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Move Now on SEC Marketing Rule Compliance, Pros Warn

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What You Need to Know

  • Many firms are behind in compliance, according to compliance consultant Amy Lynch.
  • SEC examiners will include compliance with the Marketing Rule as a focus area for 2023, says Ken Joseph of Kroll.
  • Some firms have been slower to get started, which could create compliance issues and even spark investor lawsuits, says attorney Sacks.

The Nov. 4 compliance date for the Securities and Exchange Commission’s new Marketing Rule is fast approaching, and compliance experts warn that while firms are at various stages of compliance — many advisors are “behind the eight ball,” according to Amy Lynch, founder and president of FrontLine Compliance.

Firms shouldn’t dawdle, as SEC examiners will include compliance with the Marketing Rule as a focus area for 2023, adds Ken Joseph, managing director and head of the Financial Services Compliance and Regulation practice for the Americas at Kroll.

Investment Adviser Association members “are working hard to be ready to go” by Nov. 4, said Sanjay Lamba, IAA associate general counsel, on Thursday in an email. IAA has been holding weekly meetings with members to share and discuss implementation issues, he said. “I’ve been impressed by the tremendous member participation and commitment and the granularity of issues that are being discussed.”

However, the “lack of clarity — or gray areas — regarding some aspects of the performance provisions of the rule has been the biggest stumbling block” for advisors, Lamba said.

According to the SEC, the rule replaces the current advertising rule’s “broadly drawn limitations with principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice,” and includes tailored requirements for certain types of advertisements.

For instance, the rule will require advisors to standardize certain parts of a performance presentation to help investors evaluate and compare investment opportunities, and will include tailored requirements for other types of performance presentations, the SEC said.

“Advertisements that include third-party ratings will be required to include specific disclosures to prevent them from being misleading. The rule also will permit the use of testimonials and endorsements, which include traditional referral and solicitation activity, subject to certain conditions,” the securities regulator noted.

The agency has issued FAQs as well as an email warning on the rule.

A ‘Heavy Lift’

Lynch of FrontLine adds that some firms are behind because there is more to compliance with the rule “than just updating the firm marketing policy. Several areas need to be addressed and changes may need to be made in actual marketing materials and solicitation practices. This can be a heavy lift and if firm’s have not yet started then they are already behind.”

IAA, according to Lamba, is “hopeful that the rollout of the new marketing rule will be like that of Form CRS. We are not expecting a gotcha game by the SEC staff right off the bat. We believe that in the early stages, the SEC exam and enforcement staff are expecting advisers to make good-faith efforts to comply with the Marketing Rule and implement reasonably designed policies and procedures.”

What the SEC doesn’t want to see, Lamba continued, “are firms completing ignoring their obligations — we saw [Form] CRS enforcement actions along these lines. Like CRS, we are also hopeful that the SEC will put out some guidance after Nov. 4 to share their exam observations and give firms a chance to adjust accordingly.”

Joseph adds that “similar with the recent experience with implementation of Regulation BI and Form CRS, we do expect that the Commission’s enforcement staff will launch investigations and ultimately recommend public actions that allege noncompliance with aspects of the rule.”

Risk areas the SEC will examine for “will be the accuracy and completeness of performance numbers and related disclosures, the use of testimonials and social media, and inadequate compliance policies and procedures,” Joseph said. “We are not ruling out the possibility of a staff Risk Alert and speeches during the second half of 2023 to provide additional guidance on compliance best practices.”

The SEC, Lynch adds, “won’t begin to enforce the Rule via enforcement actions until well after the compliance date. Their first step will be to focus on the rule during exams of firms and issue deficiency letters to firms that need to do a better job. This will then lead to the SEC issuing a Risk Alert regarding the new rule or other guidance.”

Lynch predicts it “may be a year or more before we see any significant enforcement actions strictly related to new components of the Rule such as testimonials.”

After assessing firms’ compliance with the rule, the SEC will determine “the trouble spots” and likely issue a Risk Alert or guidance via the Division of Investment Management. “It is also possible that firms will seek No-Action relief once the rule is in place. This is the type of rule that lends itself to No-Action relief, which is why there were over 100 related No-Action letters under the ‘old rule.’”

Potential for Lawsuits

Russell Sacks, corporate finance partner with King & Spalding, who has been advising asset managers, banks and broker-dealers about the rule, said Thursday that the rule “has created a fair bit of uncertainty — before, there was years of guidance on how advisers solicit clients. The SEC is wiping that slate clean and much of that prior guidance is out the window.”

Some firms, Sacks said, “have put processes and committees in place to revise their advertising procedures in time for November, but others have been slower to get started, which could create compliance issues and even spark investor lawsuits.”

He added: “Companies are not being passive about this, and industry participants should not take a wait-and-see-approach to see if their existing communications are compliant. The principle is that advertisements have to highlight the risks of investing and using financial services and not merely the potential for gain.”