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‘Questions Abound’ as SEC Marketing Rule Deadline Is Here

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The Friday deadline to comply with the Securities and Exchange Commission’s new marketing rule is here, and “questions abound” from firms as they assess where they are in their compliance, according to Ken Joseph, managing director and head of the Financial Services Compliance and Regulation practice for the Americas at Kroll.

The “lack of credible guidance” from the SEC is also becoming more apparent, Joseph said.

In the last few weeks, Joseph said, more and more questions have surfaced regarding several compliance-related issues:

  • the presentation of net performance at the transaction or deal level;
  • what types of client communications are carved out from the definition of advertisement;
  • the obligations of third-party marketers who are not registered broker-dealers; and
  • how historical marketing documents that may still be available to investors should be treated.

We caught up with Joseph to gauge where he sees firms in their last-minute efforts to comply with the new rule and what’s next for the SEC.

THINKADVISOR: Where are firms in their compliance?

KEN JOSEPH: I expect that most RIAs will have at least updated and enhanced their policies and procedures to address the requirements of the new rule by Nov. 4. Some may have elected to use off-the-shelf templates to meet that timeline and are now focused on tailoring those policies to their firm’s circumstances, as well as training applicable personnel on the new requirements.

There are a few early adopters and others that are much further along at this stage, but I expect that there will be some firms that will be burning the midnight oil to fully assess the impact of the rule on their fundraising and marketing practices and to comply with the requirements.

What will the SEC do if firms are noncompliant by Nov. 4?

While there is no grace period for final compliance with the new rule, I expect that the regulatory response will depend on the SEC staff’s view of the severity of the actual or potential violations.

As is typical with other new rules such as Regulation Best Interest, I expect that both examinations and enforcement will have this as a priority item on their agenda.

Registrants should not be surprised by this scrutiny because the regulator has telegraphed its intent to do so.

I do expect that the regulators will take a measured approach in the early phases — especially where the rule could benefit from additional guidance; Regulators will be more focused on providing further guidance and interpretation of unclear areas of the rule, as well as highlighting and disseminating best practices that they have observed.

However, I also expect that there will some enforcement actions and examination deficiencies against a subset of advisers who reacted to the new requirements in a manner that was deemed not reasonable or compliant.

What has been the most onerous aspect(s) of compliance with the new rule?

Although there has been a long ramp up to the ultimate compliance date, the most vexing issue for private equity advisers in particular has been the presentation of net performance at the deal or transaction level.

The major challenge has not been having a basic set of policies and procedures, but rather parsing through the voluminous requirements of the rule and tailoring the compliance to the adviser’s business. Some started this process later than others and may be feeling the pressure to get compliant by Nov. 4.

I do expect that some advisers will elect to temporarily stop making certain marketing claims and presentations, rather than run the risk of being viewed in hindsight by a regulator as being out of compliance. Another challenge has been retraining marketing personnel to change practices that may have been long-standing.

Does the SEC need to provide more guidance?

Yes.

At least in the months following final implementation date, I expect that the SEC will utilize some of its “softer” tools to issue additional guidance.

That guidance may take the form of a risk alert, updated FAQs on the commission’s website, and/or speeches at industry conferences. We cannot rule out public enforcement actions or examination deficiencies (which are confidential), but those will likely target what the SEC staff views are more egregious violations of the marketing rule.


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