SEC Marketing Rule Adoption

 

 SEC Marketing Rule Adoption

May 4, 2021, marks a historic day in the investment advisory space as the modernized “Marketing Rule” went into effect. Many advisors are finding themselves very eager to take advantage of the modernized marketing opportunities with what seems to be a more permissive and flexible rule than the original “Advertising Rule,” which has not been amended or updated since its adoption in 1961. However, the new rule doesn’t come without its many intricacies that are still being digested by advisors and industry experts alike to ensure full compliance with the new guidelines. As a result of the many complexities with this rule change, the SEC is providing an eighteen-month compliance period where during the interim, firms can choose to utilize the new Marketing rule or the old Advertising Rule, but not a combination of both.

We urge advisors to have patience and allow the regulatory landscape to fully break down and analyze the implications of this new rule. Similar to rule updates in the past, we expect to see the SEC update its FAQ page routinely in the next couple of months concerning the updated marketing guidance, which will further clarify their expectations on various disclosure and oversight obligations. In the meantime, AdvisorAssist is keeping a close eye on these updates and thoroughly working on developing and ensuring adequate policies and procedures are designed that will allow advisors to meet their continuing regulatory and compliance obligations under this new rule.

As it relates to state-registered investment advisors, we are actively monitoring each respective state to understand whether they will follow suit with federal regulations. At this time, we strongly urge state registrants to continue to comply with their current regulations. Many states rely on the SEC’s Advertising Rule, so we can expect to see updates in the near future.

Below are the highlights of the new Marketing Rule:

Definition of Advertisement

The amended definition of “advertisement” now contains two prongs. The first prong captures traditionally covered communications covered by the rule, while the second captures testimonials and/or endorsements for which an investment advisor provides direct or indirect compensation. The latter of which was formerly covered by the cash solicitation rule, which has been completely abolished and replaced by these changes.

There are 7 general violations advisors should avoid as it pertains to advertisements. These prohibited practices should come as no surprise to the advisor community, as the central tenet of them is focused on false or misleading statements, omission of material facts, and maintaining fair and balanced communication in all situations.

1. Include any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;
2. Include a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
3. Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;
4. Discuss any potential benefits to clients or investors connected with or resulting from the investment adviser's services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;
5. Include a reference to specific investment advice provided by the investment adviser where such investment advice is not presented in a manner that is fair and balanced;
6. Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or
7. Otherwise be materially misleading.

Testimonials and Endorsements

Arguably, the most significant reversal from the prior advertising rule is that advisors are now permitted to use testimonials and endorsements in an advertisement, so long as the advisor is able to satisfy certain disclosure, oversight, and disqualification provisions.

Although the SEC has broadly referred to the term testimonial for decades, the term has never been defined until now. The final definition of what constitutes a testimonial includes any statement by a current client or private fund investor about the clients’ or private fund investors’ experience with an investment advisor or its supervised persons. The definition of endorsement includes any statement by a person other than a current client or private fund investor that indicates approval, support or recommendation of the investment advisor or its supervised persons or describes that person’s experience with the investment advisor or its supervised persons.

As one might imagine, there are a number of obligations that must be met in order to meet regulatory requirements and maintain compliance in order to incorporate testimonials and endorsements into your practice. The scope of those requirements is quite broad, particularly in light of the SEC incorporating many of the elements of the solicitation rule into the revamped marketing rule.

Third-Party Ratings

As far as third-party ratings are concerned, the Marketing Rule prohibits the inclusion of third-party ratings in an advertisement unless advisors comply with the overalls rules general prohibitions, and other specific conditions.

Performance

The inclusion of performance in advertisements is allowable, given numerous requirements of the rule are met and adhered to. The main focus of including performance is on gross performance (must include net, equally as prominent), specific time periods (1, 5, 10, and/or since inception), related performance, carve-outs, and hypothetical performance. 

Recordkeeping

Lastly, the SEC has amended the Recordkeeping Rule (Rule 204-2) and will now require more robust recordkeeping by investment advisors as it relates to advertisements. Of note, whereas previously advisors were required to retain advertisements sent to ten or more people, the new rule requires that advisors maintain advertisements sent to more than one person.

Click here to read the entire marketing rule.

Posted in: