The SEC’s marketing rule came into effect May 4, 2021. Since then, registered investment advisers (RIAs) have had an 18-month transition period — until Nov. 4, 2022 — to fully adhere to its updated regulations. MirrorWeb’s Harriet Christie explores the rule and what steps RIA compliance teams must take by the deadline.
The appeal behind the modernization of the existing advertising rule 206(4)-1 is clear. The rule has remained largely unchanged since its adoption in 1961, an era that predates the internet, personal computers and most technology businesses rely on today.
In short, the doctrine is out of touch with the landscape it governs. It specifically impacts RIAs based (or providing services) in the United States, and the updated iteration reflects modern habits. Namely, the mass consumption of digital media and the abundance of channels through which that occurs.
As part of the new marketing rule, the SEC will operate on a clean-slate basis, withdrawing the arbitrary guidance issued as a stopgap measure since the original advertising rule. The regulator recognizes that “this amended rule replaces an outdated and patchwork regime on which advisers have relied for decades.” It’s a significant overhaul, which is why firms were granted 18 months to adhere.
Despite this generous grace period, it would be unwise to anticipate leniency when Nov. 4 arrives. On the contrary, ample time has been granted to ensure the necessary changes take place, and so excuses are less likely to appease the agency. While the revamp of processes and systems has been made more difficult by the influx of remote work in recent years, this was taken into consideration when the rule was ratified.
The SEC has demonstrated that any period of pandemic-enforced leniency is now over, which is potentially indicative of how far they’re willing to stretch their patience on matters of compliance. The regulator appears serious about enforcing the new marketing rule: In May, it launched an email campaign to remind RIAs about the upcoming deadline and the steps they’ll need to take to comply. Calling their bluff or pleading ignorance appears a foolish course of action.
Most RIAs seem to agree. The Investment Adviser Association recently conducted its annual survey of compliance staff at 425 investment adviser firms. For the second year in a row, implementing the marketing rule remains the No. 1 worry for RIA compliance officers. More than three in four respondents cited advertising/marketing as the hottest compliance topic for 2022, an increase of 20% from the previous year. The impending deadline is not a coincidence.
The same survey reported that 96% of advisers expected to comply with the marketing rule on or ahead of the November deadline, with 11% of those already doing so. Just 4% claimed they were unsure of their compliance timeframe. It’s a matter of urgency, and the message appears to have landed among the vast majority of RIAs.
So, what does the new marketing rule mean — and what must RIAs do differently? Here are the key points:
One rule to rule them all
The new rule makes good on its word (to simplify the current patchwork that has preceded it) by combining two others: the existing advertising rule, Rule 206(4)-1, and the cash solicitation rule, Rule 206(4)-3.
What’s an advertisement?
In order to streamline this consolidation, the SEC has redefined “advertising” to cover two clear points. An advertisement now includes any direct or indirect communication an investment adviser makes that:
- Offers their services regarding securities to existing or prospective clients
- Includes any endorsement or testimonial for which an adviser provides cash or non-cash compensation
The impact of the above alteration is enormous. While previously “advertising” was largely limited to print media (like brochures and catalogs) or communications made through TV and radio, it now also applies to electronic communications, meaning that a significant number of digital platforms (like websites, email and instant messaging platforms) now find themselves under regulatory scrutiny.
The second point encompasses a variety of communications (like endorsements and testimonials) that have always been essential in the world of advertising but have now evolved into a different form, on social media platforms in particular. They’re important weapons in a firm’s marketing arsenal, and with the growing legion of agents wielding influence in every conceivable industry, companies will now need to clearly disclose if the individual or organization posting has been compensated by them in any way. The advisers must also have a written agreement with promoters and influencers and must oversee their compliance with the marketing rule. The onus is on the adviser; there’s no debate where the accountability lies.
Seven general prohibitions
The SEC has replaced the existing prohibitions in the advertising rule with seven new general prohibitions. Investment advisers may not circulate any advertisement that:
- Includes untrue statements and omissions
- Includes unsubstantiated material statements of fact
- Includes untrue or misleading implications or inferences
- Fails to provide fair and balanced treatment of material risks or material limitations
- Fails to present specific investment advice in a fair and balanced manner
- Cherry-picks performance results or otherwise presents performance in a manner that is not fair and balanced
- Is materially misleading
The principles place a higher burden of proof on advisers, requiring them to maintain evidence to back up their claims. In a nutshell, advisers will be required to catalog advertisements to prove their adherence to the above stipulations. This also applies to any communication/documentation that has informed their understanding of whether the content within the advertisement is true, and the same applies for testimonials and endorsements.
The role of communications archiving
As more varied communications now fall under the definition of advertising, the SEC has issued related amendments. RIAs must archive and keep records of all advertisements that they have circulated, which now encompasses email, websites, social media profiles and an ever-expanding list of platforms. Advertisements are defined by the messaging they contain as opposed to the avenue through which they’re conveyed, ensuring that the SEC will not be permanently playing legislative catchup as digital channels continue to proliferate.
When we log on to a website, we only see its form at that given time, and so it’s impossible to prove compliance over a sustained duration. While other channels (like social media, email and instant messaging) provide easier access to historical data, these messages/posts are not stored immutably — they can be deleted or edited retrospectively. Archiving is the most effective way to preserve your metadata in a compliant, unalterable format.
The modernization of archaic regulations has seen digital platforms enter the SEC’s jurisdiction, and compliance demands are about to increase drastically.
RIAs should familiarize themselves with what now constitutes an advertisement as, according to the new marketing rule, all will need to be captured and recorded. The additional workload will have implications on internal compliance processes, whether that means growing compliance teams, enhancing company-wide training programs or outsourcing to third-party vendors. Above all else, it’s imperative that businesses ensure they are protected ahead of the SEC’s Nov. 4 deadline.