Exploring the SEC Marketing Rule and Its Implications

The Securities and Exchange Commission (SEC) recently adopted amendments to modernize rules that govern investment adviser marketing. This new marketing rule creates a single rule designed to regulate investment advisers’ marketing communications and practices comprehensively. Advisers need to focus on complying with this rule by the compliance date of November 2022.

Understanding Key Aspects of the New Marketing Rule

The new marketing rule replaces the previous advertising rule, cash solicitation rule, and certain aspects of the books and records rule with a consolidated, principles-based rule. This amended rule prohibits advisers from making any statement, directly or indirectly, to a client or investor that is a material statement of fact that the adviser does not have a reasonable basis for believing it will be true at the time it is made.

The modifications also include specific guidelines for how performance results should be presented depending on who is the target audience for an advertisement. Performance advertising will need to comply with the marketing rule’s general prohibitions and applicable tailored requirements to help ensure clients and investors receive relevant performance.

Key Changes in New SEC Marketing Rule 206(4)-1

The SEC marketing rule amendment makes several impactful updates to previous advertising restrictions and requirements for investment advisors. Here are some of the most notable changes advisors need to be aware of:

1. New Standards Around Hypothetical Performance

The updated rule places tighter regulations on using hypothetical performance in marketing materials. Advisors can only advertise hypothetical performance if they provide sufficient information to understand the parameters and limitations. For example, they need to disclose if the performance relates to a subset of their advisory services rather than the firm as a whole.

Hypothetical performance also needs to reflect the deduction of fees, expenses, and other charges an actual client would pay. Advisors must share enough information for clients to comprehend how the hypothetical performance results were calculated.

2. Performance Advertising Time Periods

Previously, advisors could only advertise their performance results from the immediately preceding period. The new rule allows advisors to market performance from any time period prior to the advertisement’s publishing, as long as they follow requirements around depicting performance over multiple time periods.

For example, if showing results for 1, 5, and 10-year periods, they need to display the periods with equal prominence. This change provides more flexibility for advisors to showcase their long-term performance.

3. Allowance and Requirements for Testimonials and Endorsements

The updated marketing rule permits advisors to use testimonials, endorsements, and third-party ratings. However, they must disclose any compensation provided for obtaining such content and whether it represents the experience of an individual client or a class of clients.

Advisors are prohibited from using testimonials suggesting performance results that are not verifiable or portraying results not achieved for an actual client. Any testimonial info that does not reflect the collective experiences of an adviser’s clients must be clearly indicated.

4. Updated Disclosure Requirements

The new rule expands the disclosures advisors must include when advertising performance results. Required disclaimers now incorporate the following:

• A statement that past performance does not guarantee future results.
• That performance results do not reflect the deduction of advisory fees.
• Investments with an adviser may differ, creating different results than advertised performance.
• That hypothetical performance has limitations advisors can outline.

5. Recordkeeping Expectations

Advisors must keep records demonstrating performance calculations match the new methodology requirements. They need to retain copies of communications sent to 10 or more people, documentation of recipient qualifications, and any third-party questionnaire or survey results.

Records must be kept in an easily accessible format to furnish to the SEC upon request.

How Advisers Must Prepare for Compliance

To comply with the marketing rule, advisers will need to adopt and implement policies and procedures reasonably designed to prevent violations of the new requirements. This includes reviewing their marketing practices and materials to identify any areas that do not conform with the new rule.

Specifically, advisers should ensure their procedures cover the calculation and presentation of performance results as well as the review and approval of advertisements. Procedures should be designed to prevent the dissemination of material statements of fact that the adviser does not have a reasonable basis for believing it will be true at the time they are made.

Advisers should also consider what additional information regarding their marketing practices they may need to maintain in an easily accessible format to facilitate the SEC’s inspection and enforcement capabilities. This includes maintaining appropriate books and records under rule 204-2.

How the Marketing Rule Affects Adviser Marketing Communications

The new marketing rule broadly defines “advertisement” and updates the definition of “offer” of investment advisory services with regard to brochures, websites, social media, individualized sales materials, and oral statements. This means that advisers need to apply the rule’s specific prohibitions and prescribed conditions to those communications.

For example, the use of testimonials and endorsements in advertisements is restricted under the rule. Advisers are prohibited from including, directly or indirectly, a testimonial or endorsement in communication if it does not meet certain prescribed conditions about disclosing that the testimonial was given in exchange for compensation or that the endorser was a current client.

The marketing rule also provides tailored requirements for presenting performance results based on the likely audience. Performance advertising presenting hypothetical performance now has specific required information and is subject to appropriate back-testing.

Tips for Achieving Compliance with the New Marketing Rule

The updated SEC marketing rule requires investment advisors to change their advertising practices and recordkeeping procedures. Here are some tips to ensure your firm achieves SEC compliance by the November 4, 2022 deadline:

Review All Marketing Materials and Practices

• Conduct a thorough audit of all current advertising content and channels, including websites, brochures, emails, social media, seminar materials, and more.
• Assess areas that need to be updated based on new requirements and prohibitions.

Organize and Update Marketing Records

• Gather all supporting performance data, client testimonials, and third-party questionnaires in an organized, retrievable system.
• Ensure hypothetical performance match calculations and required parameters.
• Obtain written consent for any testimonials.

Seek Compliance Training and Support

• Educate all staff involved in firm marketing on the new provisions.
• Work with attorneys and compliance consultants to identify gaps and create an action plan.

Research Compliant Marketing Tools

• Vet any third-party content creators or marketing tools against the new standards.
• Explore options that allow simplified compliance monitoring and reporting.
• Consider outsourcing the creation of performance advertising content.

Following these steps will facilitate a smooth transition to satisfying the new SEC marketing rule requirements and deadline.

Let My RIA Lawyer Guide You Through the Changes

As an RIA firm focusing specifically on the regulatory compliance needs of investment advisers, My RIA Lawyer has extensive experience helping advisers understand and implement SEC rules and regulations.

If you need assistance reviewing your marketing materials, assessing risks, and establishing policies and procedures to comply with this new marketing rule, contact My RIA Lawyer today. Their compliance attorneys can help ensure your firm avoids deficiencies and is prepared to handle SEC inspections related to the new adviser marketing rule requirements that wen into effect in November 2022.