is provided ``for the
ultimate purpose of maintaining existing clients and soliciting new
ones''). See also infra section II.D (regarding the potential
withdrawal of this letter).
    \57\ See, e.g., FINRA rule 2210(c)(3)(A) (requiring a member to
file retail communications that ``promote or recommend'' certain
investment companies); MSRB rule G-21(a) (defining ``advertisement''
as, in part, ``any written or electronic promotional literature'');
see also Amendments to Investment Company Advertising Rules, Release
No. IC-26195 (Oct. 3, 2003) [68 FR 57760 (Oct. 6, 2003)] (``Final
Investment Company Advertising Release'') (noting that when an
investment company offers its shares to the public, ``its
promotional efforts become subject to the advertising restrictions
of the Securities Act'').
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    Additionally, we believe that defining an ``advertisement'' as a
communication that ``offers or promotes'' services would allow
investment advisers to continue to deliver to existing investors
account statements or transaction reports that are intended to provide
only details regarding those accounts and investments without those
communications being considered advertisements.\58\ In the usual
course, a communication to an existing investor about the performance
of the investor's account would not be for promoting the adviser's
services or be used to obtain or retain investors.\59\ Accordingly, we
would not view information typically included in an account statement,
such as inflows, outflows, and account performance, as qualifying as
advertisements under the proposed rule.
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    \58\ Their exclusion from the proposed definition would not
prevent these account statements or transaction reports from being
subject to the other provisions of the Federal securities laws,
including section 17(a) of the Securities Act or section 10(b) of
the Securities Exchange Act of 1934 (the ``Exchange Act'') (and rule
10b-5 thereunder), to the extent those provisions would otherwise
apply.
    \59\ See also ICAA Letter (stating the staff's view that, ``[i]n
general, written communications by advisers to their existing
clients about the performance of the securities in their accounts
are not offers of investment advisory services but are part of the
adviser's advisory services.''). A communication to an existing
investor in a pooled investment vehicle about the performance of the
pooled investment vehicle would not be treated as promoting the
adviser's services or be used to obtain or retain investors for
purposes of rule 206(4)-1.
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    In addition, we would not view materials that provide general
educational information about investing or the markets as offering or
promoting an adviser's services or seeking to obtain or retain
investors. For example, an adviser that disseminates a newspaper
article about the operation of investment funds or the risks of certain
emerging markets would generally be circulating educational materials
and not offering or promoting the adviser's own services.
    However, investment advisers also may choose to deliver to existing
investors communications that include promotional information that is
neither account information nor educational material. Such additional
promotional information may make the communication an advertisement, if
that additional information ``offers or promotes'' the adviser's
advisory services under the facts and circumstances. For example, a
communication to existing investors that includes the adviser's own
market commentary or a discussion of the adviser's investing thesis may
be considered to be ``offering or promoting'' the adviser's services
depending on the facts and circumstances of the relevant
communication.\60\
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    \60\ See ICAA Letter (indicating that where an adviser writes a
letter that discussed its past specific recommendations concerning
securities not held or not recently held by some of the clients to
whom the letter was directed ``would suggest that a purpose of the
communication was to promote the advisory services of the
adviser'').
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    The proposed definition of ``advertisement'' includes
communications disseminated ``to obtain or retain'' investors. We would
expressly include communications that are intended to retain existing
investors because communications to existing investors may be used to
mislead or deceive in the same manner as communications to prospective
investors.\61\ Accordingly, we believe it is appropriate to regulate
the use of such communications as a means reasonably designed to
prevent fraudulent, deceptive, or misleading acts, practices, or
courses of business.\62\
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    \61\ Our staff has indicated its view that materials designed to
maintain existing clients should be considered to be advertisements
under the current rule's definition, see Munder Capital Management,
SEC Staff No-Action Letter (May 17, 1996), and we are proposing to
incorporate this approach in the proposed rule. See also In re Spear
& Staff, Inc., Release No. IA-188 (Mar. 25, 1965) (settled order)
(``Spear'') (the Commission brought an enforcement action against
investment adviser, asserting, in part, that the current rule
applied to direct mail and newspaper advertising that the adviser
conducted ``[t]o induce persons to enter or renew subscriptions''
for market letters containing the adviser's securities
recommendations) (emphasis added); SEC v. Richmond & Co., 565 F.2d
at 1106 (``The court below found that [the adviser] advertised in a
manner which led clients and prospective clients to believe that the
use of [the adviser's] services would lead to imminent and sizable
profits with minimum risks.'') (emphasis added).
    \62\ See Advertising Rule Adopting Release, supra footnote 5
(``The Commission believes that this rule, foreclosing the use of
advertisements which have a tendency to mislead or deceive clients
or prospective clients, is necessary to implement the statutory
mandate contained in Section 206(4) of the Act, as amended.'')
(emphasis added).
---------------------------------------------------------------------------

    We request comment on this aspect of the proposed definition:
     Are there types of communications that ``offer or
promote'' investment advisory services or that seek to ``obtain or
retain'' investors that should not be treated as ``advertisements''?
     Should the proposed rule address communications that
``offer or promote'' anything besides investment advisory services? Do
investment advisers seek to ``offer or promote'' other goods or
services that should be addressed explicitly in the proposed rule as an
exclusion from the definition or otherwise? Should the definition be
further limited to communications that offer or promote investment
advisory services that ``relate to securities''?
     Should we clarify any specific indicia to determine
whether investment advisory services are being ``offered'' or
``promoted''? Are there any challenges that investment advisers might
face in determining whether a communication is ``offering or
promoting'' advisory services?
     The proposed rule would explicitly include communications
meant to ``retain'' existing clients. Is it appropriate to treat
communications as ``advertisements'' when the persons receiving them
already are ``clients'' of the investment adviser and benefit from the
other protections of the Federal securities laws? Similarly, is it
appropriate to treat communications as ``advertisements'' when the
persons receiving them already are investors in pooled investment
vehicles advised by the investment adviser and benefit from applicable
protections of the Federal securities laws?
     Should the proposed rule treat communications to existing
investors differently from communications to prospective investors?
     Does the definition provide sufficient clarity to permit
advisers to communicate with their existing investors about their
accounts or about pooled investment vehicles in which they are
invested, in the usual course of business without those communications
being considered advertisements?

iv. Investors in Pooled Investment Vehicles
    The proposed rule's definition would expressly include
communications that are intended to offer or promote the investment
adviser's investment advisory services provided indirectly to existing
and prospective investors in a pooled investment vehicle advised by the
investment adviser,\63\ subject to the exclusion for RICs and BDCs
discussed below. This express inclusion of pooled investment vehicles
is generally consistent with our approach in rule 206(4)-8 under the
Advisers Act.\64\ In particular, section 206(4) of the Advisers Act
authorizes the Commission to adopt rules and regulations that ``define,
and prescribe means reasonably designed to prevent, such acts,
practices, and courses of business as are fraudulent, deceptive, or
manipulative.'' \65\ We believe expressly applying the proposed rule to
advertisements concerning pooled investment vehicles when used to
obtain or retain investors in those vehicles would help expand
protections to such investors, and not just to the adviser's
``clients,'' which are the pooled investment vehicles themselves.\66\
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    \63\ For this purpose, ``pooled investment vehicle'' would be
defined in the same way as the definition in rule 206(4)-8 under the
Investment Advisers Act of 1940. See proposed rule 206(4)-1(e)(9).
Rule 206(4)-8 defines ``pooled investment vehicle'' as ``any
investment company as defined in section 3(a) of the Investment
Company Act of 1940 or any company that would be an investment
company under section 3(a) of that Act but for the exclusion
provided from that definition by either section 3(c)(1) or section
3(c)(7) of that Act.'' Rule 206(4)-8(b).
    \64\ See Prohibition of Fraud by Advisers to Certain Pooled
Investment Vehicles, Release No. IA-2628 (Aug. 3, 2007) [72 FR 44756
(Aug. 9, 2007)] (``Rule 206(4)-8 Adopting Release'') (``The rule
clarifies that an adviser's duty to refrain from fraudulent conduct
under the federal securities laws extends to the relationship with
ultimate investors and that the Commission may bring enforcement
actions under the Advisers Act against investment advisers who
defraud investors or prospective investors in those pooled
investment vehicles.'').
    \65\ 15 U.S.C. 80b-6(4).
    \66\ See Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006). There
are circumstances under which an investor in a pooled investment
vehicle is also a client of the investment adviser--for example,
when the investor has its own investment advisory agreement with the
investment adviser. Under those circumstances, communications to
that person would also be addressed as ``advertisements'' under the
proposed rule.
---------------------------------------------------------------------------

    We recognize that advisers to pooled investment vehicles are
prohibited from making misstatements or materially misleading
statements to investors in those vehicles under rule 206(4)-8,\67\ and
accordingly there may be some overlap between the prohibition in rule
206(4)-8 and the proposed rule. The proposed rule provides more
specificity, however, regarding what we believe to be false or
misleading statements that advisers to pooled investment vehicles must
avoid in their advertisements.\68\ In particular, the proposed rule
contains certain protective requirements, including for Non-Retail
Persons that are invested in private funds.\69\ We believe that these
requirements, such as those regarding presentation of performance,
would protect private fund investors. We believe that any additional
costs to advisers to pooled investment vehicles as a result of
potential overlap between the proposed rule and rule 206(4)-8 with
respect to advertisements will be minimal, as an advertisement that
would raise issues under rule 206(4)-8 might also raise issues under a
specific provision of the proposed rule. We are proposing this rule
under the same authority of section 206(4) of the Advisers Act on which
we relied in adopting rule 206(4)-8.\70\
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    \67\ Rule 206(4)-8(a)(1).
    \68\ For example, rule 206(4)-8 prohibits investment advisers to
pooled investment vehicles from engaging in any act, practice, or
course of business that is fraudulent, deceptive, or manipulative
with respect to any investor or prospective investor in the pooled
investment vehicle. The proposed rule would include more specific
provisions in the context of advertisements. See proposed rule
206(4)-1(b) and 206(4)-1(c). To the extent that an advertising
practice would violate a specific restriction imposed by the
proposed rule, it is possible that such a practice may already be
prohibited under rule 206(4)-8. Investment advisers to pooled
investment vehicles may benefit from the clarity provided by the
proposed rule, to the extent that it prohibits conduct that may
otherwise be prohibited under the general principles of rule 206(4)-
8. We request comment below on whether rule 206(4)-8 itself should
be amended.
    \69\ One commenter addressed private fund advertising in
connection with the Commission's recent concept release on exempt
offerings. See 2019 Concept Release, supra footnote 19; see also
Comment Letter of the Investment Company Institute on the 2019
Concept Release (Sept. 24, 2019), at n.62 (``We recommend that the
Commission adopt restrictions for private fund advertising beyond
the anti-fraud requirements of Section 206(4) of the Advisers Act
and Rule 206(4)-8 thereunder. If those regulations alone were enough
to dispel investor confusion and prevent misleading solicitation,
then the myriad rules and staff guidance applicable to regulated
funds that the Commission and staff as well as FINRA have developed
over decades would not be necessary.'').
    \70\ See Rule 206(4)-8 Adopting Release, supra footnote 64.
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    The proposed rule would exclude advertisements, other sales
materials, or sales literature about RICs and BDCs that are within the
scope of rule 482 or rule 156 under the Securities Act, as described
below.\71\ This would result in a departure from rule 206(4)-8, which
applies to investment advisers with respect to any ``pooled investment
vehicle,'' including RICs and BDCs.\72\ We are proposing to exclude
certain communications about RICs and BDCs, which are already subject
to specific restrictions and requirements for communications to their
investors under the Securities Act and the Investment Company Act,
including rules that cover the same areas addressed by the proposed
rule and that are designed to protect investors in those funds. For
example, rule 482 under the Securities Act and the applicable
registration form impose specific requirements on the presentation and
computation of performance results for certain registered funds.\73\
Rule 156 under the Securities Act describes certain practices that may
be misleading when used in sales literature in connection with the
offer or sale of securities issued by an investment company.\74\
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    \71\ See infra section II.A.2.c.iii. The proposed rule would
exclude from the ``advertisement'' definition only those
communications within the scope of rule 482 or rule 156 under the
Securities Act.
    \72\ See supra footnote 63.
    \73\ 17 CFR 230.482(b)(3) (imposing disclosure requirements on
advertisements that include performance data of an open-end
management investment company or a trust account); 17 CFR 230.482(d)
(imposing requirements on performance information in the case of an
open-end management investment company or a trust account); 17 CFR
230.482(e) (imposing requirements on performance data for money
market funds); 17 CFR 230.482(g) (establishing standards for the
timeliness of performance data in advertisements).
    \74\ 17 CFR 230.156. See also 17 CFR 270.34b-1 (imposing
requirements on sales literature for investment companies).
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    When we adopted rule 206(4)-8, we noted its similarity to existing
anti-fraud laws and rules that ``depending upon the circumstances, may
also be applicable to the same investor communications,'' including
those applicable to RICs and BDCs.\75\ We expressed assurance that
investment advisers to pooled investment vehicles would be able to
comply with rule 206(4)-8 and those existing laws and rules, in part
because rule 206(4)-8 was adopted to impose obligations similar to
those imposed under sections 206(1) and 206(2) of the Advisers Act.\76\
We also noted that ``the nature of the duty to communicate without
false statements [was] so well developed in current law'' that the
similar duty imposed by rule 206(4)-8 would neither be unduly broad nor
have a ``chilling effect'' on investor communications.\77\
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    \75\ See Rule 206(4)-8 Adopting Release, supra footnote 64
(citing, in part, rule 156 under the Securities Act and section 34
of the Investment Company Act).
    \76\ Rule 206(4)-8 Adopting Release, supra footnote 64 (noting
that sections 206(1) and 206(2) were ``commonly accepted as imposing
similar requirements on communications with investors in a fund'').
    \77\ Id.
---------------------------------------------------------------------------

    Rule 206(4)-8 establishes a broad anti-fraud standard on
communications

with investors in pooled investment vehicles, whether publicly or
privately offered, that we believe can exist comfortably alongside the
specific prohibitions and restrictions that govern the public offering
of funds. The proposed rule, in contrast, applies specific prohibitions
and restrictions that address the same areas already governed by
specific requirements in rule 482 and rule 156. Accordingly, we believe
excluding from the proposed rule certain communications about RICs and
BDCs, as described below, is appropriate.
    We request comment on the proposed definition of ``advertisement''
expressly including communications that are disseminated to obtain or
retain ``investors in pooled investment vehicles.''
     Are there any particular burdens or difficulties that
investment advisers may bear in treating as ``advertisements''
communications designed for investors in pooled investment vehicles--
that is, investors who may not be clients of the investment advisers?
     Are there communications that investment advisers
currently disseminate to investors in pooled investment vehicles that
otherwise satisfy the proposed definition of ``advertisement'' but
should not be treated as such? What types of communications, and why
should they not be treated as advertisements?
     Would investment advisers to pooled investment vehicles
prefer that we address our concerns regarding advertisements through an
amendment to rule 206(4)-8 instead of through the proposed rule? For
example, should we incorporate the proposed rule's requirements and
prohibitions into rule 206(4)-8? Would there be any costs or benefits
if we used that approach or a similar approach instead?
     Should the proposed rule apply to communications to
investors in pooled investment vehicles other than those that are
``pooled investment vehicles'' as defined in rule 206(4)-8--e.g., funds
that are excluded from the definition of ``investment company'' by
reason of section 3(c)(5) or 3(c)(11) of the Investment Company Act?
Which other vehicles, and why or why not? Should we consider not
defining ``pooled investment vehicle'' for purposes of the proposed
rule? \78\ Why or why not?
---------------------------------------------------------------------------

    \78\ See, e.g., rule 206(4)-2(a)(5).
---------------------------------------------------------------------------

c. Specific Exclusions
    The proposed rule would specifically exclude four types of
communications from the definition of ``advertisement'': (i) Non-
broadcast live oral communications; (ii) responses to certain
unsolicited requests; (iii) communications relating to RICs and BDCs;
and (iv) information required by statute or regulation. Although these
types of communications would not be ``advertisements'' for purposes of
the proposed rule, they would remain subject to all other applicable
provisions in the Advisers Act and the rules thereunder and other
applicable provisions of the Federal securities laws.\79\
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    \79\ In particular, any such communication to a client or
prospective client would remain subject to the general anti-fraud
prohibitions of section 206 of the Advisers Act. In addition,
communications that are excluded from the definition of
``advertisement'' would remain subject to any other applicable
provisions in the Federal securities laws. See, e.g., 15 U.S.C.
77q(a); 15 U.S.C. 78(j)(b); 17 CFR 240.10b-5.
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i. Non-Broadcast Live Oral Communications
    We are proposing to exclude from the definition of
``advertisement'' live oral communications that are not broadcast on
radio, television, the internet, or any other similar medium. If such
communications are broadcast, for example by webcast, social media,
video blog, or similar media, they would be ``advertisements'' under
the proposed rule's definition.
    This proposed exclusion is generally consistent with the approach
under the current rule's definition of ``advertisement,'' which also
excludes oral communications that are not ``on radio or television.''
\80\ However, the proposed definition of ``advertisement'' is broader
than the current rule's definition because it would capture oral
communications that are widely disseminated, or ``broadcast,'' not just
via radio or television (as under the current rule), but also via ``the
internet or any other similar medium.'' \81\ We believe this broader
definition is appropriate in light of the continuously evolving means
of mass communication available to advisers and should allow the
proposed rule to remain evergreen in light of changing technologies.
Accordingly, the proposed exclusion would not apply to communications
that are ``broadcast,'' or widely disseminated. For example, an adviser
that engages in a ``Facebook Live'' Q-and-A session that is available
to the general public would be ``broadcasting'' the communication on
the internet and that communication would not qualify for the proposed
exclusion. Alternatively, a ``Facebook Live'' Q-and-A session that is
available only to one person or a small group of people invited by the
adviser would not be ``broadcast'' and so would qualify for the
proposed exclusion.
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    \80\ See, e.g., rule 206(4)-(1)(b).
    \81\ Rule 206(4)-1(b) (defining as an advertisement certain
notices or other announcements ``by radio or television''). See ICAA
Letter (stating the staff's view that ``[t]he rule also applies to
announcements in publications and to radio and television
broadcasts, but does not apply to any other oral communications'').
For the reasons discussed in this release, the Commission is
proposing a different approach. As discussed in Section II.D., staff
in the Division of Investment Management is reviewing staff no-
action and interpretative letters to determine whether any such
letters should be withdrawn in connection with any adoption of this
proposal. If the rule is adopted, some of the letters may be moot,
superseded, or otherwise inconsistent with the rule and, therefore,
would be withdrawn.
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    We have also proposed to limit the exclusion to ``live'' oral
communications to ensure that previously recorded oral communications
are included in the proposed definition of ``advertisement.'' The live
oral communication exclusion is designed to address situations where
advisers are communicating to investors directly and where employee
review and the other provisions of the proposed rule cannot be
practically applied.\82\ In cases where an adviser pre-records a
message and then disseminates it, such a message would not be ``live''
and thus should be treated as an advertisement if it otherwise meets
the requirements of the proposed definition.\83\ Similarly, any script
or storyboards, or other written materials prepared in advance for use
during a live oral communication, as well as any slides or other
written materials presented alongside or distributed as part of the
live oral communication, would fall within the proposed definition of
``advertisement'' if those materials otherwise meet the definition of
``advertisement.'' \84\ We believe that prepared written materials
intended for use during a live oral communication are eligible for pre-
use review and approval and should be subject to the other requirements
of the proposed rule.
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    \82\ See infra section II.A.7 (discussing proposed employee
review requirements). Communication need not be made ``face-to-
face'' to qualify for the exclusion so long as it is live and oral.
For example, a phone call or FaceTime communication between an
adviser and a client could qualify for this exclusion.
    \83\ However, a voicemail message would qualify for the proposed
exclusion (and thus would not be an advertisement), if the voicemail
message was made ``live'' and the recording is not further
disseminated by or on behalf of the adviser.
    \84\ This approach would mirror that under FINRA rule 2210(f),
which distinguishes between certain public communications, including
any ``radio or television interview,'' and the ``scripts, slides,
handouts or other written (including electronic) materials used in
connection with'' such communications. See FINRA Rule 2210(f)(1) and
(f)(4); see also supra footnote 57 and accompanying text.

---------------------------------------------------------------------------

    The proposed rule's definition of ``advertisement'' would include
any communication that meets the proposed definition's criteria without
regard to the number of people to whom the communication is addressed.
This differs from the definition in the current rule, which includes
written communications ``addressed to more than one person.'' The
Commission limited the definition of ``advertisement'' in the current
rule because of concerns that a broad definition could encompass even
``face to face conversations between an investment counsel and his
prospective client.'' \85\ The Commission stated in proposing the
current rule's definition that it would not include a ``personal
conversation'' with a client or prospective client.\86\ As discussed
above, we believe that by excluding live oral communications that are
not broadcast, the proposed rule would retain advisers' ability to have
these face-to-face communications with investors.\87\
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    \85\ See Prohibited Advertisements, Release No. IA-119 (Aug. 8,
1961) [26 FR 7552, 7553 (Nov. 15, 1961)].
    \86\ Id.
    \87\ In addition, we believe an adviser's ability to communicate
directly with existing clients and investors would be preserved to
the extent such communications do not ``offer or promote'' the
adviser's services. See supra footnote 59 and accompanying text.
---------------------------------------------------------------------------

    At the same time, we recognize that the proposed rule could affect
the ability of advisers to communicate directly with investors in
writing, to the extent those writings are promotional. We considered
excluding from the definition of ``advertisement'' any communication
disseminated to only one person. However, we are concerned that this
approach could allow the types of misleading communications we seek to
prevent. For example, changes in technology now permit advisers to
create communications that appear to be personalized to single clients
and are ``addressed to'' only one person, but are actually widely
disseminated to multiple persons.\88\ The proposed rule therefore would
prevent an adviser from communicating performance advertising solely to
one person in writing outside the scope of the rule. To address the
potential burdens that would arise from the proposed definition's
inclusion of all one-on-one written communications that meet the
proposed definition of advertisement, the proposed rule's internal
review and approval requirements would not apply to these written
communications.\89\
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    \88\ For example, advisers today, like any other marketers, may
be able to identify a group of prospective investors who have
searched online for specific information about investment advice and
then craft communications for those prospective investors that
nominally are addressed to individual persons despite being
otherwise identical to communications disseminated to the rest of
the group. These types of communications, such as bulk emails or
algorithm-based messages, are widely disseminated in the aggregate
even though individually each is nominally directed at or
``addressed to'' one person.
    \89\ See proposed rule 206(4)-1(d)(1) (excepting
``communications that are disseminated only to a single person or
household or to a single investor in a pooled investment vehicle'');
see also infra section II.A.7. Widely disseminated communications
(even if they appear to be personalized), however, would not qualify
for the one-on-one exception to the review requirement. See supra
footnote 88 and accompanying text.
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    In addition, we recognize that applying the employee review and
approval provisions of the proposed rule to live oral communications
that are broadcast may not be practical. Accordingly, as discussed
below, we are proposing to except live oral communications that are
broadcast from the employee review and approval provisions, much as we
are proposing to except one-on-one communications.\90\ However, as
discussed above, any script, storyboards, or other written materials
prepared in advance for use during a broadcast live oral communication
would fall within the proposed definition of ``advertisement'' if those
materials otherwise meet the definition of ``advertisement,'' and we
are not proposing to except such materials from the review process.
---------------------------------------------------------------------------

    \90\ See infra section II.A.7.
---------------------------------------------------------------------------

    We considered including in the proposed definition of
``advertisement'' oral communications made by an investment adviser in
non-broadcast public appearances, for example, an unscripted talk at a
luncheon or a conference appearance. We recognize that excluding such
public oral communications from the proposed definition of
``advertisement'' may result in many commonly used forms of promotional
communication not being subject to the protections and requirements of
the proposed rule. However, we believe that including such public
appearances as advertisements could pose compliance difficulties, for
example, maintaining records of the speech or applying the other
substantive requirements of the proposed rule to such unscripted
remarks.\91\ Accordingly, the proposed rule would exclude these public
appearances only to the extent they satisfy the requirements of the
non-broadcast live oral communication exclusion.
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    \91\ In addition, although not included within the proposed
definition of ``advertisement,'' statements made during such live
broadcasts would continue to be subject to the general anti-fraud
prohibitions of section 206 of the Advisers Act and the relevant
Federal securities laws.
---------------------------------------------------------------------------

    We request comment on the proposed exclusion for non-broadcast live
oral communications.
     As proposed, should we exclude live oral communications
that are not broadcast from the definition of ``advertisement''? Should
we extend the exclusion to live oral communications that are broadcast?
     As proposed, should we expand the types of broadcast
communication methods included to the internet and other similar
methods (along with radio and TV as under the current rule)?
     Are we correct that ``broadcast'' should be interpreted as
``widely disseminated''? Why or why not? Should we further define what
qualifies as a ``broadcast'' communication? If so, how should we define
it?
     What issues may result from the proposed exclusion of live
oral communications that are not broadcast? In particular, what issues
may result with respect to unscripted public appearances? If we were to
include such unscripted public appearances in the definition of
``advertisement,'' would that create unique compliance difficulties,
such as recordkeeping issues? If so, should we address those
difficulties through an exception to the recordkeeping requirement for
unscripted public appearances? How should we define such an unscripted
public appearance?
     We believe our approach to oral communications is
conceptually similar to FINRA's approach to ``public appearances'' in
rule 2210,\92\ which generally subjects members' unscripted public
appearances to only the rule's general content standards,\93\ and
requires members to comply with all applicable provisions of the rule
for any scripts, slides, handouts, or other written materials used in
connection with the public appearance. Do commenters agree? Should the
rules apply more similarly in this respect? Would another existing
regulation provide an approach to such ``public appearance''
communications that we should consider for such an exclusion?
---------------------------------------------------------------------------

    \92\ FINRA rule 2210(f)(1).
    \93\ FINRA rule 2210(d)(1).
---------------------------------------------------------------------------

     Should we subject public appearance communications to the
content provisions of the proposed rule, even if they are not defined
as ``advertisements''? Should we define such public appearance
communications as ``advertisements,'' but subject them only to a more
limited set of requirements, such as just the

proposed rule's general prohibitions but not the review requirement?
ii. Response to Unsolicited Request
    The proposed rule would exclude from the definition of
``advertisement'' any communication by an investment adviser ``that
does no more than respond to an unsolicited request'' for
``information, specified in such request, about the investment adviser
or its services'' other than a communication to a Retail Person that
includes performance results or a communication that includes
hypothetical performance. Specifically, neither a communication to a
Retail Person that includes performance results nor a communication to
any person that includes hypothetical performance would qualify for
this exclusion.\94\ We believe this exclusion would appropriately allow
persons affirmatively seeking specified information about an investment
adviser or services to obtain that information when the investment
adviser has not directly or indirectly solicited the request.\95\
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    \94\ Proposed rule 206(4)-1(e)(1)(ii).
    \95\ Persons may seek information through, for example, requests
for proposal, due diligence questionnaires, and requests for
information. Information under this exclusion could also include
unsolicited requests for information about an adviser's services,
such as information about funds that it advises or its non-security
related planning services.
---------------------------------------------------------------------------

    In the case of an unsolicited request, an investor seeks specified
information for that requester's own purposes, rather than responding
to a communication disseminated by an adviser for the adviser's purpose
of offering or promoting its services. The proposed exclusion would
recognize this difference in the goal of the communication. In
addition, the investment adviser's communication would be limited by
the information requested and the fact that the investor has already
established the parameters of the information he or she needs.\96\
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    \96\ Our approach to this proposed exclusion is consistent with
our staff's past approach when considering whether or not to take a
no-action position in the context of past specific recommendations
and testimonials. See, e.g., ICAA Letter.
---------------------------------------------------------------------------

    The unsolicited request exclusion would not apply to a
communication to a Retail Person to the extent it contains performance
results.\97\ As discussed below, the proposed rule would provide
additional requirements and restrictions for presenting performance
results because performance advertising raises special concerns.\98\ To
help ensure that Retail Persons receive the benefits of those
requirements and restrictions, any communication to Retail Persons
containing performance results would not qualify for the unsolicited
request exclusion with respect to such results.\99\ Accordingly, any
such performance results that also met the definition of
``advertisement'' would be subject to the requirements of the proposed
rule. Similarly, because of the specific concerns raised by
hypothetical performance, communications to any person that contain
hypothetical performance would not qualify for the unsolicited request
exclusion to the extent it contains such results. Instead,
communications with hypothetical performance must be presented in
accordance with the requirements discussed below.
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    \97\ Proposed rule 206(4)-1(e)(1)(ii)(A).
    \98\ See infra section II.A.5.
    \99\ The unsolicited request exclusion would not oblige the
investment adviser to generate the requested information. The
exclusion simply would allow investment advisers to provide
requested information, if available, in response to unsolicited
requests, without such information being considered an
``advertisement.''
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    In addition, if the adviser were to include additional information
beyond what was specifically requested, that additional information
would not qualify for the exclusion if the additional information met
the definition of ``advertisement.'' However, if the only additional
information the adviser includes is information necessary to make the
requested specified information not misleading, the additional
information would not render the communication or that additional
information an advertisement.
    Finally, the unsolicited request exclusion would not apply to
requests for information that are solicited by the investment
adviser.\100\ For example, any affirmative effort by the investment
adviser intended or designed to induce an existing or prospective
client or investor to request specified information would render the
request solicited. In that case, a person requesting the information
would be acting out of interest raised by the investment adviser, and
the request would not be ``unsolicited.'' And, if the investment
adviser subsequently disseminates a communication that qualifies for
this exclusion to one or more other persons who do not make their own
unsolicited requests, that same communication would not meet the
exclusion's requirements with respect to those other persons.
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    \100\ It is not our intent to disqualify from this exclusion
every inquiry from an investor who was referred to the adviser by a
solicitor because the investor was solicited. The act of soliciting
under our proposed solicitation rule is separate and distinct from a
client making an unsolicited request for information under the
proposed advertising rule. Thus a client who was solicited to be a
client may still make requests for specified information so long as
that specific request was not solicited by the adviser or solicitor.
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    We request comment on the proposed unsolicited request exclusion.
     Would the proposed unsolicited request exclusion have our
intended effect of allowing persons requesting specified information
from an investment adviser to receive that information? Is there an
alternative approach to this exclusion that would better produce this
intended effect? Would an alternative approach be more successful in
preventing investment advisers from disseminating misleading or
deceiving information?
     Are there types of information that an investment adviser
should be prohibited from disseminating even in response to an
unsolicited request? For example, should an adviser be prohibited from
disseminating any advertisement that would, but for this exclusion, be
prohibited by the proposed rule or the current rule? Should an adviser
be prohibited from disseminating materials that are subject to any of
the per se prohibitions in the current rule?
     Should the unsolicited request exclusion apply to
communications presenting performance results to Retail Persons? Should
it apply to communications presenting performance results to any
person, not just Retail Persons? Why or why not? Would it be
appropriate to exclude such communications from certain requirements of
the proposed rule? Why or why not?
     Should the unsolicited request exclusion apply to
communications that include hypothetical performance? Why or why not?
Alternatively, should communications including hypothetical performance
qualify for the unsolicited request exclusion if such communications
are provided only to Non-Retail Persons or only to Retail Persons? Why
or why not? Would it be appropriate to exclude such communications from
certain requirements of the proposed rule? Why or why not?
     Are there other specific types of information that should
be treated as an ``advertisement'' even in response to an unsolicited
request?
     Should we provide in this exclusion additional flexibility
for advisers to provide information in addition to the ``specified
information'' sought by the requester, when the adviser determines that
such information would be necessary to prevent the information provided
from being false or misleading? Should we

provide additional guidance regarding the term ``specified
information''? If so, what additional guidance should we provide?
     Should we clarify any specific criteria by which an
investment adviser can determine whether a request is ``unsolicited''
for purposes of the unsolicited request exclusion?
     Should we take the position that an existing or
prospective client or investor may submit an unsolicited request to an
investment adviser through an intermediary--for example, a consultant
for the investment adviser or the requester?
iii. Advertisements, Other Sales Materials, and Sales Literature of
RICs and BDCs
    We are proposing to exclude from the definition of
``advertisement'' any advertisement, other sales material, or sales
literature about a RIC or a BDC that is within the scope of rule 482 or
rule 156 under the Securities Act.\101\ As discussed above, this RIC
and BDC exclusion would acknowledge that advertisements, other sales
materials, and sales literature about RICs and BDCs are regulated under
the Securities Act and Investment Company Act and subject to the
specific prescriptions of the rules and forms adopted thereunder.\102\
Those rules generally are consistent with the principles underlying the
proposed rule.
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    \101\ Proposed rule 206(4)-1(e)(1)(iii). For example, to the
extent that a RIC's statutory and summary prospectus, annual and
semi-annual report, and statement of additional information are
within the scope of rule 156 under the Securities Act, they would
not be advertisements under the proposed definition.
    \102\ See Request for Comment on Fund Retail Investor Experience
and Disclosure, Release No. 33-10503 (June 5, 2018) [83 FR 26904
(June 11, 2018)]. We recently sought public comment from individual
investors and other interested parties on enhancing investment
company disclosures to improve the investor experience and to help
investor make more informed investment decisions. Id. In that
request for comment, we specifically sought comments with respect to
rule 482 under the Securities Act.
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    The RIC and BDC exclusion would not encompass any communication by
an investment adviser of a RIC or a BDC with respect to other advisory
services or products offered by that adviser. Thus, a communication
that does not satisfy the RIC and BDC exclusion but is otherwise an
``advertisement'' would still be subject to the proposed rule's
requirements. For example, the exclusion would not extend to a
communication by an investment adviser of a RIC or BDC if that
communication is not within the scope of rule 482 or rule 156.
Similarly, the exclusion would not extend to a communication by an
investment adviser of a RIC or BDC to an investor in a pooled
investment vehicle advised by the investment adviser when that
communication is not within the scope of rule 482 or rule 156. The RIC
and BDC exclusion is intended simply to allow advisers to RICs and
BDCs, and affiliates of those advisers, to prepare their
advertisements, other sales materials, and sales literature in
connection with RICs and BDCs in accordance with the relevant rules and
forms under the Securities Act and Investment Company Act.
    We request comment on the proposed RIC and BDC exclusion.
     Are there communications with respect to RICs and BDCs
that should be subject to the proposed rule? If so which communications
and why?
     Is the description of the materials that are eligible for
this RIC and BDC exclusion clear?
     Are there any restrictions that apply to RICs or BDCs
under the Securities Act or the Investment Company Act and the rules
thereunder that should be incorporated into the proposed rule?
     Should the scope of the exclusion include other fund
communications that may not be subject to rule 156 or 482? For example
should the annual reports of a closed-end fund that is not offering
shares be included as an advertisement or excluded? Should we extend
the scope to specifically exclude from the definition of
``advertisement'' any fund communication that is filed or deemed filed
with the Commission for any reason?
iv. Information Required by Statute or Regulation
    We are proposing to exclude from the definition of
``advertisement'' any information required to be contained in a
statutory or regulatory notice, filing, or other communication--for
example, information required by Part 2 of Form ADV or Form CRS.\103\
This exclusion would apply to information that an adviser is required
to provide to an investor under any statute or regulation under Federal
or state law.\104\ We do not generally believe that communications that
are prepared as a requirement of statutes or regulations \105\ should
be viewed as advertisements under the proposed rule.\106\ However, if
an adviser includes in such a communication information that is neither
required under applicable law nor required by the proposed rule, and
such additional information ``offers or promotes'' the adviser's
services, then that information would be considered an
``advertisement'' for purposes of the proposed rule.\107\ We request
comment on this proposed exclusion.
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    \103\ See proposed rule 206(4)-1(e)(1)(iv).
    \104\ To the extent information is required by regulation to be
provided in a non-public filing with a regulatory agency, then this
exclusion may not apply. At the same time, such information would
not be an ``advertisement'' under the proposed rule if the
information does not offer or promote the adviser's services or seek
to obtain or retain investors--and so the adviser would not need to
rely on the exclusion.
    \105\ See, e.g., rule 204-3 (requiring registered investment
advisers to deliver a brochure and one or more brochure supplements
to each client or prospective client).
    \106\ However, information that is required to be provided or
offered by the proposed advertising rule would not qualify for this
proposed exclusion. For example, the schedule of fees and expenses
required to be provided under the proposed rule would be part of the
advertisement and subject to the proposed rule. See, e.g., proposed
rule 206(4)-1(c)(1)(i) (requiring an advertisement to provide or
offer to provide promptly a schedule of certain fees and expenses as
a condition of presenting gross performance).
    \107\ For example, Item 5.A of Part 2 of Form ADV requires
investment advisers to describe how they are compensated for their
advisory services. If an investment adviser completes that
requirement by describing how its fee structure compares favorably
to the fee structure of other investment advisers, then we would
view that comparison as information ``offering or promoting'' the
investment adviser's services. Such a comparison to other investment
advisers is not required by the terms of Item 5.A., even though such
a comparison is permitted in responding to Item 5.A. See
Instructions for Part 2A of Form ADV, Instruction 12 (permitting the
inclusion of information not required by an Item as long as the
response does not include so much additional information that the
required information is obscured).
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     Is the description of the information eligible for this
exclusion clear?
     Should any information required to be contained in a
statutory or regulatory notice, filing, or other communication be
advertisements under the rule? Should any such documents or other
communications be considered to ``offer or promote'' advisory services?
     Would this proposed exclusion create any compliance
difficulties for investment advisers? What types of difficulties and
how should we address them? Are there specific notices, filings, or
other communications that are required of investment advisers by
statute or regulation and that would be affected by this proposed
exclusion?
     Considering that there may be additional legal duties or
liability that attach to documents filed with regulatory bodies, should
we exclude from the definition of ``advertisement'' all legally
required filings regardless of content?
    We also request comment on all aspects of the proposed exclusions
from the definition of ``advertisement.''
     Do the proposed exclusions sufficiently describe the types
of communications that should not be

subject to the requirements of the proposed rule? Are there types of
communications that should not be subject to the requirements of the
proposed rule but do not satisfy the conditions of any of the proposed
exclusions? For example, should we provide an exclusion for all one-on-
one communications made by an adviser to its clients, including
communications in writing? Conversely, do the listed exclusions exclude
communications that should be subject to the requirements of the
proposed rule?
     Would any of the proposed rule's exclusions allow
communications that are subject to the current rule's definition of
``advertisement'' to be excluded from the proposed rule's definition of
``advertisement''? Conversely, are there communications that commenters
believe are not subject to the current rule's definition of
``advertisement'' that would not satisfy the conditions of any of the
proposed exclusions?
3. General Prohibitions
    The proposed rule contains general prohibitions of certain
advertising practices as a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts.\108\ To establish a
violation of the proposed rule, the Commission would not need to
demonstrate that an investment adviser acted with scienter; negligence
is sufficient.\109\
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    \108\ Proposed rule 206(4)-1(a).
    \109\ See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992).
As we noted when we adopted rule 206(4)-8, the court in Steadman
analogized section 206(4) of the Advisers Act to section 17(a)(3) of
the Securities Act, which the Supreme Court had held did not require
a finding of scienter (citing Aaron v. SEC, 446 U.S. 680 (1980)).
See also Steadman at 643, n.5. In discussing section 17(a)(3) and
its lack of a scienter requirement, the Steadman court observed
that, similarly, a violation of section 206(2) of the Advisers Act
could rest on a finding of simple negligence. See also Standard of
Conduct Release, supra footnote 23, at n.20.
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    We discuss below each of these practices, and the reasons we
believe they should be prohibited.\110\ We developed the proposed list
of prohibited practices from our experience with the current rule, our
review and consideration of investment adviser advertisements, FINRA
rule 2210,\111\ Securities Act rule 156, and our experience with
private fund advertising practices. Rule 156 identifies certain
pertinent factors that may be relevant to the question of whether a
particular statement is, or might be, misleading in investment company
sales literature.\112\
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    \110\ We believe these practices, which are each discussed in
detail below, are associated with a significant risk of being false
or misleading. We therefore believe it is in the public interest to
prohibit these practices, rather than permit them subject to
specified conditions.
    \111\ FINRA rule 2210 contains content standards that prohibit
misleading claims or statements in certain communications.
    \112\ Rule 156 describes statements, representations,
illustrations, and other information found in fund sales literature
that could be considered false or misleading in violation of the
anti-fraud provisions in the securities laws applicable to sales of