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Melanie Waddell

Regulation and Compliance > Federal Regulation > SEC

Still Not Ready for the SEC's New Marketing Rule? Here's What to Do

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What You Need to Know

  • Advisors have had several months to plan for the revamped advertising and marketing rule, which was adopted in December 2020 and has been in effect since May 2021.
  • If advisors’ policies and procedures do not satisfy the SEC’s requirements, they should consider suspending further marketing and advertising efforts.

Now that compliance with the Securities and Exchange Commission’s new Marketing Rule has officially kicked in, advisors and industry attorneys are urging advisors not to brush it off — and to forgo moving ahead with advertising and testimonials until their firms are fully compliant.

While the compliance date hit on Nov. 4, the SEC’s revamped advertising and marketing rule was adopted by the SEC in December 2020 and has been in effect since May 2021. I reached out to compliance experts to get their views on what advisors should be doing now to be ready if the SEC comes knocking.

“I would encourage them [advisors] to immediately call their compliance consultant or lawyer to come into compliance” if they haven’t done so already, says Max Schatzow, partner at RIA Lawyers.

While most of RIA Lawyers’ clients “reached out to us for assistance” well in advance of the Nov. 4 compliance date, a couple clients waited until just days before the deadline “to get across the finish line,” Schatzow relayed, while othersmade some calculated decisions on their policies at the last minute.”

Since the SEC will be conducting “focused exams” on the marketing rule next year, “it is important that they [advisors] take this seriously,” Schatzow said.I wouldn’t wait another second before working on compliance.”

Right now, advisors “need to focus on their relationships with solicitors, their contracts that might implicate the new rule, outstanding marketing collateral, plans for future marketing (including performance-related marketing), and their policies and procedures,” Schatzow said.

Peter Hong, a partner at Stradley Ronon Stevens and Young in Washington, added that if advisors’ policies and procedures do not satisfy the SEC’s requirements, he recommends advisors “hold off on disseminating advertisements and suspending any third-party referral arrangements that started after the effective date of the rule” until they’re able to comply.

That being said, “any compensation obligation for a referral/solicitation arrangement established prior to the effective date of the marketing rule is permitted to continue,” Hong added.

Hong recommends that advisors make a record of their “decision to suspend advertisements and referral/solicitation arrangements so that the adviser can show to SEC staff that no violations of the marketing rule have occurred.”

As to compliance policies and procedures, “I would suggest putting one together the best they can initially, and to continually work on revising the policies and procedures until they are reasonably satisfied,” Hong stated.

Ken Joseph, managing director and head of the Financial Services Compliance and Regulation practice for the Americas at Kroll, said that “questions abound” from firms as they assess where they are in their compliance, and that the “lack of credible guidance” from the SEC is also becoming more apparent.

Bill Simpson, compliance principal at Hearsay Systems, anticipates that the securities regulator “will likely be heavy-handed in its disciplinary actions for firms that are not in compliance,” as firms have had “roughly two years to comply.”

Marketing Rule Nuts and Bolts

The new marketing rule applies to registered investment advisors of all types — including those to hedge funds, private funds and separately managed accounts, BakerHostetler’s Investment Funds team wrote in a recent alert.

Among other changes, the marketing rule “broadly defines ‘advertisement’ to generally include communications with investors and potential investors on securities advisory services, including testimonials, endorsements, and third-party ratings, but in large part excludes tailored one-on-one communications with investors,” BakerHostetler said.

The SEC’s Division of Exams said that it will “actively examine compliance” with the new rule through “a number of specific national initiatives,” BakerHosteler said, noting a particular focus on whether advisors have:

  • implemented appropriate written policies and procedures;
  • a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements;
  • complied with the rule’s performance advertising prohibitions; and
  • maintained the requisite books and records.

The rule further defines “advertisement” as any direct or indirect communication made by an advisor that offers securities advisory services to prospective clients or new securities advisory services to existing clients, BakerHostetler explained.

This “sweeping definition,” BakerHostetler said, includes communications regardless of how they are disseminated — whether via emails, text messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, social media, or otherwise via digital or hard-copy means, or by consultants, other fund advisors, promoters, or other third parties.

“Subject to certain restrictions, this definition also includes compensated endorsements, testimonials, and other statements made by third parties as well as communications by advisers to investors in private funds,” the BakerHostetler attorneys write.

Advisors, the BakerHostelter attorney continued, “should also be aware that they may be held liable under the Marketing Rule for communications by third parties — including hyperlinks to independent webpages and public commentary on an adviser’s own website or social media page — if such communications constitute ‘advertisements.’”

New Rule a ‘Sea Change’

Compliance with the marketing rule “has not been an easy task,” Issa Hanna, partner at Eversheds, said in an email.  “Even if you put the more difficult, gray area issues aside, the more straightforward implementation tasks have still been a significant lift because of how much of a sea change the rule is for a lot of firms.”

For those running behind, Hanna recommended that they put “a laser focus on the fundamentals so that you can put the best possible foot forward if you are examined out of the gate.”

Practically speaking, Hanna continued, this means advisors should be “making sure your policies and procedures are up to date (and that they are appropriately tailored to the business of your firm), rolling out training and policy communications to the appropriate parties, and ensuring your advertisements comply with the rule’s big-ticket items, like the performance advertising requirements.”

Firms should also “pay attention to the items specifically called out” in the Division of Exams’ recent Risk Alert, Hanna added. The SEC staff “seems to be signaling that it will be vigorously examining for compliance with certain elements of the rule, including the rule’s requirement to have substantiation for statements of material fact, the rule’s requirements relating to performance advertising, and the associated amendments to the Advisers Act books and records rule.”

Expect Exams to Start

With compliance now mandatory, Sanjay Lamba, associate general counsel for the Investment Adviser Association, warned that SEC examiners will “start conducting” exams that focus on areas outlined in the Sept. 19 Risk Alert.

These exams will include making sure advisors “have implemented written policies and procedures to address the requirements of the Marketing Rule, particularly with respect to being able to substantiate material statements of fact in their advertising materials,” Lamba said.

Advisors “are also subject to new recordkeeping requirements relating to the Marketing Rule,” and “they should continue to assess their procedures and controls to ensure that they are working as intended and to address any further guidance the SEC staff may issue in the future.”


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