Clayton pushes ad rule reforms as clock winds down

SEC chairman Jay Clayton wants an overhaul of the advertising rule that would bring private funds into scope by year end. The proposal has industry representatives up in arms.

SEC Chairman Jay Clayton is telling fellow commissioners that he wants to complete an overhaul of the decades-old advertising rule by the end of the year, agency sources tell sister title RCW.

The proposed changes to the ad rule are on a small to-do list of still-pending rulemaking notices—others include proposals to impose sterner due diligence requirements before putting investors’ money into leveraged or inverse ETFs, a new approach to the Commission’s “market data infrastructure,” and changes to the way whistleblowers are rewarded for their tips. But the ad rule is probably the most important because it’s an effort to cover social media, it would expand the rules to private funds, and it could well lead to a mountain of fresh paperwork for CCOs.

Clayton has told his fellow commissioners that he wants to get them all done by the end of the year, two sources at the SEC said.

Term limit

It is conventional thinking in and around the Commission that, regardless of how November’s elections turn out, Clayton won’t be in the chairman’s seat when Washington, DC hosts its next presidential inaugural. He is one of the few President Trump appointees to have served the entire term (others include Education Secretary Betsy DeVos, Transportation Secretary Elaine Chao, Housing and Urban Development Secretary Ben Carson and FCC Chairman Ajit Pai).

Clayton very nearly did not make it this far.  In June, Trump abruptly put Clayton’s name up for US Attorney for the Southern District of New York. The political controversy singed Clayton but his nomination is still pending before the Senate.

The chairman has already punted the proposed whistleblower award rules—twice, most recently before the September 2 scheduled open meeting. Outside observers have speculated that criticism from whistleblower attorneys spooked Clayton, who has admitted to having ambitions to become Attorney General someday.

The proposed rules would allow for bigger awards at the low end of cases, but it would also reduce the size of awards at the top end. Two weeks before the scheduled vote, Stephen Kohn—generally considered one of the top whistleblower lawyers—took to the pages of a national law publication to blast the proposed caps.

Private fund pushback

The advertising rule can’t be that much easier to drag across the finish line. Although there’s broad agreement that the regime needs updating, private fund advisers are particularly skittish about being brought under them. They’re also worried about the seemingly broad definition of “advertisement.”

As written, the proposed rule would extend to “indirect” communications to existing and prospective investors—private funds have read that to mean private placement memoranda, pitchbooks and investor letters. Additionally, the proposed reforms would expand to cover a lot more one-on-one conversations than the current rules do.

For some private fund advisers, the proposals strike right at the heart of the kind of intimate, informal conversations that are their lingua franca. Will chats on the golf course, for instance, be covered by the new rules? What about cocktails with clients?

‘Needlessly prescriptive’

“We believe that it is needlessly prescriptive, particularly with respect to communications to highly sophisticated institutional investors,” American Investment Council COO and General Counsel Jason Mulvihill told the SEC of its rulemaking notice in a June letter.

As AIC and others argue it, there are already anti-fraud provisions in place to protect investors from misleading claims. Why add a huge new layer of oppressive regulation?

“At a minimum,” Mulvihill says in his letter, “the definition of ‘advertisement’ should exclude (i) a communication limited to existing clients/investors and primarily designed to explain the performance of the client/investor’s account or investment and (ii) responses by an adviser to any unsolicited requests for information, including those that contain performance information or any other kind of information that the adviser determines in good faith to be reasonably related to the request.”