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The Securities and Exchange Commission is warning advisors to review and improve their practices before the new rules take effect that require firms to advertise and promote their practices.
The SEC this week warned of a risk that advisers will conduct a series of surveys to assess how well they are complying with a new trading rule that allows advisers to use third-party endorsements and reviews to promote their practices. Proper documentation and record keeping is also required to support business promotion activities.
"The team will conduct a thorough review of specific national initiatives as well as a process to assess compliance with marketing regulations," the disclaimer read.
The revised marketing law, which replaces the previous advertising and fundraising law, will come into force on November 4 and cover a range of activities, the commission said.
"Any advertisement posted or registered by advisers registered with the Commission on or after the closing date is subject to market regulations," the warning says.
This week's announcement could add to concerns among advisers about the upcoming legislation. Advisors interviewed by the Investment Advisers Association earlier this year cited trading regulations as a top compliance issue. Among respondents to this survey, 78% said advertising and marketing is the "most" compliance issue, up 20 percentage points from last year's survey and surpassing recurring concerns such as cybersecurity and conflict of interest.
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The commission outlined four specific areas where SEC staff will review how companies are complying with the new rules.
The first relates to core policies and procedures that ensure companies update their compliance protocols to take new regulations into account.
The second area is what the SEC calls evidence, where companies can show that they have a "reasonable basis" to believe any claims made in marketing materials are true.
Third, SEC examiners will look at how advisers include performance measures in their advertising, particularly given the complexity of the rules designed to give consumers a balanced and relevant understanding of advisers' performance. .
"The area of investment performance regulation is extremely complex and the SEC must advance the scope of ad performance if it wants to avoid lack of or poor ad performance," said Duane Thompson, president of consulting firm Potomac Strategies.
A final area of concern for SEC auditors is books and records, including current information that advisers must include in their regulatory ADV filings, including trading practices.
The SEC's examination division concluded the risk warning by saying that the call to action for advisers was not so subtle, adding that the section "encourages advisers to reflect on their practices, policies and procedures and implement appropriate changes on their own. Training, Monitoring, Surveillance and Compliance Programs .”
Together, new marketing laws may represent major compliance with regulations. Thompson cited significant compliance changes to the best interest rule and Form CRS — for brokers and advisers — and the SEC did not immediately finalize the implementation of these rules.
Instead, auditors first looked for companies that made a serious effort to comply. More than two years after the Reg BI package went into effect, major enforcement actions are rare except for a few SEC cases against companies for failing to complete the CRS form.
Thomson suggested that the Commission could take a similar approach with the Marketing Act.
"It's very complicated," Thompson said. "And as the industry applies the new regulatory framework as a rule of good faith, I hope that the SEC will get rid of good faith and unintended violations."
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