SEC Advertising Proposals Could Create Marketing Opportunities
The Securities and Exchange Commission recently proposed amendments to its advertising rules that would give mutual funds, variable annuity issuers and producers new marketing options–and also result in significant savings to the financial services industry.
If adopted, they will open the door to simpler and more cost-efficient ways of marketing mutual funds and VAs–a significant development for companies and distributors.
However, the changes would impose new requirements on the industry and raise significant new interpretive questions. These will merit close scrutiny by the industry.
Here, we will look at some of the opportunities and issues created by the proposal, as it relates to mutual fund and VA sales materials. (Variable life sales materials would also be affected, but that will not be addressed here.)
With respect to general advertising campaigns in magazines and newspapers, the new rules would mean additional content flexibility together with increased disclosure obligations.
The way the SECs advertising rules now work, magazine or newspaper advertisements that include performance are generally permitted only under “Rule 482.” The content of Rule 482 ads is limited to information the “substance of” which is included in the full prospectus.
As a result, magazine or newspaper ads generally may not include information outside the four corners of the prospectus, such as a discussion of recent market developments or financial planning advice.
Under the new rules, however, any information could be included in advertisements–without the substance of that information being included in the prospectus. This would give marketing departments significant new flexibility.
The other type of sales literature that may contain performance is “supplemental sales literature.” This type must be accompanied (or preceded) by a full prospectus, but is not subject to the “substance of” requirement currently applicable to Rule 482 ads.
Magazine and newspaper ads presenting performance, as noted above, cannot as a practical matter be accompanied by a full prospectus, so almost invariably they are Rule 482 ads. However, a producer or issuer has more flexibility when it comes to general marketing materials, since they can be treated either as Rule 482 ads or supplemental sales literature.
The choice of which type of sales literature to use is, for some companies, currently driven by weighing the content flexibility of supplemental sales literature against the increased costs of providing full prospectuses along with the sales literature. This is particularly the case for VA issuers that include fund prospectuses along with contract prospectuses.
The SECs new rules would change the core of this decision-making process because all sales literature would qualify as a Rule 482 advertisement and would not need to be accompanied by full prospectuses.
In the future, companies would need to weigh the significant cost savings from not including full prospectuses with sales literature against the desire to include an application with the literature.
The reason for this stems from the fact that Rule 482 ads generally may not be accompanied by applications. (The SEC wants to encourage investors to review a full prospectus before making an investment decision.) Therefore, to include an application with sales literature, the literature must qualify as “supplemental sales literature.”
In practice, this means that to include an application with a sales kit, the sales kit generally would also need to include full prospectuses.
Why is this? Currently, a special rule permits a VA prospectus to contain an application even though the prospectus is not accompanied by prospectuses for the underlying mutual funds. In proposing the advertising rule amendments, however, the SEC noted that the current exception may not permit VA prospectuses to include an application if they are accompanied by additional sales material, unless also accompanied by all underlying fund prospectuses.
The SEC has asked for comment on whether it should “clarify” the current exception to permit VA prospectuses with applications to be used with other marketing materials without full fund prospectuses. Significantly, however, the SEC has also asked for comment on whether the exception should be eliminated.
The SEC has also proposed requiring funds and VA issuers that advertise performance to provide total return information current to the end of most recent month at a toll-free (or collect) telephone number. The new requirement means that companies without automated performance quotation systems would need to make a significant investment.
What should the industry expect? Elimination of the “substance of” requirement has been mandated by Congress and, therefore, is likely to be adopted. Other aspects of the proposal appear to break new ground and will be closely scrutinized by the industry.
W. Thomas Conner is a partner, and Mary E.Thornton a senior associate, in the Washington, D.C. law firm of Sutherland Asbill & Brennan LLP. E-mail them at firstname.lastname@example.org and email@example.com. Steve Roth, a partner at the firm, assisted in preparing the article.
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 17, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.