other ``bad actors'' from certain securities offerings.\485\ Our
reference to the definition of self-regulatory organization in section
3 of the Exchange Act in the proposed provision would also be
consistent with such rules: It would mean any registered national
securities exchange or a registered national or affiliated securities
association.\486\ As we determined when adopting such rules, the
conduct that would typically give rise to CFTC sanctions is similar to
the type of conduct that would result in disqualification if it were
the subject of sanctions by another financial services industry
regulator.\487\ In addition, we believe that the type of conduct that
would typically give rise to a self-regulatory organization's bar or
final order based on violations of any laws or regulations that
prohibit fraudulent, manipulative, or deceptive conduct is similar to
the type of conduct that would result in disqualification if it were
the subject of sanctions by another financial services industry
regulator. We believe that including applicable bars and orders of such
regulators will also make the disqualification provisions more
internally consistent with other bad actor disqualification provisions
in the Federal securities laws, treating similar types of sanctions
similarly for disqualification purposes.
---------------------------------------------------------------------------

    \483\ The current rule's statutory disqualification provision
includes findings of certain misconduct by another regulatory
authority only insofar as such findings form a basis of a finding by
the Commission (including a Commission order issued under section
203(f) of the Act) or certain convictions by a court of competent
jurisdiction, including a foreign court of competent jurisdiction.
See rule 206(4)-3(a)(1)(ii).
    \484\ See sections 203(e)(9) and 203(f).
    \485\ See, e.g., paragraph (d)(iii) of rule 506 of Regulation D;
paragraph (d)(vi) of rule 506 of Regulation D (disqualifying a
person who is suspended or expelled from membership in, or suspended
or barred from association with a member of, a registered national
securities exchange or a registered national or affiliated
securities association for any act or omission to act constituting
conduct inconsistent with just and equitable principles of trade).
To the extent that a person is subject to both the disqualification
provision of rule 506 and the proposed amendments to the
disqualification provision under the solicitation rule, there would
be some overlapping categories of disqualifying events (i.e.,
certain bad acts would disqualify a person under both provisions).
For instance, certain types of final orders of certain state and
Federal regulators would be disqualifying events under both
provisions.
    \486\ Proposed rule 206(4)-3(a)(3)(iii)(B)(3).
    \487\ For example, both registered broker-dealers and investment
advisers may be subject to Commission disciplinary action based on
their conduct that gave rise to violations of the Commodity Exchange
Act. See, e.g., section 15(b)(4)(D) of the Exchange Act (15 U.S.C.
80(b)(4)(C)) and section 203(e)(5) of the Advisers Act (15 U.S.C.
80b-3(e)(5)).
---------------------------------------------------------------------------

    The fourth prong of the proposed disqualifying event definition
describes the entry of an order, judgment, or decree described in
paragraph (4) of section 203(e) of the Act, of any court of competent
jurisdiction within the United States.\488\ Paragraph (4) of section
203(e) describes certain orders, judgments or decrees that permanently
or temporarily enjoin persons from acting in multiple capacities within
the securities industry, and they are bases for Commission action to
censure, place limitations on the activities, or revoke the
registration of any investment adviser or its associated persons.\489\
This prong would generally follow the corresponding provision of the
current rule's disqualification provision, except that we are proposing
not to include orders, judgments, or decrees by a foreign court, as we
discuss below.\490\ As when we adopted the cash solicitation rule, we
continue to believe that these events should be disqualifying under the
rule, subject to our proposed carve-out, because such events call into
question the credibility of a solicitor's referral or solicitation.
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    \488\ Proposed rule 206(4)-3(a)(3)(iii)(B)(4).
    \489\ See sections 203(e)(4) and 203(f) of the Act.
    \490\ Rule 206(4)-3(a)(1)(ii)(D).
---------------------------------------------------------------------------

    Similar to our rationale for not proposing to include in our first
prong convictions by foreign courts, we do not believe advisers should
be required to incur the cost and burden of inquiry into foreign
proceedings or to make a determination of what is a ``foreign person
performing a function substantially equivalent to'' the functions
described in the section, or what is a ``foreign entity substantially
equivalent'' to the entities described in the section, as is required
under section 203(e)(4).\491\ A person subject to any such order,
judgment, or decree by a foreign court might still be an ineligible
solicitor, however, to the extent that the Commission uses its
authority to bar, suspend, or place limits on that person's association
with an investment adviser or otherwise issue a disqualifying
Commission action based on such conduct.\492\
---------------------------------------------------------------------------

    \491\ Section 203(e)(2)(A)-(D). Cf. section 9(b) of the
Investment Company Act, pursuant to which foreign court convictions
are not automatically disqualifying (in such instances, in order for
its action to be disqualifying, the Commission would have to use its
authority to bar, suspend or place limits on that person's
activity).
    \492\ See section 203(f). Any Commission order issued under this
section would be a disqualifying Commission action under the
proposed rule.
---------------------------------------------------------------------------

d. Conditional Carve-Out From Definition of ``Ineligible Solicitor''
    We are proposing a conditional carve-out from the determination of
whether a person is an ineligible solicitor due to a person's act or
omission that is the subject of a disqualifying event and that is also
the subject of a ``non-disqualifying Commission action'' with respect
to that person.\493\ The term ``non-disqualifying Commission action''
would mean (i) an order pursuant to section 9(c) of the Investment
Company Act (commonly referred to as a ``waiver''), or (ii) a
Commission opinion or order that is not a disqualifying Commission
action.\494\ For either such opinion or order to be disregarded in
determining whether the person is an ineligible solicitor, (i) the
person must have complied with the terms of the opinion or order,
including, but not limited to, the payment of disgorgement, prejudgment
interest, civil or administrative penalties and fine; and (ii) for a
period of ten years following the date of each opinion or order, the
person must include in its solicitor disclosure a description of the
acts or omissions that are the subject of, and the terms of, the
opinion or order.
---------------------------------------------------------------------------

    \493\ Proposed rule 206(4)-3(a)(3)(iii)(C).
    \494\ Id.
---------------------------------------------------------------------------

    Our proposed conditional carve-out would permit advisers to
compensate for solicitation activities, in certain circumstances,
persons with disciplinary events that would otherwise be disqualifying
events. Our proposed approach would carve out of the definition of
ineligible solicitor a person whose only disqualifying events are those
for which the Commission has issued a waiver under the Investment
Company Act or the Commission has issued an opinion or order that is
not disqualifying Commission action (e.g., an order that does not bar
or suspend the person from association with a Commission-registered
entity or prohibit the person from acting in any capacity under the
Federal securities laws). We are proposing this carve-out because, in
those instances where the Commission has acted on the conduct yet not
barred or suspended the person or prohibited the person from acting in
any such capacity, and has not made a finding of a violation of a
scienter-based anti-fraud provision of the Federal securities laws, it
would be appropriate to likewise permit such person to engage in
solicitation activities. This approach will obviate the need for the
Commission to consider how to treat under the solicitation rule a
person with disciplinary events for which the Commission has issued one
or more opinions or orders but did not bar or suspend the person or
prohibit the person from acting in any capacity under the Federal
securities laws, and did not order the person to cease and desist from
committing or causing a violation or future violation of certain

provisions of the Federal securities laws.\495\
---------------------------------------------------------------------------

    \495\ Cf. Dougherty Letter. In the Dougherty Letter, Commission
staff stated that it would not recommend enforcement action to the
Commission under section 206(4) and rule 206(4)-3 if an investment
adviser pays cash solicitation fees to a solicitor who is subject to
an order issued by the Commission under section 203(f) of the
Advisers Act, or who is subject to an order issued by the Commission
in which the Commission has found that the solicitor: (a) Has been
convicted of any felony or misdemeanor involving conduct described
in section 203(e)(2)(A) through (D) of the Advisers Act; (b) has
engaged, or has been convicted of engaging, in any of the conduct
specified in paragraphs (1), (5) or (6) of section 203(e) of the
Advisers Act; or (c) was subject to an order, judgment or decree
described in section 203(e)(4) of the Advisers Act (for purposes of
the Dougherty Letter, such Commission orders are collectively
referred to as ``Rule 206(4)-3 Disqualifying Orders''), provided
that certain conditions are met, including that no Rule 206(4)-3
Disqualifying Order bars or suspends the solicitor from acting in
any capacity under the Federal securities laws.
---------------------------------------------------------------------------

    Under our proposal, a solicitor that is subject to a disqualifying
event would be an ineligible solicitor unless the Commission has issued
a non-disqualifying Commission action covering such event.\496\
However, in the event that (i) the Commission has not previously
evaluated the disqualifying event and, (ii) neither the solicitor nor
any person on its behalf has previously sought a waiver under the
Investment Company Act with respect to the disqualifying event, the
solicitor could contact the Commission to seek relief.
---------------------------------------------------------------------------

    \496\ Under the current rule, Commission staff has issued
several staff no-action letters stating that it would not recommend
enforcement action to the Commission under section 206(4) and rule
206(4)-3 if any investment adviser registered or required to be
registered with the Commission pays solicitation fees to a solicitor
in accordance with the solicitation rule, notwithstanding a final
judgment entered by a U.S. court of competent jurisdiction that
otherwise would preclude such an investment adviser from paying such
a fee to the solicitor, subject to the conditions therein. See,
e.g., Stifel, Nicolaus & Company, Inc. (Dec. 6, 2016); Macquarie
Capital (USA) Inc., (June 1, 2017); F. Porter Stansberry, (pub.
avail. Sept. 30, 2015); and Royal Bank of Canada, (Dec. 19, 2014).
Under the proposed rule, however, a solicitor subject to a
conviction by U.S. court of competent jurisdiction that meets the
second prong of the disqualifying event definition would be an
ineligible solicitor unless such person is subject to a non-
disqualifying Commission action with respect to the disqualifying
event.
---------------------------------------------------------------------------

    We believe that the two conditions of the proposed carve-out are
important for solicitors with certain disciplinary events to meet in
order for the events to be disregarded in determining whether the
person is an ineligible solicitor. Our first condition--that the person
has complied with the terms of the non-disqualifying Commission action,
including, but not limited to, the payment of disgorgement, prejudgment
interest, civil or administrative penalties and fines--would
demonstrate the person's compliance regarding the Commission opinion or
order. We believe that our second condition--that for a period of ten
years following the date of each non-disqualifying Commission action,
the solicitor disclosure includes a description of the acts or
omissions that are the subject of, and the terms of, the opinion or
order--would provide investors with important information regarding the
solicitor's misconduct. Investors should be aware of the solicitor's
misconduct and the terms of the Commission opinion or order so that the
investor can fully evaluate the integrity of the solicitor. Knowledge
of a solicitor's misconduct may affect the degree of trust and
confidence an investor would place in the solicitor's referral. We
believe that these two conditions should sufficiently address the risks
associated with a solicitor who has engaged in the type of misconduct
that results in a Commission sanction, but not a bar, suspension, or
prohibition, or certain cease and desist orders described in the
proposed rule. However, we believe the two conditions described above
may not sufficiently address the risks associated with allowing a
person to solicit investors who has engaged in such significant
misconduct that the person has been barred from acting in the
capacities described above or has been subject to certain cease and
desist orders described above.
    The time period of ten years is consistent with the proposed look-
back period for the rule's disqualifying events.\497\ We believe that a
ten year look back period should provide for a sufficient period of
time after the disqualifying event that the past actions of the
ineligible solicitor may no longer pose as significant a risk. We
believe that a limited look back period is more appropriate than a
permanent bar on acting as a solicitor because a limited look back
period would allow for the potential of a barred solicitor who has not
continued to engage in misconduct to act as a solicitor after a period
of time.
---------------------------------------------------------------------------

    \497\ In the Dougherty Letter, discussed supra footnote 495, the
staff stated that it would not recommend enforcement action under
the cash solicitation rule if: (i) The solicitor has complied with
the terms of each Rule 206(4)-3 Disqualifying Order, including, but
not limited to, the payment of disgorgement, prejudgment interest,
civil or administrative penalties and fines; and (ii) for a period
of ten years following the date of each Rule 206(4)-3 Disqualifying
Order, the solicitor discloses the order to each person whom the
solicitor solicits in the separate written disclosure document
required to be delivered to such person under rule 206(4)-
3(a)(2)(iii)(A) or, if the solicitor is a person specified in rule
206(4)-3(a)(2)(i) or (ii), the solicitor discloses the order to each
person whom the solicitor solicits by providing the person at the
time of the solicitation with a separate written disclosure document
that discusses the terms of the order.
---------------------------------------------------------------------------

    We request comment on our proposed disqualification provision;
particularly, the proposed definitions of disqualifying Commission
action, disqualifying event, and non-disqualifying Commission action.
     Do commenters agree with the proposed definition of
disqualifying Commission action? Why or why not? Should we narrow the
proposed definition of disqualifying Commission action, and if so, how?
Alternatively, should we expand the proposed definition to capture
other types of misconduct? If so, why, and how? For example, should a
disqualifying Commission action include, as proposed, officer and
director bars imposed in Commission cease and desist orders and penny
stock bars under section 15(b) of the Exchange Act? Should a
disqualifying Commission action include, as proposed, a Commission
opinion or order to cease and desist from committing or causing a
violation or future violation of any scienter-based antifraud provision
of the Federal securities laws or Section 5 of the Securities Act of
1933, even if that person is not barred, suspended, or prohibited from
acting in any capacity under the Federal securities laws?
     Do commenters agree with the proposed definition of
disqualifying event, including the types of misconduct and events
enumerated in its four prongs? Should we add or subtract any misconduct
or events to the proposed definition? If so, why, and how should the
proposed definition be changed?
     Should we, as proposed, include as disqualifying events
certain final orders by the CFTC, any self-regulatory organization, a
State securities commission, State authority that supervises or
examines banks, savings associations, or credit unions, State insurance
commission, certain Federal banking agencies, or the National Credit
Union Administration? Do commenters agree with the proposed definition
of self-regulatory organization, or should the proposed definition be
modified, for example, to include any national commodities exchange?
Should we modify the scope of these final orders?
     We have not proposed to include in the definition of
disqualifying event any convictions and orders, judgments, or decrees
by foreign courts and findings by foreign financial regulatory
authorities, on the basis that advisers should not be required to incur
the cost and burden of inquiry into foreign proceedings and foreign
regulatory

actions or to make a determination of what is a ``substantially
equivalent crime'' to certain felonies or misdemeanors. Do commenters
agree?
     Do commenters agree that the definition of disqualifying
event should generally capture enumerated events that occurred within
the previous ten years or, in the case of bars and injunctions, that
are in effect at the time of solicitation? Why or why not? Should the
look-back period be longer (or permanent) or shorter?
     Do commenters agree with the proposed carve-out to
disregard, in determining whether a person with a disqualifying event
is an ineligible solicitor, the same act(s) or omission(s) that are
also the subject of a non-disqualifying Commission action with respect
to that person? Are the conditions for such carve-out appropriate
(i.e., to have complied with the terms of the order and making required
disclosures for 10 years)? Why or why not? Should we modify the
conditions or impose additional conditions?
     Given that the term non-disqualifying Commission action
would include a Commission opinion or order that does not bar, suspend,
or prohibit the person from acting in any capacity under the Federal
securities laws, and certain Commission ceases and desist orders
relating to scienter-based antifraud provisions of the Federal
securities laws and Section 5 of the Securities Act of 1933, subject to
conditions described herein, should we specify whether or not non-
disqualifying Commission action'' should also include a Commission
opinion or order requiring an adviser, broker-dealer or other
registrant to hire an independent compliance consultant?
     Are there any other types of misconduct or act(s) or
omission(s) that should be disregarded for a person in determining
whether that person is an ineligible solicitor?
     Are there additional conditions that we should place on an
adviser's ability to compensate for solicitation activity persons whose
only disqualifying events are also subject to non-disqualifying
Commission actions? For example, should the Commission include a
similar mechanism to the one used under Securities Act rule 405 and in
the rules disqualifying felons and other ``bad actors'' from certain
securities offerings, which states that the Commission may grant
waivers of ineligible issuer status ``upon a showing of good cause,
that it is not necessary under the circumstances that the issuer be
considered an ineligible issuer''? \498\ If so, how should the
Commission incorporate these or other considerations into the rule?
---------------------------------------------------------------------------

    \498\ Securities Act Rule 405. See paragraphs (d) and (e) of
rule 506 of Regulation D.
---------------------------------------------------------------------------

     Should we require advisers that compensate for
solicitation activity persons whose only disqualifying events are also
subject to non-disqualifying Commission actions report such events to
the Commission in Form ADV or to disclose such events to investors?
     Are there additional terms that should be defined in the
rule, such as ``felony,'' ``misdemeanor,'' ``convicted,'' ``found,''
``bar,'' ``suspend,'' ``sanctions,'' ``final order,'' ``order,''
``judgment,'' or ``decree''? If so, how should we define those terms?
     As discussed above, under our proposal, certain solicitors
that are not currently disqualified under the rule would be
disqualified under the amended rule as ``ineligible solicitors'' solely
as a result of the proposed changes to the rule's disqualification
provisions. For example, under the current rule, an adviser would not
be prohibited from using a solicitor based solely on the entry of a
final order of the CFTC or a self-regulatory organization. But under
the proposed rule, such a solicitor would be an ineligible solicitor
if, for example, the final CFTC or self-regulatory order bars the
solicitor from association with an entity regulated by the CFTC or the
self-regulatory authority, respectively. While the proposed
disqualification provision would apply only to any disqualifying
Commission action or disqualifying event occurring after the
effectiveness of the proposed rule amendments (or the compliance date,
as applicable), we request comment on whether we should provide a
longer transition period for any such solicitors that are not currently
disqualified under the rule but would be disqualified under the amended
rule as ``ineligible solicitors'' solely as a result of the proposed
changes to the rule's disqualification provisions. If so, how long a
transition period for such solicitors should we provide, and why?
     Should we, as discussed above, ``grandfather'' certain
advisers and solicitors that currently rely on letters issued by the
Commission staff stating that the staff would not recommend enforcement
action to the Commission under section 206(4) and rule 206(4)-3 if an
investment adviser paid cash solicitation fees to a solicitor that was
subject to particular disciplinary events that fall within the current
rule's disqualification provision? \499\ Why or why not? Should we
permit some, but not all, persons to be grandfathered under the
proposed rule, if the solicitors continue to comply with the conditions
specified in the Commission staff no-action letters and, except for the
disciplinary events described in the applicable letter, would not
otherwise be ineligible solicitors under the proposed rule? Why or why
not? If so, what standards should we apply in making such
determination?
---------------------------------------------------------------------------

    \499\ See, e.g., the ``bad actor'' letters listed below in
section II.D. While these staff letters generally only apply to the
solicitor or adviser to which the letter is addressed, the staff has
issued one letter that it stated would apply with respect to any
cash solicitation arrangement under which an investment adviser
proposes to pay cash solicitation fees to a solicitor subject to a
specific type of disqualification event under the circumstances
described in the letter. See Dougherty Letter, discussed supra
footnote 495.
---------------------------------------------------------------------------

C. Recordkeeping

    We are also proposing to amend Advisers Act rule 204-2, the books
and records rule, which sets forth requirements for maintaining,
making, and retaining advertisements and books and records relating to
the solicitation of clients.\500\ These proposed amendments would help
facilitate the Commission's inspection and enforcement capabilities.
---------------------------------------------------------------------------

    \500\ Provisions of rule 204-2 that relate to advertising or
solicitation under the proposed rules do not apply to registered
investment companies.
---------------------------------------------------------------------------

    First, we are proposing to amend the current rule to require
investment advisers to make and keep records of all advertisements they
disseminate to one or more persons.\501\ The current rule requires
investment advisers to keep a record of advertisements sent to 10 or
more persons. We are proposing this change to conform the books and
records rule to the definition of ``advertisement'' in the proposed
amendments to the advertising rule, which would not be defined in terms
of the number of persons to whom it is disseminated.\502\ We are not
proposing to change the requirement that advisers keep a record of
communications other than advertisements (e.g., notices, circulars,
newspaper articles, investment letters, and bulletins) that the
investment adviser disseminates, directly or indirectly, to 10 or more
persons. The proposed books and recordkeeping revision would not apply
to live oral communications that are not broadcast, as those
communications are excluded from the proposed definition

of ``advertisement.'' \503\ It would, however, apply to any information
provided under proposed rule 206(4)-1(c)(1)(v), which permits
hypothetical performance in an advertisement subject to certain
conditions, including a requirement that the investment adviser
provides (or offers to provide promptly to a recipient that is a Non-
Retail Person) sufficient information to enable the person to
understand the risks and limitations of using such hypothetical
performance in making investment decisions. We consider any such
supplemental information that would be required by proposed rule
206(4)-1 to be a part of the advertisement and therefore subject to the
books and records rule.\504\
---------------------------------------------------------------------------

    \501\ An adviser's live oral communications that are broadcast
would be excluded from the recordkeeping requirements. See proposed
rule 206(4)-1(d)(2).
    \502\ See proposed rule 206(4)-1(e)(1).
    \503\ Proposed rule 206(4)-1(e)(1)(i).
    \504\ Among other conditions, the proposed rule also would
require the adviser to provide (rather than simply offer to provide)
information sufficient to enable Retail Persons to understand the
risks and limitations of using such hypothetical performance in
making investment decisions. See proposed rule 206(4)-1(c)(1)(v)(C);
see also supra footnote 317 and accompanying text.
---------------------------------------------------------------------------

    Second, we are proposing to add a provision to the books and
records rule that would explicitly require investment advisers to
maintain records related to third-party questionnaires and surveys, as
applicable. Specifically, the proposed amendment would require
investment advisers that use third-party ratings in an advertisement to
make and keep a record of any questionnaire or survey used to create
the third-party rating. This requirement would include any
questionnaire or survey completed by the adviser for the third party,
as well as the form of any questionnaire or survey sent by the third
party to the adviser's investors or other participants. This proposal
would track the proposed provision of the advertising rule that would
permit the use of third-party ratings in advertisements so long as the
investment adviser reasonably believes that any questionnaire or survey
used in the preparation of the third-party rating is structured to make
it equally easy for a participant to provide favorable and unfavorable
responses and is not designed or prepared to produce any predetermined
result.\505\ Requiring that such information be retained can provide
helpful information to examiners or internal compliance personnel,
especially since the persons providing the rating often will not be
registered with the Commission and subject to the Commission's books
and records requirements.\506\
---------------------------------------------------------------------------

    \505\ See proposed rule 206(4)-1(b)(2).
    \506\ See supra section II.A.4.
---------------------------------------------------------------------------

    Third, we are proposing to add a provision to the books and records
rule that would require investment advisers to maintain a copy of all
written approvals of advertisements by designated employees.\507\
Requiring that such information be retained can also provide helpful
information to examiners or internal compliance personnel.
---------------------------------------------------------------------------

    \507\ Proposed rule 204-2(a)(11)(iii).
---------------------------------------------------------------------------

    Fourth, we are proposing to amend the provisions of the books and
records rule that require investment advisers to maintain
communications containing any performance or rate of return in their
advertisements. Specifically, we are proposing to require that
investment advisers make and keep originals of written communications
received, and copies of written communications sent, relating to the
performance or rate of return of any or all portfolios, as defined in
the proposed advertising rule.\508\ Similarly, we are proposing to
require that investment advisers make and keep all supporting records
regarding the calculation of the performance or rate of return of any
or all portfolios, as defined in the proposed advertising rule, in any
advertisement or other communication.\509\ The current books and
records rule requires investment advisers to make and keep these
communications and supporting records with respect to the performance
or rate or return of any or all managed accounts or securities
recommendations.\510\ The proposed amendments seek to impose the same
requirements with respect to the performance or rates of return of any
or all ``portfolios,'' a defined term that the proposed advertising
rule would use to impose specific requirements on the presentation of
performance.\511\
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    \508\ Proposed rule 204-2(a)(7)(iv).
    \509\ Proposed rule 204-2(a)(16).
    \510\ Rule 204-2(a)(7)(iv) and (a)(16). See also Recordkeeping
by Investment Advisers, Release No. IA-1135 (Aug. 17, 1988) [53 FR
32033 (Aug. 23, 1988)] (describing as ``supporting records'' the
documents necessary to form the basis for performance information in
advertisements that are required under rule 204-2(a)(16)).
    \511\ See, e.g., proposed rule 206(4)-1(c)(2)(ii) (requiring the
inclusion of performance results of the same ``portfolio'' for
specific time periods in any Retail Advertisement presenting
performance results of such portfolio); proposed rule 206(4)-1(e)(4)
(defining ``gross performance'' by reference to the performance
results of a specific portfolio); proposed rule 206(4)-1(e)(6)
(defining ``net performance'' by reference to the performance
results of a specific portfolio).
---------------------------------------------------------------------------

    Fifth, we are proposing two changes to paragraph (a)(16) of the
current books and records rule, which requires investment advisers to
make and keep all ``accounts, books, internal working papers, and any
other records or documents that are necessary to form the basis for or
demonstrate the calculation of the performance or rate of return of any
or all managed accounts or securities recommendations'' appearing in
any advertisement.\512\ First, as described above, we are proposing to
require investment advisers to make and keep all supporting records
regarding the calculation of the performance or rate of return of any
or all ``portfolios,'' in addition to the managed accounts and
securities recommendations already addressed in the provision.\513\
Second, we are proposing to amend the provision to clarify that such
supporting records must include copies of all information provided or
offered pursuant to the hypothetical performance provisions of the
proposed advertising rule.\514\ Although we believe that this provision
of the current books and records rule, which we recently amended,\515\
is broad and would apply to the proposed advertising rule's performance
provisions, we want to ensure that copies of the information provided
to investors in connection with hypothetical performance requirements
of the proposed advertising rule are available to our examination staff
to better review compliance with that proposed rule and other
applicable law. As a result, investment advisers would be required to
create and retain records for any performance-related data the proposed
rule permits an investment adviser to include in an advertisement.
---------------------------------------------------------------------------

    \512\ See rule 204-2(a)(16); see also supra footnote 512.
    \513\ See supra footnote 511 and accompanying text.
    \514\ Proposed rule 206(4)-1(c)(1)(v).
    \515\ See Form ADV and Investment Advisers Act Rules, Release
No. IA-4509 (Aug. 26, 2016) [81 FR 60417 (Sept. 1, 2016)].
---------------------------------------------------------------------------

    Finally, to correspond to changes we are proposing to make to the
solicitation rule 206(4)-3, we are proposing to amend the current books
and records rule to require investment advisers to make and keep
records of: (i) Copies of the solicitor disclosure delivered to
investors pursuant to rule 206(4)-3(a)(1)(iii), and, if the adviser
participates in any nonprofit program pursuant to rule 206(4)-3(b)(4),
copies of all receipts of reimbursements of payments or other
compensation the adviser provides relating to its inclusion in the
program; (ii) any communication or other document related to the
investment adviser's determination that it has a reasonable basis for
believing that (a) any solicitor it compensates under rule 206(4)-3 has
complied with the written agreement required by rule 206(4)-3(a)(1),
and that such solicitor is not an ineligible solicitor, and (b) any
nonprofit program it participates in pursuant to rule 206(4)-3(b)(4)
meets

the requirements of rule 206(4)-3(b)(4); and (iii) a record of the
names of all solicitors who are an adviser's partners, officers,
directors or employees or other affiliates, pursuant to rule 206(4)-
3(b)(2).\516\
---------------------------------------------------------------------------

    \516\ Proposed rule 204-2(a)(15)(i)-(iii).
---------------------------------------------------------------------------

    The current books and records rule requires investment advisers to
keep a record of all written acknowledgments of receipt obtained from
clients pursuant to rule 206(4)-3(a)(2)(iii)(B), and copies of the
disclosure documents delivered to clients by solicitors pursuant to
rule 206(4)-3.\517\ Even though our proposed amendments to the
solicitation rule would remove the current rule's acknowledgment
requirement, an adviser may still choose to receive acknowledgements as
a means to inform its belief that the solicitor has satisfied the terms
of the written agreement. If the adviser uses investor acknowledgments
to evidence its compliance with the proposed solicitation rule, then
the adviser would be required to maintain the communications or other
documents containing those acknowledgments in accordance with this
provision.\518\ Requiring that such information be retained can also
provide helpful information to our examiners or internal compliance
personnel.
---------------------------------------------------------------------------

    \517\ Rule 206(4)-3(a)(2)(iii)(B) requires that, as a condition
to paying a cash fee to a solicitor for solicitation activity, the
adviser must receive from the client, prior to, or at the time of,
entering into any written or oral investment advisory contract with
such client, a signed and dated acknowledgment of receipt of the
investment adviser's written disclosure statement and the
solicitor's written disclosure document.
    \518\ Proposed rule 204-2(a)(15)(ii).
---------------------------------------------------------------------------

    The current rule also requires investment advisers to keep a record
of copies of the disclosure documents delivered to clients by
solicitors pursuant to rule 206(4)-3. We are proposing to maintain this
requirement with adjustments to correspond to our proposed changes to
the solicitation rule, which would permit either the adviser or the
solicitor to deliver the solicitor disclosure. We believe that such
proposed changes to the solicitation rule and corresponding changes to
the recordkeeping rule aid internal compliance personnel by making it
easier for advisers to comply with the books and records requirement to
keep records of the solicitor disclosure. Further, our proposed
amendment to the solicitation rule would remove the current rule's
requirement to include the adviser's brochure in the disclosures.
Accordingly, the corresponding books and records requirement would be
removed as no longer relevant or necessary.
    Additionally, our proposal to add to the books and records rule a
new requirement that advisers keep a record of the names of all
solicitors who are an adviser's partners, officers, directors or
employees or other affiliates, would correspond to our proposed changes
to the solicitation rule. Our proposed amendments to the solicitation
rule would require advisers that employ the solicitation rule's limited
exemptions for solicitors that are partners, officers, directors or
employees or certain other affiliates, to document such solicitor's
status at the time the adviser enters into the solicitation
arrangement.\519\ Amending rule 204-2 as proposed will therefore
correspond to the proposed changes to the solicitation rule. Our
proposal would also add to the books and records rule new recordkeeping
requirements for advisers that participate in nonprofit referral
programs pursuant to the nonprofit exemption from the solicitation
rule. This recordkeeping requirement would correspond to the
solicitation rule's proposed nonprofit exemption by requiring an
adviser to maintain communications relating to its determination that
it has a reasonable basis for believing the nonprofit program meets the
requirements of the proposed solicitation rule exemption for nonprofit
programs. In addition, the proposed new books and record requirement
would require advisers that use the nonprofit exemption to retain
copies of all receipts of reimbursements the adviser provides relating
to its inclusion in the program. This information would be critical for
an adviser to demonstrate that it compensates the solicitor only to
reimburse it for the administrative costs incurred in operating the
program, as required under the exemption. Requiring that such
information be retained can also provide helpful information to our
examiners or internal compliance personnel, especially since we believe
that under our proposed solicitation rule, solicitors would often
deliver to investors the solicitor disclosure; solicitors (rather than
advisers) would operate nonprofit referral programs, and; solicitors
would oftentimes not themselves be registered with the Commission and
therefore not subject to the Commission's books and records
requirements.
---------------------------------------------------------------------------

    \519\ See proposed rule 206(4)-3(b)(2).
---------------------------------------------------------------------------

    We are not proposing amendments to the books and records rule that
would specifically reference the adviser's obligation to retain any
written agreements with solicitors entered into pursuant to the
requirements of the solicitation rule.\520\ Such a provision would be
duplicative of the current books and records rule, which requires
advisers to retain ``[a]ll written agreements (or copies thereof)
entered into by the investment adviser with any client or otherwise
relating to the business of such investment adviser as such.'' \521\ We
are not proposing to make any changes to this provision of the rule
because we believe that this provision currently applies, and would
continue to apply, to the solicitation rule written agreement
requirement.
---------------------------------------------------------------------------

    \520\ See proposed rule 206(4)-3(a)(1).
    \521\ See rule 204-2(a)(10).
---------------------------------------------------------------------------

    We request comment on the proposed books and recordkeeping
amendments.
     Do commenters agree that the recordkeeping requirement
should be revised to apply to advertisements distributed to one or more
persons? If we were to require records only for advertisements
disseminated to a minimum number of people, as under the current rule,
what is the appropriate minimum? Is it less or more than 10?
     Do advisers have concerns it will be difficult to retain
advertisements distributed to one or more persons? Would this place an
undue burden on smaller advisers? How many advertisements do advisers
disseminate via electronic correspondence, and do advisers already have
processes in place to automatically retain all such correspondence?
     Proposed rule 204-2(a)(11), like the current rule, would
require advisers to make and keep records of communications other than
advertisements (e.g., notices, circulars, newspaper articles,
investment letters, and bulletins) distributed to 10 or more person.
While we believe many of these communications nonetheless would fall
under the proposed definition of ``advertisement,'' should we treat any
such communications that are not advertisements differently (e.g.,
subject them to the recordkeeping rule if distributed to one or more
persons)?
     Is it clear to commenters what supplemental information
would be required to be maintained by advisers advertising hypothetical
performance?
     Have advisers had difficulty retaining communications that
are not advertisements under this provision of the current rule? How
many communications do advisers disseminate via electronic
correspondence, and do advisers already have processes in place to
automatically retain all such correspondence?

     Do commenters believe it will be difficult for any
investment advisers to obtain a copy of a survey or questionnaire used
to create third-party rating?
     Do commenters agree with the proposed amendments to the
performance recordkeeping requirements in 204-2(a)(16)? Why or why not?
     Should we consider amending the rule to address
specifically other provisions of the proposed advertising rule? For
example, should the books and recordkeeping rule require specific
records related to testimonials and endorsements?
     Do commenters agree that the recordkeeping requirement
should be revised to correspond to our proposed changes to the
solicitation rule? Why or why not?
     Given that our proposed solicitation rule would remove the
current requirement that an adviser obtain signed and dated client
acknowledgments of the rule's required disclosures, should we require
that the adviser maintain any communication with a solicitor or another
person related to the investment adviser's determination that it has a
reasonable basis for believing that any solicitor it compensates under
rule 206(4)-3 has complied with the written agreement required by rule
206(4)-3(1), and that such solicitor is not an ineligible solicitor?
Why or why not?
     Proposed rule 204-2(a)(15) does not currently require
advisers to make and keep records of their written agreements with
solicitors required under the solicitation rule, but advisers are
required to make and keep records of such agreements under another
provision of the books and records rule that applies more broadly to an
adviser's business. Should we clarify, in the books and records
provision relating specifically to the solicitation rule, the
requirement to keep such records? Why or why not?
     Is it currently difficult for investment advisers to
obtain copies of the solicitor disclosure that the solicitor delivers
to clients, even though the adviser is also required to obtain signed
and dated client acknowledgments of receipt of such disclosure? Why or
why not? If so, would the proposed change to the solicitation rule--
that would allow advisers to deliver the solicitor disclosure--improve
compliance with the books and records rule's requirement to retain
copies of the solicitor disclosure? Why or why not?
     Should the books and records rule require that advisers
make and keep records of the names of solicitors that are in-house or
otherwise affiliated with the adviser? Why or why not?
     Are there other records related to advertisements that we
should require investment advisers to keep and maintain? For example,
should we require advisers to retain materials substantiating the
policies and procedures reasonably designed to ensure that a Non-Retail
Advertisement is disseminated solely to Non-Retail Persons, as defined
in the proposed rule?
     Investment advisers would be required to maintain the
proposed records for the same period of time as required under the
current books and recordkeeping rule. Do commenters believe advisers
should be required to maintain these records for a shorter or longer
period of time? Why?
     Should we require that investment advisers include a
unique identifier, such as the adviser's SEC number or Central
Registration Depository (CRD) number, on all advertisements?

D. Existing Staff No-Action Letters and Other Related Guidance

    Staff in the Division of Investment Management is reviewing certain
of our staff's no action letters and other guidance addressing the
application of the advertising and solicitation rules to determine
whether any such letters should be withdrawn in connection with any
adoption of this proposal. If the rule is adopted, some of these
letters and other guidance would be moot, superseded, or otherwise
inconsistent with the amended rules and, therefore, would be withdrawn.
We list below the letters that are being reviewed for withdrawal as of
the dates the proposed rules, if adopted, would be effective after a
transition period.\522\ If interested parties believe that additional
letters should be withdrawn, they should identify the letter, state why
it is relevant to the proposed rule, and how it should be treated and
the reason therefor. To the extent that a letter listed relates both to
a topic identified in the list below and another topic, the portion
unrelated to the topic listed is not being reviewed in connection with
the adoption of this proposal.
---------------------------------------------------------------------------

    \522\ See infra Section II.E, discussing the proposed transition
periods.
---------------------------------------------------------------------------

1. Letters To Be Reviewed Concerning Rule 206(4)-1

------------------------------------------------------------------------
            Letter and date                Topic subject to withdrawal
------------------------------------------------------------------------
A.R. Schmeidler & Co. Inc. (pub. avail.  Hypothetical performance.
 June 1, 1976).
Alphadex Corp. (pub. avail. Feb. 21,     Graphs, charts, and formulas.
 1971).                                   hypothetical performance, past
                                          specific recommendations.
Amherst Financial Services Inc. (pub.    Prohibition and scope of
 avail. May 23, 1995).                    testimonials, generally,
                                          including audio files.
Analytic Investment Management           Prohibition and scope of
 Incorporated (pub. avail. March 22,      testimonials, such as client
 1971).                                   reference letters.
Anametrics Investment Mgmt. (pub.        Misleading performance.
 avail. May 5, 1977).
Andrew M. Rich (pub. avail. Feb. 22,     False or misleading
 1989).                                   advertisements.
Association for Investment Management    Performance advertisements.
 and Research (pub. avail. Dec. 18,
 1997).
Bache & Company (pub. avail. Feb 5,      Graphs, charts, and formulas,
 1976).                                   false or misleading
                                          advertisements, hypothetical
                                          performance.
Bradford Hall (pub. avail. Jul. 19,      Performance advertisements,
 1991).                                   gross performance.
BullBear Indicator, Inc. (pub. avail.    Past specific recommendations.
 Apr. 14, 1976).
Bypass Wall Street, Inc. (pub. avail.    Performance advertisements,
 Jan. 17, 1992).                          gross performance.
Cambiar Investors, Inc., (pub. avail.    Prohibition and scope of
 Aug. 28, 1997).                          testimonials, generally,
                                          including partial client
                                          lists.
CIGNA Securities, Inc. (pub. avail. May  Prohibition and scope of
 8, 1991).                                testimonials, generally.
Clover Capital Management (pub. avail.   Performance advertisements,
 July 19, 1991).                          gross performance.
Clover Capital Management (pub. avail.   Performance advertisements,
 Oct. 28, 1986).                          model or actual results.
Covato/Lipsitz, Inc. (pub. avail. Oct.   Past specific recommendations.
 23, 1981).
Cubitt-Nichols Associates (pub. avail.   Past specific recommendations,
 Dec. 22, 1971).                          hypothetical performance.

DALBAR, Inc., (pub. avail. March 24,     Prohibition and scope of
 1998).                                   testimonials, generally,
                                          including third-party ratings.
Denver Investment Advisors, Inc. (pub.   Prohibition and scope of
 avail. July 30, 1993).                   testimonials, generally,
                                          including partial client
                                          lists.
Donaldson, Lufkin & Jenrette Securities  Misleading advertisements, past
 Corp. (pub. avail. Mar. 2, 1977).        specific recommendations.
Dow Theory Forecasts, Inc. (pub. avail.  Report, analysis or service
 May 21, 1986).                           provided ``free of charge''.
Dow Theory Forecasts, Inc. (pub. avail.  Past specific recommendations.
 Nov. 7, 1985).
Edward F. O'Keefe (pub. avail. Apr. 13,  False or misleading
 1978).                                   advertisements, past specific
                                          recommendations.
Executive Analysts, Inc. (pub. avail.    False or misleading
 Aug. 6, 2972).                           advertisements.
F. Eberstadt & Co., Inc. (pub. avail.    False or misleading
 Jul. 2, 1978).                           advertisements.
Ferris & Company, Inc. (pub. avail. May  Performance advertisements,
 23, 1972).                               model or actual results.
Foster & Marshall, Inc. (pub. avail.     Past specific recommendations.
 Feb, 18, 1977).
Franklin Management, Inc. (pub. avail.   Past specific recommendations.
 Dec. 10, 1998).
Gallagher and Associates, Ltd. (pub.     Prohibition and scope of
 avail. July 10, 1995).                   testimonials, generally,
                                          including non-investment
                                          related commentary (e.g.,
                                          religious affiliation or moral
                                          character) *.
                                         * Note that staff has
                                          previously partially rescinded
                                          its Gallagher position. See IM
                                          Guidance Update No. 2014-04,
                                          at note 12 and accompanying
                                          text.
Investment Adviser Association (pub.     Prohibition and scope of
 avail. Dec. 2, 2005).                    testimonials, generally,
                                          including third-party ratings.
Investment Company Institute (pub.       Performance advertisements,
 avail. Aug. 24, 1987).                   gross performance.
Investment Company Institute (pub.       Performance advertisements,
 avail. Sept. 23, 1988).                  gross performance.
Investment Counsel Association of        Past specific recommendations.
 America (pub. avail. Mar. 1, 2004).
Investor Intelligence (John Anthony)     False or misleading
 (pub. avail. April 18, 1975).            advertisements.
J.D. Minnick & Co. (pub. avail. Apr.     Past specific recommendations.
 30, 1975).
J.P. Morgan Investment Mgmt., Inc.       Performance advertisements,
 (pub. avail. May 7, 1996).               gross performance, model fees.
J.Y. Barry Arbitrage Management, Inc.    Prohibition and scope of
 (pub. avail. October 18, 1989).          testimonials, generally.
James B. Peeke & Co., Inc. (pub. avail.  Past specific recommendations.
 Sept. 13, 1982).
James Maratta (pub. avail. June 3,       Graphs, charts, and formulas,
 1977).                                   false or misleading
                                          advertisements.
Kurtz Capital Management (pub. avail.    Prohibition and scope of
 Jan. 18, 1988).                          testimonials, generally, and
                                          third-party reports.
Mark Eaton (pub. avail. June 9, 1977)..  Past specific recommendations.
Multi-Financial Securities Corp. (pub.   Prohibition and scope of
 avail. November 9, 1995).                testimonials, generally,
                                          including audio files.
New York Investors Group, Inc. (pub.     Prohibition and scope of past
 avail. Sept. 7, 1982).                   specific recommendations and
                                          testimonials, generally, and
                                          reprints of articles; false or
                                          misleading advertisements.
Norman L. Yu (pub. avail. Apr. 12,       Past specific recommendations.
 1971).
Oberweis Securities, Inc. (pub. avail.   Past specific recommendations.
 July 25, 1983).
Richard Silverman (pub. avail. March     Prohibition and scope of
 27, 1985).                               testimonials, generally.
S.H. Dike & Co., Inc. (pub. avail. Apr.  Past specific recommendations,
 20, 1975) \523\.                         hypothetical performance,
                                          graphs, charts, and formulas.
Schield Stock Services, Inc. (pub.       False or misleading
 avail. Feb. 26, 1972).                   advertisements.
Scientific Market Analysis (pub. avail.  Hypothetical performance, past
 Mar. 24, 1976).                          specific recommendations.
Securities Industry Association (pub.    Performance advertisements,
 avail. Nov. 27, 1989).                   gross performance.
Stalker Advisory Services (pub. avail.   Prohibition and scope of
 Jan. 18, 1994).                          testimonials, generally, and
                                          reprints of articles.
Starr & Kuehl, Inc. (pub. avail. Apr.    Past specific recommendations.
 17, 1976).
Taurus Advisory Group, Inc. (pub.        Performance advertisements,
 avail. July 15, 1993).                   past performance.
The Mottin Forecast (pub. avail. Nov.    Graphs, charts, and formulas,
 29, 1975).                               false or misleading
                                          advertisements.
The TCW Group (pub. avail. Nov. 7,       Performance advertisements,
 2008).                                   past specific recommendations.
Triad Asset Management (pub. avail.      Past specific recommendations.
 Apr. 22, 1993).
------------------------------------------------------------------------

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

    \523\ The portion of this letter pertaining to rule 206(4)-1
would be withdrawn, but the portions pertaining to the adviser's
investment management arrangements potentially involving the
creation of investment companies under section 3(a) of the
Investment Company Act, as well as the participations in those
investment companies as securities as defined in section 2(1) of the
Securities Act, would not be withdrawn.
---------------------------------------------------------------------------

2. Letters To Be Reviewed Concerning Rule 206(4)-3

------------------------------------------------------------------------
            Letter and date                Topic subject to withdrawal
------------------------------------------------------------------------
Allen Isaacson (pub. avail. Dec. 17,     Scope of the rule's exemption
 1979).                                   for certain affiliates.
AMA Investment Advisers, Inc. (pub.      Delivery of solicitor brochure
 avail. Oct. 28, 1993).                   (timing and the requirement
                                          for the solicitor to deliver
                                          it).
Ameriprise Financial Services, Inc.      Timing of delivery of required
 (pub. avail. Apr. 5, 2006).              disclosures (solicitor
                                          disclosure and/or adviser
                                          brochure).
Bond Timing Securities Corporation       Solicitation for impersonal
 (pub. avail. Nov. 29, 1984).             investment advice.
Charles Schwab & Co. (pub. avail. Dec.   Discussion of ``person
 17, 1980).                               associated with an investment
                                          adviser''.
Charles Schwab & Co. Inc. (pub. avail.   Timing of delivery of required
 Apr. 29, 1998).                          brochure.
Cunningham Advisory Services, Inc.       ``Person associated with an
 (pub. avail. Apr. 27, 1987).             investment adviser''.

Dana Investment Advisors, Inc. (pub.     Application of rule to
 avail. Oct. 12, 1994) *.                 solicitation of investors in
                                          investment pool managed by the
                                          adviser.
* Staff has previously partially
 retracted statements it made in this
 letter about the application of the
 rule to solicitation of investors in
 investment pool managed by the adviser
 (see e.g., Mayer Brown, below).
Dechert Price and Rhoads (pub. avail.    Application of rule to
 Dec. 4, 1990) *.                         solicitation of investors in
                                          investment pool managed by the
                                          adviser.
* Staff has previously retracted
 statements it made in this letter
 about the application of the rule to
 solicitation of investors in
 investment pool managed by the adviser
 (see e.g., Mayer Brown, below).
Denver Credit Union (pub. avail. Sept.   General applicability of the
 15, 1988).                               rule.
E. Magnus Oppenheim & Co. (pub. avail.   Written agreement requirement
 Mar. 25, 1985).                          for an adviser's in-house
                                          (employee) solicitors,
                                          including solicitor
                                          disclosure.
E.F. Hutton and Co. Inc. (pub. avail.    Delivery of solicitor brochure
 Sept. 21, 1987).                         (timing and the requirement
                                          for the solicitor to deliver
                                          it).
Excellence in Advertising, Ltd. (pub.    Scope of rule.
 avail. Dec. 15, 1986).
Fried, Frank, Harris, Shriver &          Scope of the rule's exemption
 Jacobson (pub. avail. Dec. 17, 1979).    for certain affiliates.
Heys, Robert J. (pub. avail. May 12,     Scope of rule.
 1986).
International Association for Financial  Scope of rule.
 Planning (pub. avail. June 1, 1998).
JMB Financial Managers, Inc. (pub.       General application of the
 avail. June 23, 1993).                   rule.
Koyen, Clarke and Assoc. Inc. (pub.      Discussion of ``person
 avail. Nov. 10, 1986).                   associated with an investment
                                          adviser''.
Lincoln National Investment Management   Timing of delivery of required
 Co. (pub. avail. Mar. 26, 1992).         disclosures.
Mayer Brown LLP (pub. avail. July 15,    Application of rule to cash
 2008, superseded by letter with minor,   payments by registered
 non-substantive changes, pub. avail.     advisers to persons who
 July 28, 2008).                          solicit investors to invest in
                                          investment pool managed by the
                                          adviser.
Merchants Capitol Management, Inc.       Written agreement requirement
 (pub. avail. Oct. 4, 1991).              for an adviser's in-house
                                          (employee) solicitors,
                                          including solicitor
                                          disclosure.
Mid-States Capital Planning (pub.        Setting the amount of the
 avail. Apr. 11, 1983).                   solicitation fee.
Moneta Group Investment Advisors, Inc.   Delivery of solicitor brochure
 (pub. avail. Oct. 12, 1993).             (timing and the requirement
                                          for the solicitor to deliver
                                          it).
National Football League Players Ass'n   Scope of rule.
 (pub. avail. Jan. 25, 2002).
Redmond Associates, Inc. (pub. avail.    General requirements of the
 Jan. 12, 1985).                          rule.
Roy Heybrock (pub. avail. Apr. 5, 1982)  General applicability of the
                                          rule.
Securities International, Ltd., dba      General applicability of the
 ITZ, Ltd. (pub. avail. Mar. 14, 1989).   rule.
Shareholder Service Corporation (pub.    Setting the amount of the
 avail. Feb. 3, 1989).                    solicitation fee.
Stein, Roe and Farnham Inc. (pub.        Scope of the rule's exemption
 avail. May 26, 1987).                    for certain affiliates.
Stein, Roe and Farnham, Inc. (pub.       Application of rule to
 avail. June 29, 1990) *.                 solicitation of investors in
                                          investment pool managed by the
                                          adviser; satisfaction of the
                                          rule's disclosure provisions.
* Staff has previously partially
 retracted statements it made in this
 letter about the application of the
 rule to solicitation of investors in
 investment pool managed by the adviser
 (see e.g., Mayer Brown, above)
Stonebridge Capital Management (pub.     General applicability of the
 avail. Dec. 12, 1979).                   rule.
The Lowry Management Corp. (pub. avail.  Definition of solicitor
 Sept. 7, 1982).                          (specifically, the term
                                          ``person'' as used in the
                                          definition of solicitor).
Trident Investment Management, Inc.      Content of solicitor
 (pub. avail. Dec. 18, 1981).             disclosure.
Trinity Investment Management Corp.      General application of the
 (pub. avail. Mar. 7, 1980).              rule.
Van Eerden Investment Advisory           Requirements for the written
 Services, Inc. (pub. avail. May 21,      agreement.
 1984).
All rule 206(4)-3 ``bad actor'' letters  Solicitor disqualification.
 (see list below). But see requests for
 comment on grandfathering some
 disqualification letters, infra
 section II.E.
------------------------------------------------------------------------

    Solicitor disqualification letters that are being reviewed in full:

1. Aeltus Investment Management, Inc. (pub. avail. July 17, 2000)
2. American International Group, Inc. (pub. avail. Dec. 8, 2004)
3. American International Group, Inc. (pub. avail. Feb. 21, 2006)
4. Automated Trading Desk Specialists, LLC (pub. avail. Mar. 13,
2009)
5. BAC Home Loans Servicing, LP (formerly Countrywide Home Loans
Servicing LP) (pub. avail. June 2, 2011)
6. Banc of America Securities LLC (pub. avail. June 10, 2009)
7. Bank of America, N.A. (pub. avail. Nov. 25, 2014)
8. Barclays Bank, PLC (pub. avail. June 6, 2007)
9. Bear Sterns & Co., Inc., and several settling firms (pub. avail.
Jan. 1, 1999).
10. Bear, Stearns & Company Inc. (pub. avail. Oct. 31, 2003)
11. Bear, Stearns Securities Corp. (pub. avail. Aug. 5, 1999)
12. BT Alex. Brown Inc. (pub. avail. Nov. 17, 1999)
13. BT Securities Corp. (pub. avail. Mar. 30, 1992)
14. Carnegie Asset Management, Inc. (pub. avail. July 11, 1994)
15. CIBC Mellon Trust Company (pub. avail. Feb. 24, 2005)
16. Citigroup Global Markets Inc. (pub. avail. Oct. 31, 2003)
17. Citigroup Inc. (pub. avail. Oct. 22, 2010)
18. Credit Suisse First Boston Corp. (pub. avail. Aug. 24, 2000)
19. Credit Suisse First Boston LLC (pub. avail. Oct. 31, 2003)
20. Credit Suisse (pub. avail. May 20, 2014)
21. Deutsche Bank Securities Inc. (pub. avail. Sept. 24, 2004)
22. Deutsche Bank Securities Inc. (pub. avail. June 9, 2009)
23. Dougherty & Company LLC (pub. avail. July 3, 2003)
24. Dougherty & Company LLC (pub. avail. Mar. 21, 2003)
25. E*Trade Capital Markets LLC (pub. avail. Mar. 12, 2009)
26. E-Invest, Inc. (pub. avail. Sept. 22, 2000)

27. F. Porter Stansberry (pub. avail. Sept. 30, 2015)
28. Fahnestock & Company Inc. (pub. avail. Apr. 21, 2003)
29. First City Capital Corp. (pub. avail. Feb. 9, 1990)
30. Founders Asset Management LLC (pub. avail. Nov. 8, 2000)
31. GE Funding Capital Market Services, Inc. (pub. avail. Jan. 25,
2012)
32. General Electric Company (pub. avail. Aug. 12, 2009)
33. General Electric Company (pub. avail. Aug. 2, 2010)
34. Goldman, Sachs & Co. (pub. avail. Feb. 23, 2005)
35. Goldman, Sachs & Co. (pub. avail. July 22, 2010)
36. Goldman, Sachs & Co. (pub. avail. Oct. 31, 2003)
37. Gruntal & Co. (pub. avail. July 17, 1996)
38. Hickory Capital Management (pub. avail. Feb. 11, 1993)
39. In re William R. Hough & Co./In the Matter of Certain Municipal
Bond Refundings (pub. avail. Apr. 13, 2000)
40. In the Matter of Market Making Activities on Nasdaq (pub. avail.
Jan. 11, 1999)
41. ING Bank N.V. (pub. avail. Aug. 31, 2005)
42. Interstate/Johnson Lane Corp. (pub. avail. Apr. 21, 1997)
43. J.B. Hanauer (pub. avail. Apr. 27, 1999)
44. J.B. Hanauer (pub. avail. Dec. 12, 2000)
45. J.P. Morgan Securities Inc. (pub. avail. Oct. 8, 2003)
46. J.P. Morgan Securities LLC (pub. avail. Jan. 9, 2013)
47. J.P. Morgan Securities LLC (pub. avail. July 11, 2011)
48. J.P. Morgan Securities LLC (pub. avail. June 29, 2011)
49. J.P. Morgan Securities Inc. (pub. avail. Oct. 31, 2003)
50. J.P. Turner & Company, L.L.C., et al. (pub. avail. Sept. 10,
2012)
51. James DeYoung (pub. avail. Oct. 24, 2003)
52. Janney Montgomery Scott LLC and Norman T. Wilde, Jr. (pub.
avail. July 18, 2000)
53. JPMorgan Chase & Co. (pub. avail. May 20, 2015)
54. Kidder Peabody & Co. (pub. avail. Mar. 30, 1992)
55. Kidder Peabody & Co., Inc. (pub. avail. Oct. 11, 1990)
56. Legg Mason Wood Walker, Inc. (pub. avail. June 11, 2001)
57. Lehman Brothers (pub. avail. Oct. 31, 2003)
58. Macquarie Capital (USA) Inc. (pub. avail. June 1, 2017)
59. McDonald Investments Inc. (pub. avail. Apr. 2, 1999)
60. Merrill Lynch, Pierce, Fenner & Smith Inc. (pub. avail. Sept.
15, 1999)
61. Merrill Lynch, Pierce, Fenner & Smith Inc. (pub. avail. Aug. 7,
1997)
62. Merrill Lynch, Pierce, Fenner & Smith Inc. (pub. avail. Oct. 31,
2003)
63. Millennium Partners, L.P. (pub. avail. Mar. 9, 2006)
64. Mitchell Hutchins Asset Management, Inc. (pub. avail. Jan. 2,
1998)
65. Morgan Keegan & Co., Inc. (pub. avail. Jan. 9, 1998)
66. Morgan Stanley & Co., Inc. (pub. avail. Feb. 4, 2005)
67. Morgan Stanley & Co. (pub. avail. Oct. 31, 2003)
68. Nationsbanc Investments, Inc. (pub. avail. May 6, 1998)
69. Norman Zadeh and Prime Advisors, Inc. (pub. avail. Nov. 8, 2001)
70. Oppenheimer & Co., Inc. (pub. avail. June 5, 1992)
71. PaineWebber Inc. (pub. avail. Dec. 22, 1998)
72. Paul Laude, CFP (pub. avail. June 22, 2000)
73. Prudential Financial, Inc. (pub. avail. Sept. 5, 2008)
74. Prudential Securities Inc. (pub. avail. Feb. 7, 2001)
75. Ramius Capital Management (pub. avail. Apr. 5, 1996)
76. RBC Capital Markets Corp. (pub. avail. June 10, 2009)
77. RBS Securities, Inc. (pub. avail. Nov. 26, 2013)
78. RNC Capital Management Inc. (pub. avail. Feb. 7, 1989)
79. Royal Bank of Canada (pub. avail. Dec. 19, 2014)
80. Salomon Brothers, Inc. (pub. avail. Jan. 26, 1994)
81. Stein Roe & Farnham Inc. (pub. avail. Aug. 25, 1988)
82. Stein Roe Farnham--Touche Remnant Holdings Ltd. (pub. avail.
Jan. 20, 1990)
83. Stephanie Hibler (pub. avail. Jan. 24, 2014)
84. Stephens Inc. (pub. avail. Dec. 27, 2001)
85. Stifel, Nicolaus & Company, Inc. (pub. avail. Dec. 6, 2016)
86. The Dreyfus Corp. (pub. avail. Mar. 9, 2001)
87. Thomas Weisel Partners LLC (pub. avail. Sept. 24, 2004)
88. Tucker Anthony Inc. (pub. avail. Dec. 21, 2000)
89. U.S. Bancorp Piper Jaffray Inc. (pub. avail. Oct. 31, 2003)
90. UBS AG (pub. avail. Mar. 20, 2009)
91. UBS AG (pub. avail. May 20, 2015)
92. UBS Financial Services Inc. (pub. avail. May 9, 2011)
93. UBS Securities LLC (pub. avail. Oct. 31, 2003)
94. UBS Securities LLC (pub. avail. Dec. 23, 2008)
95. Wachovia Securities LLC (pub. avail. Feb. 18, 2009)
96. Wells Fargo Bank, N.A. (pub. avail. July 15, 2013)
97. Wells Fargo Bank, N.A. (pub. avail. Sept. 21, 2012)
98. Wells Fargo Bank, N.A. (pub. avail. Dec. 12, 2011)

E. Transition Period and Compliance Date

    We are proposing that advisers registered or required to be
registered with the Commission would be permitted to rely on each
amended rule after its effective date as soon as the adviser could
comply with the rule's conditions, and would be required to comply with
each amended rule applicable to it starting one year from the rule's
effective date (the ``compliance date''). This would provide a one-year
transition period during which we would permit registered investment
advisers to continue to rely on the current rules. If any final rule is
adopted, the proposed transition period would permit firms to develop
and adopt appropriate procedures to comply with the proposed new
advertising rule and the proposed changes to the solicitation rule.
    Pursuant to our proposal, any advertisements and solicitations made
on or after the compliance date by advisers registered or required to
be registered with the Commission would be subject to the new and
amended rules, respectively. Our proposed transition period would also
address solicitation arrangements where an adviser continues to
compensate a solicitor for soliciting an investor for a period of time
(i.e., trailing payments). Under our proposal, an adviser would not be
subject to the proposed amendments to the solicitation rule with
respect to trailing payments for any solicitations made prior to the
compliance date. However, any solicitation arrangement structured to
avoid the solicitation rule's restrictions, depending on the facts and
circumstances, would violate section 208(d) of the Act's general
prohibitions against doing anything indirectly which would be
prohibited if done directly.\524\
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    \524\ Section 208(d) of the Act.
---------------------------------------------------------------------------

    We request comment on the following:
     Do commenters agree that a one-year transition period
following each rule's effective date is appropriate? If not, how long
of a transition period following each rule's adoption would be
appropriate? For example, would 90 days be an appropriate amount of
time? Would longer be necessary, e.g., eighteen months, and if so, why?
Should we have different compliances dates for each rule? Why or why
not? Should we have different compliances dates for larger or smaller
entities? Why or why not?
     Under our proposal, certain solicitors that are not
currently disqualified under the rule would be disqualified under the
amended rule as ``ineligible solicitors'' solely as a result of the
proposed changes to the rule's disqualification provisions. For
example, under the current rule, an adviser would not be prohibited
from using a solicitor based solely on the entry of a final order of
the CFTC or a self-regulatory organization. But under the proposed
rule, such solicitor would be an Ineligible Person if, for example, the
final CFTC or self-regulatory order bars the solicitor from association
with

an entity regulated by the CFTC or the self-regulatory authority,
respectively. We request comment on whether the rule should include a
provision that grandfathers an adviser's arrangement with a solicitor
when the solicitor was engaged immediately prior to the proposed rule's
effective date and was not subject to disqualification under the
current rule, but would be an ineligible solicitor under the proposed
rule because of the changes to the rule's disqualification provision.
We would not apply such a grandfathering provision where a solicitor
becomes subject to disqualification during the rule's transition
period. Should we? We would not apply such grandfathering provision to
solicitation arrangements established after the rule's effective date.
Do commenters agree? Would a different grandfathering provision be
appropriate? Why or why not?

III. Economic Analysis

A. Introduction

    The Commission is proposing amendments to rule 206(4)-1 related to
investment adviser advertising. The proposed amendments expand the
scope of the definition of ``advertisement.'' The proposed amendments
also include general prohibitions of certain advertising practices, and
the proposed approach (i) would impose requirements on investment
adviser performance in advertisements, and (ii) would require
investment advisers that use certain features in an advertisement, such
as testimonials and endorsements, to disclose information that would
help investors evaluate the advertisement. The proposal would also
amend rule 206(4)-3 to, among other things, broaden its application to
all forms of compensation while also removing requirements that are
duplicative of more recent rules adopted under the Act, and extend the
solicitation rule requirements to solicitors of investors in private
funds. The Commission is also proposing 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 to correspond to the proposed changes to the advertising
and solicitation rules. Some portion of these provisions would create a
collection of information burden under rule 206(4)-1 and would have an
impact on the current collection of information burdens of rules
206(4)-3 and 204-2 under the Investment Advisers Act (``the Act'') and
Form ADV, which we discuss in the next section. The proposed rules
reflect market developments since 1961 and 1979, when rules 206(4)-1
and 206(4)-3 respectively were adopted, as well as practices consistent
with conditions in staff no-action letters and guidance. These market
developments include advances in communication technology and
advertising practices that did not exist at the time the rule was
adopted and may fall outside of the scope of the current rules.
    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Whenever we engage in rulemaking and are required to
consider or determine whether an action is necessary or appropriate in
the public interest, section 202(c) of the Investment Advisers Act
requires the Commission to consider, in addition to the protection of
investors, whether the action would promote efficiency, competition,
and capital formation. The following analysis considers, in detail, the
potential economic effects that may result from the proposed rule,
including the benefits and costs to market participants as well as the
broader implications of the proposal for efficiency, competition, and
capital formation. Where possible, the Commission quantifies the likely
economic effects of the proposal; however, the Commission is unable to
quantify certain economic effects because it lacks the information
necessary to provide estimates or ranges. In some cases, quantification
is particularly challenging due to the number of assumptions that it
would need to make to forecast how investment advisers would respond to
the new conditions of the proposed rules, and how those responses would
in turn affect the broader market for investment advice and the
investors' participation in this market. Nevertheless, as described
more fully below, the Commission is providing both a qualitative
assessment and quantified estimate of the economic effects, where
feasible. The Commission invites commenters to include estimates and
data that could help it form useful estimates of the economic effects
of the proposed amendments.

B. Broad Economic Considerations

    The proposed rule and form amendments would affect many different
methods and practices that investment advisers use to advertise their
services. While we discuss each of these methods and practices in
detail later, in this section we discuss the broad economic
considerations that frame our economic analysis of the proposed
amendments and describe the relevant structural features of the market
for investment advice and its relationship to marketing of advisory
services and pooled investment vehicles. Key to this framework is the
concept of ``information asymmetry''--in this case, the lack of
information that investors have about the ability and potential fit of
investment advisers available to them--and the difficulties certain
investors may face in verifying the ability and potential fit of
investment advisers. By setting up this economic framework, we can see
how the characteristics of the market for investment advice and its
participants can influence the costs and benefits of elements of the
proposed amendments, as well as their impact on efficiency,
competition, and capital formation. This economic framework
demonstrates how the features of the market for investment advice and
its participants can influence whether certain investment adviser
advertising practices promote or hinder economic efficiency.
    The accuracy of investment adviser advertisements is an important
factor in determining how investors decide which investment advisers to
engage with. If investment advisers faced fewer consequences for making
untruthful statements about their performance in advertisements,
investors would have more difficulty choosing an investment adviser.
For the purposes of the proposed advertising rule, we use the term
``ability'' to refer to the usefulness and accuracy of advice an
investment adviser is willing to provide for a given fee. The
``potential fit'' of an investment adviser refers to attributes that
investors may have specific preferences for, such as communication
style, investment style, or risk preference. For example, some
investors would prefer an investment adviser that does not proactively
provide advice or suggest investments, while others might prefer a more
active communication style.
    While the effectiveness and accuracy of an investment adviser's
advertisements can have direct effects on the quality of the matches
that investors make with investment advisers--in terms of both fit and
better returns from the investment, there may be important indirect
effects as well. If the proposed rules provide additional methods for
investment advisers to credibly and truthfully advertise the quality of
their services, investment advisers may have a greater incentive to
invest more in the quality of their services, because advisers would be
able to communicate the quality of these services more easily through
advertisements. Additionally, because investors might be able to better
observe the relative qualities of competing

investment advisers, the proposed rules may also enhance competition
between investment advisers. To the extent that the proposed rules
improve the effectiveness and accuracy of investment adviser
advertisements, the proposed rules could also have a secondary effect
of increasing competition among investment advisers, and encourage
investment in the quality of services.
    Investors generally have access to a variety of sources of
information on the ability and potential fit of an investment adviser.
Advertisements, word of mouth referrals, and independent research are
all ways in which investors acquire information about investment
advisers as they search for them. During this search, investors trade
off the benefits of finding a better investment adviser against the
costs of searching for one, or for more information about one. If the
costs of search are too high, investors will contract with lower
quality investment advisers on average, because they either do not know
a higher quality alternative exists with the available information or
are unable to evaluate the quality of the investment adviser they have
found. Thus, higher search costs can result in inefficiencies because
the same expected quality of match requires an investor to incur higher
search costs. Similarly, for a fixed amount of spending on a search, an
investor is less able to find information about investment advisers,
and finds a lower expected quality of match.
    Advertising and investor solicitation can potentially mitigate
inefficiencies associated with the costs of searching for good products
or suitable services. To the extent that advertising and investor
solicitation provide accurate and useful information to investors about
investment advisers at little or no cost to investors, advertising and
investor solicitation can reduce the search costs that investors bear
to acquire information and improve the ability of investors to identify
high quality investment advisers. Investors have a variety of
preferences over investment adviser characteristics such as investment
strategies or communication styles. Investment adviser advertisements
and use of solicitors can help communicate information about an
investment adviser that may aid an investor in selecting an investment
adviser who is a good ``fit'' for the investor's preferences.
    While advertisements and communications by investment advisers and
solicitors may reduce search costs, their incentives are not
necessarily aligned with those of their potential investors, which may
undercut the potential gains to efficiency. For example, investment
advisers and solicitors have incentives to structure their
advertisements to gain potential investors, regardless of whether their
advertisements correspond to their ability and potential fit with an
investor. In addition, advertisements might make claims that are costly
for investors to verify or are inherently unverifiable. For example,
evaluating a claim that an investment adviser's strategy generates
``alpha'' or returns in excess of priced risk factors generally
requires information about the strategy's returns and permitted
holdings, as well as a model that attributes returns to risk factors.
While some investors may have ready access to these resources or
information, other investors may not. In some cases, an investor may be
unable to assess the plausibility of an investment adviser's claims. An
investment adviser or solicitor might also state facts but omit the
contextual details that an investor would need to properly evaluate
these facts.
    Notably, there are considerable differences among investors and
potential investors of investment advisers in their ability to process
and evaluate information communicated by investment advisers. Many
investors and prospective investors may lack the financial knowledge
needed to evaluate and interpret the types of financial information
contained in investment adviser advertisements. In 2010, the Dodd-Frank
Act required the Commission to conduct a study to identify the existing
level of financial literacy among retail investors as well as methods
and efforts to increase the financial literacy of investors.\525\ The
Commission then contracted with the Federal Research Division at the
Library of Congress to conduct a review of the quantitative studies on
the financial literacy of retail investors in the United States.\526\
According to the Library of Congress Report, studies show consistently
that American retail investors \527\ lack basic financial literacy. For
example, studies have found that investors do not understand many
elementary financial concepts, such as compound interest and inflation.
Studies have also found that many investors do not understand other key
financial concepts, such as diversification or the differences between
stocks and bonds, and are not fully aware of investment costs and their
impact on investment returns.\528\ A 2016 FINRA survey found that 56
percent of respondents correctly answered less than half of a set of
basic financial literacy questions, and yet 65 percent of respondents
assessed their own knowledge about investing as high (between five and
seven on a seven-point scale).\529\
---------------------------------------------------------------------------

    \525\ U.S. Securities and Exchange Commission, Study Regarding
Financial Literacy Among Investors As Required by Section 917 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug.
2012), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf. (``Financial Literacy Study'').
    \526\ See id. Although the report does not link American
investors specifically to those who would become clients of SEC
registered investment advisers or investors in private pooled
investment vehicles, we believe that the study may be indicative of
the level of financial literacy for prospective investors.
    \527\ The financial literacy studies in the Library of Congress
Report (2011) fall into three categories, depending on the
population or special topic under investigation. Most studies survey
the general population. For example, the FINRA Investor Education
Foundation's 2009 National Financial Capability study, which was
included in the Library of Congress Report, consisted of a national
sample of 1,488 respondents. Other research included in the report
focus on particular subgroups, such as women, or specific age groups
or minority groups. A third type of study deals specifically with
investment fraud. These studies do not differentiate between
qualified purchasers, knowledgeable employees, and other investors.
Results from studies conducted on general populations may not apply
to private fund investors.
    \528\ See Financial Literacy Study supra footnote 524.
    \529\ ``Investors in the United States.'' FINRA Investor
Education Foundation, 2016.
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    The general lack of financial literacy among some investors makes
it difficult for those investors to evaluate claims about financial
services made in advertisements, which increases the risk that such
investors are unable to effectively use the information in
advertisements to find an investment adviser that has high ability and
is a good fit.\530\ Moreover, evidence presented in recent research
suggests that market forces alone may not be sufficient to discipline
financial professionals. Egan, Matvos and Seru (2019) observe that 44
percent of associated persons of broker-dealers with a history of
misconduct are re-employed in the financial services industry within a
year.\531\ Furthermore,

prior offenders are found to be five times as likely to engage in new
misconduct as the average registered representative.\532\ Approximately
84 percent of active registered investment adviser representatives are
dually registered with FINRA as broker-dealer representatives, who are
the subjects studied in the paper.\533\ To the extent that these
results carry over to investment adviser advertisements, they
potentially highlight the risk that false or exaggerated advertising
exacerbates information asymmetries by providing investors, especially
investors that lack financial literacy, an incorrect impression of an
investment adviser's ability or quality of fit.
---------------------------------------------------------------------------

    \530\ Annamaria Lusardi and Olivia S. Mitchell, The Economic
Importance of Financial Literacy: Theory and Evidence, 52 J. ECON.
LITERATURE 5 (2014).
    \531\ Mark Egan, Gregor Matvos and Amit Seru, The Market for
Financial Adviser Misconduct, 127 J. POL. ECON. 233 (2019). The
dataset used in the paper covers all financial services employees
registered with FINRA from 2005 to 2015. The paper's results apply
to the population represented by the dataset used in the study, some
of which are investment adviser representatives. Roughly 84 percent
of active registered investment adviser representatives were also
dually registered with FINRA as broker-dealer representatives in
2017. (There were 286,799 dual broker-dealer-IA representatives, and
56,472 non-broker-dealer RIA representatives in 2017.) See, 2018
FINRA Industry Snapshot report, https://www.finra.org/sites/default/files/2018_finra_industry_snapshot.pdf).
    \532\ Id.
    \533\ Id.
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C. Baseline

1. Market for Investment Advisers
a. Current Rule
    As mentioned in adopting current rule 206(4)-1, the Commission
targeted advertising practices that it believed were likely to be
misleading by imposing four per se prohibitions. In addition to these
prohibitions, the current rule prohibits any advertisement that
contains any untrue statement of a material fact, or which is otherwise
false or misleading. 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, risk misleading investors.
b. Market Practice
    In addition to rule 206(4)-1, investment adviser advertising
practices have been shaped by staff no-action letters and other staff
guidance. For example, staff have issued no-action letters stating that
the staff would not recommend enforcement actions under rule 206(4)-
1(b) based on certain questions related to the definition of
``advertisement,'' taking the position that, in general, a written
communication by an adviser to an existing client or investor about the
performance of the securities in the investor's account is not an
``offer'' of investment advisory services but is part of the adviser's
advisory services (unless the context in which the performance or past
specific recommendations are provided suggests otherwise), and that
communications by an adviser in response to an unsolicited request by
an investor, prospective client, or consultant for specified
information is not an advertisement.\534\
---------------------------------------------------------------------------

    \534\ See supra footnote 59.
---------------------------------------------------------------------------

    The staff has also stated that it would not recommend enforcement
action under section 206(4) on issues relating to third-party ratings
and testimonials. The staff has stated that it would not recommend
enforcement action if certain conditions were met regarding the use of
ratings or testimonials, such as: (i) References to independent third-
party ratings that are developed by relying significantly on client
surveys or clients' experiences more generally; \535\ (ii) the use of
``social plug-ins'' such as the ``like'' feature on an investment
adviser's social media site; \536\ and (iii) references regarding, for
example, an adviser's religious affiliation or moral character,
trustworthiness, diligence or judgement, in addition to more typical
testimonials that reference an adviser's technical competence or
performance track record.\537\ The Commission has also 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.\538\ For
example, staff has stated that it would not recommend enforcement
action, under certain conditions, when an adviser provided: (i) Full
and partial client lists \539\; and (ii) references to unbiased third-
party articles concerning the investment adviser's performance.\540\
---------------------------------------------------------------------------

    \535\ See Investment Adviser Association, SEC Staff No-Action
Letter (Dec. 2, 2005) (not recommending enforcement action if in
determining whether a third-party rating is a testimonial, the
adviser considers the criteria used by the third party when
formulating the rating and the significance to the ratings
formulation of criteria related to client evaluations of the
adviser); DALBAR, Inc., SEC Staff No-Action Letter (Mar. 24, 1998)
(not recommending enforcement action if an adviser used references
to third-party ratings that reflect client experiences, provided
certain conditions were met and certain disclosures made, both of
which designed to ensure the that rating is developed in a fair and
unbiased manner and that disclosures provide investors with
sufficient context to make informed decisions).
    \536\ See, e.g., National Examination Risk Alert, Office of
Compliance, Inspections and Examinations (Jan. 4, 2012).
    \537\ See Gallagher and Associates, Ltd., SEC Staff No-Action
Letter (July 10, 1995) (where the staff reiterated its view that
rule 206(4)-1 prohibits testimonials of any kind concerning the
investment adviser); see also IM Guidance Update No. 2014-04, at
note 12 and accompanying text, in which staff partially withdrew its
Gallagher position.
    \538\ See Interpretive Guidance on the Use of Company websites,
Release No. IC-28351 (Aug. 1, 2008); see also Guidance on the
Testimonial Rule and Social Media, IM Guidance Update No. 2014-04,
at n.19 and accompanying text.
    \539\ See, e.g., Cambiar Investors, Inc., SEC Staff No-Action
Letter (Aug. 28, 1997) (stating it would not recommend enforcement
action when the adviser proposed to use partial client lists that do
no more than identify certain clients of the adviser, the Commission
staff stated its view that partial client lists would not be
testimonials because they do not include statements of a client's
experience with, or endorsement of, an investment adviser); see also
Denver Investment Advisors, Inc., SEC Staff No-Action Letter (July
30, 1993) (providing that partial client lists can be, but are not
necessarily, considered false and misleading under 206(4)-1(a)(5)).
    \540\ See New York Investors Group, Inc., SEC Staff No-Action
Letter (Sept. 7, 1982) (stating that an unbiased third-party article
concerning an adviser's performance is not a testimonial unless the
content includes a statement of a customer's experience with or
endorsement of the adviser).
---------------------------------------------------------------------------

    Staff no-action letters have stated that the staff would not
recommend enforcement action under rule 206(4)-1 for references to
specific investment advice in an advertisement, notwithstanding the
rule's general prohibition of the use of past specific recommendations.
An adviser that is able to rely on a staff no-action letter may include
past specific recommendations in an advertisement provided the
recommendations were selected using performance-based or objective,
non-performance-based criteria, and in either case, the adviser
practices are consistent with a number of specific conditions
articulated in the no action letters.\541\ For example, the staff
stated that it would not recommend enforcement action if an adviser
included in an advertisement a partial list of recommendations provided
that, in general, the list: (i) Includes an equal number (at least
five) of best and worst-performing holdings; (ii) takes into account
consistently the weighting of each holding within the portfolio (or
representative account) that contributed to the performance during the
measurement period; (iii) is presented consistently from measurement
period to measurement period; and (iv) discloses how to obtain the
calculation methodology and an analysis showing every included
holding's contribution to the portfolio's (or representative account's)
overall performance.\542\
---------------------------------------------------------------------------

    \541\ See, e.g., Scientific Market Analysis, SEC Staff No-Action
Letter (Mar. 24, 1976) (the staff would not recommend enforcement
action when an investment adviser offers a list of past specific
recommendations, provided that the adviser offers to provide the
list free of charge); and Kurtz Capital Management, SEC Staff No-
Action Letter (Jan. 18, 1988) (the staff would not recommend
enforcement action relating to an adviser's distribution of past
specific recommendations contained in third-party reports, provided
that the adviser sends only bona-fide unbiased articles).
    \542\ See The TCW Group, SEC Staff No-Action Letter (Nov. 7,
2008) (not recommending enforcement action provided that the adviser
met certain other conditions such as presenting best and worst-
performing holdings on the same page with equal prominence;
disclosing that the holdings identified do not represent all of the
securities purchased, sold or recommended for the adviser's clients
and that past performance does not guarantee future results; and
maintaining certain records, including, for example, evidence
supporting the selection criteria used and supporting data necessary
to demonstrate the calculation of the chart or list's contribution
analysis).

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

    The staff has also stated that it would not recommend enforcement
action if an adviser includes in an advertisement a partial list of
recommendations selected using objective, non-performance-based
criteria, provided that, in general: (i) The same selection criteria
are used consistently from measurement period to measurement period
(ii) there is no discussion of the profits or losses (realized or
unrealized) of any specific securities; and (iii) the adviser maintains
certain records, including, for example, records that evidence a
complete list of securities recommended by the adviser in the preceding
year for the specific investment category covered by the advertisement
and the criteria used to select the specific securities listed in the
advertisement.\543\
---------------------------------------------------------------------------

    \543\ See Franklin Management, Inc., SEC Staff No-Action Letter
(Dec. 10, 1998) (not recommending enforcement action provided that
the adviser met certain other conditions such as requiring that the
adviser disclose in the advertisement that the specific securities
identified and described do not represent all of the securities
purchased, sold, or recommended for advisory clients, and that the
investor not assume that investments in the securities identified
and discussed were or will be profitable).
---------------------------------------------------------------------------

    Finally, the Commission has brought enforcement actions related to
the presentation of performance results in advertisements. For example,
we have alleged in settled enforcement actions that the performance
information that certain advisers included in their advertisements
failed to disclose all material facts, and thus created unwarranted
implications or inferences.\544\ Our staff has also expressed its views
as to the types of disclosures that would be necessary in order to make
the presentation of certain performance information in advertisements
not misleading.\545\ Our staff has taken the position that the failure
to disclose how material market conditions, advisory fee expenses,
brokerage commissions, and the reinvestment of dividends affect the
performance results would be misleading.\546\ Our staff has also
considered materially misleading the suggestion of potential profits
without disclosure of the possibility of losses.\547\
---------------------------------------------------------------------------

    \544\ See, e.g., In re Van Kampen Investment Advisory Corp.,
Release No. IA-1819 (Sept. 8, 1999) (settled order); In re Seaboard
Investment Advisers, Inc., Release No. IA-1431 (Aug. 3, 1994)
(settled order).
    \545\ See, e.g., Clover Capital Mgmt., Inc., SEC Staff No-Action
Letter (Oct. 28, 1986) (not recommending enforcement action provided
that certain disclosures about included performance results are
made). Regarding mutual funds, our staff has stated that it would
not recommend enforcement action if an advertisement included
performance data from private accounts that are substantially
similar in size and investment strategy to the fund in the fund's
prospectus or sales literature provided that the prospectuses or
advertisements: (i) Disclose that the performance results are not
those of the fund and should be considered a substitute for such
performance; (ii) include the fund's performance results if such
results exist and; (iii) disclose all material differences between
the institutional accounts and the fund. See Nicholas-Applegate
Mutual Funds, SEC Staff No-Action Letter (Aug. 6, 1996); GE Funds,
SEC Staff No-Action Letter (Feb. 7, 1997); ITT Hartford Mutual
Funds, SEC Staff No-Action Letter (Feb. 7, 1997).
    \546\ See Clover Capital Management, Inc., SEC Staff No-Action
Letter (Oct. 28, 1986) (not recommending enforcement action provided
that that if an adviser compares performance to that of an index,
they must disclose all material factors affecting the comparison)
See also Investment Company Institute, SEC Staff No-Action Letter
(May 5, 1988); Association for Investment Management and Research,
SEC Staff No-Action Letter (Dec. 18, 1996) (not recommending
enforcement action provided that gross performance results may be
provided to clients so long as this information is presented on a
one-on-one basis or alongside net performance with appropriate
disclosure.) See Also Securities Industry Association, SEC Staff No-
Action Letter (Nov. 27, 1989) (not recommending enforcement action
provided that an adviser that advertises historical net performance
using a model fee makes certain disclosures.)
    \547\ Id.
---------------------------------------------------------------------------

    Our staff has taken the position that prior performance results of
accounts managed by a predecessor entity may be used so long as: (i)
The person responsible for such results is still the adviser; (ii) the
prior account and the present account are similar enough that the
performance results would provide relevant information; (iii) all prior
accounts that are being managed in a substantially similar fashion to
the present account are being factored into the calculation; and (iv)
the advertisement includes all relevant disclosures.\548\ More
recently, our staff has taken the position that, subject to certain
conditions, a surviving investment adviser following an internal
restructuring may continue to use the performance track record of a
predecessor advisory affiliate to the same extent as if the
restructuring had not occurred.\549\
---------------------------------------------------------------------------

    \548\ See Horizon Asset Management, LLC, SEC Staff No-Action
Letter (Sept. 13, 1996); see also Great Lakes Advisers, Inc., SEC
Staff No-Action Letter (Apr. 3, 1992) (not recommending enforcement
action if a successor adviser, composed of less than 100 percent of
the predecessor's committee, used the preceding performance
information in their calculation so long as there is a substantial
identification of personnel, and noting that without substantial
identification of personnel in such a committee, use of the data
would be misleading even with appropriate disclosure.)
    \549\ See South State Bank SEC Staff No-Action Letter (May 8,
2018) (conditioning the staff's position not to recommend
enforcement action on representations including, for example, that
the successor adviser would operate in the same manner and under the
same brand name as the predecessor adviser).
---------------------------------------------------------------------------

    Regarding the use of model performance results, our staff has
indicated it would consider such results misleading under rule 206(4)-
1(a)(5) if the investment adviser fails to make certain
disclosures.\550\ Our staff has also indicated it would find the use of
backtested performance data to be misleading unless accompanied by
disclosure detailing the inherent limitations of data derived from the
retroactive application of a model developed with the benefit of
hindsight.\551\ Moreover, staff have taken the position that the rule
204-2(a)(16) requirement to keep records of documents necessary to form
the basis for performance data provided in advertisements also applies
to a successor's use of a predecessor's performance data.\552\
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    \550\ Id. See also In re LBS Capital Mgmt., Inc., Release No.
IA-1644 (July 18, 1997) (not recommending enforcement action
provided that the Commission will look into the identity of the
intended recipient of advertisement when determining if the results
were misleading.)
    \551\ See re Market Timing Systems, Inc., et al., Release No.
IA-2047 (Aug. 28, 2002) (settled order) (the Commission brought an
enforcement action against, among others, a registered investment
adviser, asserting that its advertising was misleading because it
failed to disclose that performance results advertised were
hypothetical and generated by the retroactive application of a
model, and in other cases failed to disclose the relevant
limitations inherent in hypothetical results and the reasons why
actual results would differ); see also In re Leeb Investment
Advisers, et al., Release No. IA-1545 (Jan. 16, 1996) (settled
order) (the Commission brought an enforcement action against, among
others, a registered investment adviser, asserting that advertising
mutual fund performance using a market-timing program based on
backtested performance was misleading because the program changed
during the measurement period and certain trading strategies were
not available at the beginning of the measurement period). See also
In re Schield Mgmt. Co., et al., Release No. IA-1872 (May 31, 2000)
(settled order) (The Commission brought an enforcement action
against, among others, a registered investment adviser, asserting
that advertisements presenting backtested results were misleading in
violation of section 206(2) and rule 206(4)-1 because, among other
things, they failed to disclose or inadequately disclosed that the
performance was backtested, and stating that labeling backtested
returns ``hypothetical'' did not fully convey the limitations of the
performance).
    \552\ Rule 204-2(a)(16); See Great Lakes Advisors, Inc., SEC
Staff No-Action Letter (Apr. 3, 1992) (not recommending enforcement
action and stating the staff's view that the requirement in rule
204-2(a)(16) applies to a successor's use of a predecessor's
performance data.)
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c. Data on Investment Advisers
    Based on Form ADV filings, as of Sep 30, 2019, 13,463 investment
advisers were registered with the Commission. Of these registered
investment advisers (``RIAs''), 11,289 reported that they were ``large
advisory firms,'' with regulatory assets under management (``RAUM'') of

at least $90 million. 538 reported that they were ``mid-sized advisory
firms,'' with RAUM of between $25 million and $100 million, and 1,639
did not report as either, which implies that they have regulatory
assets under management of under $25 million.\553\
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    \553\ From Form ADV: A ``Large advisory firm'' either: (a) Has
regulatory assets under management of $100 million or more or (b)
has regulatory assets under management of $90 million or more at the
time of filing its most recent annual updating amendment and is
registered with the SEC; a ``mid-sized advisory firm'' has
regulatory assets under management of $25 million or more but less
than $100 million and either: (a) Not required to be registered as
an adviser with the state securities authority of the state where
they maintain their principal office and place of business or (b)
not subject to examination by the state securities authority of the
state where they maintain their principal office and place of
business.
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    Form ADV disclosures show $83.9 trillion RAUM for all registered
investment advisers, with an average of $6.23 billion RAUM and a median
of $318 million. These values show that the distribution of RAUM is
skewed, with more RIAs managing assets below the average, than above.
    The majority of Commission-registered investment advisers report
that they provide portfolio management services for individuals and
small businesses.\554\ In aggregate, investment advisers have over $83
trillion in assets under management (``AUM''). A substantial percentage
of AUM at investment advisers is held by institutional investors, such
as investment companies, pooled investment vehicles, and pension or
profit-sharing plans.\555\ Based on staff analysis of Form ADV data,
8,396 (62 percent) have some portion of their business dedicated to
individual clients, including both high net worth and non-high net
worth individual clients.\556\ However, using the number of high-net
worth clients as a basis for estimating the number of non-retail
clients likely significantly overstates the number of non-retail
clients. In total, these firms have approximately $41.2 trillion of
AUM,\557\ of which $11 trillion is attributable to clients, including
both non-high net worth and high net worth clients. Approximately 7,330
registered investment advisers (54 percent) serve 31.4 million non-high
net worth individual \558\ clients and have approximately $4.8 trillion
in AUM attributable to the non-high net worth clients, while nearly
8,143 registered investment advisers (60 percent) serve approximately
4.6 million high net worth clients with $6.1 trillion in AUM
attributable to the high-net worth clients. The Commission
preliminarily believes that many advisers currently prepare and present
Global Investment Performance Standards (``GIPS'')-compliant
performance information, and also that many advisers, particularly
private fund advisers, currently prepare annual performance for
investors.
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    \554\ Of the 13,463 SEC-registered investment advisers, 8,569
(64 percent) report in Item 5.G.(2) of Form ADV that they provide
portfolio management services for individuals and/or small
businesses. In addition, there are approximately 17,933 state-
registered investment advisers. Approximately 14,360 state-
registered investment advisers are retail facing (see Item 5.D. of
Form ADV).
    \555\ See Table 1. High-net worth clients are not necessarily
qualified purchasers for purposes of the rule's distinction between
retail and non-retail advertisements.
    \556\ We use the responses to Items 5(D)(a)(1), 5(D)(a)(3),
5(D)(b)(1), and 5(D)(b)(3) of Part 1A of Form ADV. If at least one
of these responses was filled out as greater than 0, the firm is
considered as providing business to retail investors. Form ADV Part
1A. Of the 8,396 investment advisers serving individual clients, 311
are also registered as broker-dealers.
    \557\ The aggregate AUM reported for these investment advisers
that have retail investors includes both retail AUM as well as any
institutional AUM also held at these advisers.
    \558\ A high net worth (HNW) individual is an individual who is
a ``qualified client''. Generally, this means a natural person with
at least $1,000,000 assets under the management of an adviser, or
whose net worth exceeds $2,100,000 (excluding the value of his or
her primary residence).
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2. Market for Solicitors
a. Current Rules
    The current rule makes paying 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
at the time of solicitation.\559\ The solicitor disclosure must contain
information highlighting the solicitor's financial interest in the
investor's choice of an investment adviser.\560\ In addition, the rule
prescribes certain methods of compliance, such as requiring an adviser
to receive a signed and dated acknowledgment of receipt of the required
disclosures.\561\ The current rule also prohibits advisers who have
engaged in certain misconduct from acting as solicitors.\562\
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    \559\ See supra footnote 28.
    \560\ See supra footnote 29.
    \561\ See supra footnote 30.
    \562\ See rule 206(4)-3(a)(1)(ii).
    [GRAPHIC] [TIFF OMITTED] TP10DE19.000

    Given that there is no registration requirement for solicitors of
investment advisers, our only view on solicitation practices is through
the disclosures made by registered investment advisers in Form ADV. As
of August 2019, 27 percent of registered investment advisers reported
compensating any person besides an employee for client referrals.\563\
Based on Figure [1], the share of registered investment advisers that
reported this type of arrangement has declined since 2009. However,
this figure does not capture employees of an investment adviser that
are compensated for client referrals, who are solicitors under the
current rule. The downward trend of Figure [1] may suggest that the use
of solicitors is declining through an overall decline in client
referral activity. Or, the chart may suggest that employers are
shifting their solicitation activities in-house.
---------------------------------------------------------------------------

    \563\ Response to Item 8(h)(1) of Part 1A of Form ADV.
---------------------------------------------------------------------------

b. RIAs to Private Funds
    Based on Form ADV data from Sep 30 2019, 4865 RIAs report that they
are advisers to private funds, and 44 of them report that they are a
small entity.\564\ Of the RIAs that advise private funds, 1590 RIAs
report to use the services of solicitors (``marketers'' in Form ADV)
that are not their employees or themselves (``related marketers'' in
Form ADV). Among the RIAs that hire solicitors, each RIA uses 3
solicitors on average, while the median number of solicitors reported
is 1, and the maximum is 79. There are 340 RIAs indicate that they have
at least one related marketer, and 210 of them indicate that they only
hire related marketers. Among RIAs that report using a related
marketer, the average number of related marketers reported is 1.7,
while the median reported is 1 and the maximum is 21. 1315 RIAs
indicate that they have at least one marketer which is registered with
the SEC: The average number of SEC registered marketers employed by
these RIAs is 2.1, while the median number reported is 1 and the
maximum is 49. Finally, 556 RIAs indicate that they have at least one
non-US marketer: The average number of non-US marketers reported among
these RIAs is 2.9, while the median is 1 and the maximum is 71.\565\
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    \564\ Form ADV Item 5.F. and Item 12.
    \565\ Data on solicitors (marketers) hired by RIAs to private
funds are collected from Form ADV Section 7.B(1) (28).
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3. RIA Clients
    SEC-registered advisers are required to report their specific
number of clients in 13 different categories and a catch-all ``Other''
category.\566\ Based on Form ADV data collected as of September, 2019,
SEC-registered advisers report having a total of approximately 38
million clients, and 84 trillion RAUM. Individual investors constitute
the majority (92 percent) of the RIA client base. Columns 2 and 3 of
Table 1 present the breakdown of the RIA client base, and column 4
shows the total RAUM from each investor category as of October 2018.
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    \566\ Form ADV Item 5.D. of Part 1A.
---------------------------------------------------------------------------

    Non-high net worth (HNW) individuals comprise the largest group of
advisory clients by client number--78 percent of total clients. The
number of HNW individuals is only 13 percent of advisory clients, but
RAUM from HNW individuals makes up almost 7 percent of the industry-
wide RAUM ($82.5 trillion) in 2018, while RAUM from non-HNW individuals
accounts for about 5.5 percent. Investment companies and other pooled
investment vehicles and pension plans represent the largest portion of
RAUM among all non-retail investors.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                       RAUM
       Investor categories            Clients       Clients (%)     (billions)       RAUM (%)        Advisers
----------------------------------------------------------------------------------------------------------------
Non-HNW individuals.............      27,996,201          78.288       $4,842.93           5.429           7,068
HNW individuals.................       4,763,963          13.322        6,119.78           6.860           7,854
Other investment advisers.......         824,986           2.307        1,784.57           2.000           1,045
Corporations or other businesses         434,859           1.216        2,975.73           3.336           5,050
Pension and profit sharing plans         426,570           1.193        6,233.17           6.987           5,626
Other...........................         338,150           0.946        2,365.03           2.651           1,484
Pooled Investment Vehicles               221,594           0.620       21,856.89          24.500           5,384
 (PIVs)--Other..................
State/municipal entities........         219,058           0.613        3,805.27           4.265           1,399
Charities.......................         200,256           0.560        1,261.84           1.414           4,832
Banking or thrift institutions..         183,886           0.514        1,078.13           1.209             633
Insurance companies.............         101,171           0.283        5,374.18           6.024           1,079
PIVs--Investment companies......          47,188           0.132       29,673.14          33.262           1,831
Sovereign Wealth Funds and                 1,412           0.004        1,691.79           1.896             193
 Foreign official institutions..
PIVs--Business development                 1,175           0.003          148.61           0.167             109
 companies......................
----------------------------------------------------------------------------------------------------------------

    A number of surveys show that individuals \567\ predominantly find
their current financial firm or financial professional from personal
referrals by family, friends, or colleagues, rather than through
advertisements.\568\ For instance, a 2008 study conducted by RAND
reported that 46 percent of survey respondents indicated that they
located a financial professional from personal referral, although this
percentage varied depending on the type of service provided (e.g., only
35 percent of survey participants used personal referrals for brokerage
services). After personal referrals, RAND 2008 survey participants
ranked professional referrals (31 percent), print advertisements (4
percent), direct mailings (3 percent), online advertisements (2
percent), and television advertisements (1 percent), as their source of
locating individual professionals. The RAND 2008 study separately
inquired about locating a financial firm,\569\ in which respondents
reported selecting a financial firm (of

any type) based on: Referral from family or friends (29 percent),
professional referral (18 percent), print advertisement (11 percent),
online advertisements (8 percent), television advertisements (6
percent), direct mailings (2 percent), with a general ``other''
category (36 percent).
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    \567\ The surveys generally use ``retail investors'' to refer to
individuals that invest for their own personal accounts.
    \568\ See Angela A. Hung, et al., Investor and Industry
Perspectives on Investment Advisers and Broker-Dealers, RAND
Institute for Civil Justice Technical Report (2008), available at
https://www.rand.org/content/dam/rand/pubs/technical_reports/2008/RAND_TR556.pdf (``RAND 2008''), which discusses a shift from
transaction-based to fee-based brokerage accounts prior to recent
regulatory changes; see also Financial Literacy Study, supra
footnote 524.
    \569\ The Commission notes that only one-third of the survey
respondents that responded to ``method to locate individual
professionals'' also provided information regarding locating the
financial firm.
---------------------------------------------------------------------------

    The Commission's 2012 Financial Literacy Study provides similar
responses, although it allowed survey respondents to identify multiple
sources from which they obtained information that facilitated the
selection of the current financial firm or financial professional.\570\
In the 2012 Financial Literacy Study,\571\ 51 percent of survey
participants received a referral from family, friends, or colleagues.
Other sources of information or referrals came from: Referral from
another financial professional (23 percent), online search (14
percent), attendance at a financial professional-hosted investment
seminar (13 percent), advertisement (e.g., television or newspaper)
(11.5 percent), other (8 percent), while approximately 4 percent did
not know or could not remember how they selected their financial firm
or financial professional. Twenty-five percent of survey respondents
indicated that the ``name or reputation of the financial firm or
financial professional'' affected the selection decision.
---------------------------------------------------------------------------

    \570\ See Financial Literacy Study, supra footnote 524.
    \571\ The data used in the 917 Financial Literacy Study comes
from the Siegel & Gale, Investor Research Report (Jul. 26, 2012),
available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part3.pdf.
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D. Costs and Benefits of the Proposed Rule and Form Amendments

    In this section, we first outline the overall costs and benefits of
the general structure and prohibitions of the proposed rule and form
amendments, and later discuss the costs and benefits of specific
provisions of the proposed amendments. We have considered the potential
costs and benefits of the amendments, but these economic effects are
generally difficult to quantify. Several factors make quantification of
the potential effects of the proposed rule difficult. First, there is
little to no direct data suggesting how investment advisers might alter
their advertising practices as a result of the proposed rule or
mitigate the compliance burdens related to the proposed rule. Second,
it is difficult to quantify the impact that the specific disclosures
required in the proposed rule would have on investor behavior because
we cannot meaningfully predict the impact on investor behavior that the
proposed rule might have. In addition, the specific provisions of the
proposed rule sometimes contain multiple effects that could potentially
affect investor behavior in opposing directions. Without knowing the
magnitude of these opposing effects, it is not possible to quantify the
net effect of specific provisions of the proposed rule. Finally, it is
difficult to quantify the extent to which certain changes in adviser