SEC Marketing Rule Enforcement Actions Could Be on Their Way

Securities and Exchange Commission exams of compliance with the agency’s new marketing rule are in full swing, and enforcement actions related to firms’ lax compliance could be in the pipeline.

The SEC’s 2023 exam priorities reflect “a huge focus” on compliance with the marketing rule, notes Sanjay Lamba, associate general counsel for the Investment Adviser Association in Washington.

The good news is that results of initial SEC exams conducted during the first four months of the rule’s Nov. 4 compliance date “apparently revealed that the majority of advisors have fully updated their policies and procedures to reflect the new rule,” Lamba said.

The bad news, however, is that IAA has “very recently learned that the [SEC] exam staff has found serious [marketing rule-related] deficiencies on a large number of exams — with some being referred to the SEC enforcement staff,” Lamba said.

“It would be very unfair if these deficiencies and referrals” relate to the agency’s updated FAQ guidance issued in January, Lamba said.

IAA hopes that the SEC exam staff “is not referring cases where advisors in general have made good faith efforts to implement” the new rule.

While the SEC has begun issuing deficiency letters to firms that relate to the updated FAQ, IAA said that it does not know “the subject of any deficiency that’s been referred” to the agency’s enforcement division.

On a recent webcast held by the National Society of Compliance Professionals, Amy Lynch, president and founder of FrontLine Compliance, stated that firms that have “done nothing” to comply with the new marketing rule are at risk of facing an enforcement action.

These include firms that have no updated policy, firms that have “not touched” their marketing materials, and firms that are “out there doing testimonials and endorsements without the proper disclosures,” Lynch said. “That’s the kind of firm or activity that’s going to be a ‘gotcha,’ and the SEC will be likely taking enforcement against that type of an entity.”

Right now, Lynch said, the SEC expects firms to have updated written policies and procedures and to also “have conducted [an] analysis of their current marketing materials to see what need[s] to be changed/updated to be in compliance with the new rule.”

Because the new rule is in it’s early days, the SEC “just wants to see that firms are making a best effort approach and they’ve got those policies in place, they are updating those [marketing] materials and are going through the process of being in full compliance,” Lynch continued.

“As long as that best effort can be proven, in the early stages of a new rule typically the SEC is not going to go out and do a ‘gotcha’ enforcement action against a firm,” Lynch said.

‘Little Patience’

The SEC has signaled a likely heavy hand on marketing rule compliance.

In statements last November, William Birdthistle, director of the SEC’s Office of Investment Management, called the new marketing rule one of the agency’s more “ambitious” rulemakings, and stated: “I would very much encourage a rigorous compliance with the rule.”

While the compliance date was Nov. 4, the SEC’s advertising and marketing rule has been in effect since May 2021.

Kurt Gottschall and Kit Addleman, partners at Haynes Boone, told me in an email that given the “relatively long time” advisors have had to comply with the marketing rule, they expected the SEC to have “little patience with firms that had not undertaken a robust review and revision” of their policies and procedures.

As with enforcement matters following the adoption of Regulation Best Interest and Form CRS, Gottschall and Addleman say they expect the SEC exam division “will make enforcement referrals whenever they encounter firms that do not appear to have made a good faith effort to consider all new aspects” of the marketing rule.