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 others “made 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.