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The SEC’s Marketing Rule: How to Stay Compliant/Avoid Fines

5 Mins read

The U.S. Securities and Exchange Commission’s (SEC’s) Marketing Rule was approved in December 2020 and came into effect on May 4, 2021. From that point, Registered Investment Advisers (RIAs) have had an 18-month transition period — until November 4, 2022— to fully adhere to its updated regulations. This article will delve into how and why it has come into practice, the changes that have been made, and the subsequent steps that must be taken by RIA compliance teams.

Why Now?

The appeal behind the modernization of the existing Advertising Rule 206(4)-1 is clear. It has remained largely unchanged since its adoption in 1961, an era which predates the internet, personal computers, and a large proportion of the technology at businesses’ disposal in 2022.

Resultantly, the doctrine is out of touch with the landscape that 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.

Is it Mandatory?

As part of the new Marketing Rule, the SEC will operate on a clean slate basis, withdrawing all of the arbitrary guidance that has been 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 The regulator recognizes that “this amended rule replaces an outdated and patchwork regime on which advisers have relied for decades”.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 remiss to anticipate leniency when November 4th arrives. On the contrary, ample time has been granted to ensure the necessary upheaval takes place, and so excuses are less likely to appease the regulator. 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, plus 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 their annual survey of compliance staff at 425 investment advisor firms, sharing their findings in July. For the second year in a row, implementing the Marketing Rule remains the number one worry for RIA compliance officers. 78% of respondees 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 that they were unsure of their compliance timeframe. It’s a matter of urgency, and the message appears to have landed amongst the vast majority of RIAs.

But what does the new Marketing Rule mean, and what must RIAs do differently? We’ll summarize the key points below.

  1. 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.

  1. So 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 (brochures, catalogs) or communications made through TV and radio, it now also applies to electronic communications, meaning that a significant number of digital platforms (websites, email, instant messaging platforms) now find themselves under regulatory scrutiny.

The second point encompasses a variety of communications (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 very 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/organization posting has been compensated by them in any way. The advisers must also have a written agreement with promoters/influencers, and must oversee their compliance with the Marketing Rule. The onus is on the adviser; there’s no debate where the accountability lies.

  1. 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:

  1. Includes untrue statements and omissions
  2. Includes unsubstantiated material statements of fact
  3. Includes untrue or misleading implications or inferences
  4. Fails to provide fair and balanced treatment of material risks or material limitations
  5. Fails to present specific investment advice in a fair and balanced manner
  6. Cherry-picks performance results or otherwise presents performance in a manner that is not fair and balanced
  7. 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 to … the books and records rule.” 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 that they contain as opposed to the avenue through which they’re conveyed, ensuring that the SEC will not be permanently playing legislative catch-up 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 (social media, email, 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.

Ensuring Compliance

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 November 4th deadline.

Harriet Christie graduated from the University of Sheffield in 2010, with a BA in Management Accounting, Entrepreneurship, Business Law, BSR, HR. She entered the Tourism space, starting as an Accounts Executive at LateRooms.com, and earning the title of Global Accounts Manager within 3 years. She occupied this role for a further 5 years as the business continued to evolve and flourish, before taking up her role as a Key Account Manager with MirrorWeb, a data archiving solution based in Manchester. Harriet was appointed Operations Director in 2020. Since then, she has helped oversee the evolution of the MirrorWeb product and service offering, as well as the business’ impressive growth since her taking on the role.

Marketing rule stock image by Miha Creative/Shutterstock

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