The SEC's Marketing Rule was approved in December 2020 and took effect on May 4, 2021. From now on, registered investment advisors have been given an 18-month transition period until November 4, 2022 to fully comply with its update . the rules. the rules. This article will discuss how and why it came into effect, the changes that were made, and the next steps that RIA compliance teams must take as the deadline approaches.
why now?
The attractiveness of updating the current Rule 206(4)-1 on the Declaration is clear. It has remained largely unchanged since its adoption in 1961, an era that predates the Internet, personal computers, and most technology available to businesses in 2022.
As a result, the creed detaches from the landscape that governs it. This particularly affects RIAs that are located (or provide services) in the United States, and the updated frequency reflects recent practices; Specifically the mass consumption of digital media and the many channels through which this occurs.
Is it mandatory?
Under the new marketing rule, the Securities and Exchange Commission (SEC) will run with a clean slate and remove any arbitrary directive issued on a temporary basis as a result of the original advertising rule. The regulator acknowledges that "this revised rule replaces an outdated and disproportionate system that advisors have relied on for decades." This is an important revision, so companies had 18 months to implement it.
Despite this generous grace period, it would be unreasonable to expect mercy on November 4. On the contrary, enough time is allotted to provide the necessary shock, so excuses are unlikely to satisfy the regulator. While modernizing processes and systems has become more difficult in recent years due to the flow of remote work, this hurdle was taken into account when setting up the rule.
The Securities and Exchange Commission has indicated that any pandemic tolerance period is now over , which may indicate how prepared it is to extend its compliance tolerance. The regulator appears to be taking enforcement of the new marketing rule very seriously, starting in May via email . Calling the SEC a hoax or invoking ignorance seems absurd.
Most RIA seem to agree. The Society of Investment Advisers recently conducted an annual employee survey of 425 investment advisors and shared the results in July. For the second year in a row, marketing compliance remains the number one concern of RIA compliance officers. 78 percent of respondents cited advertising/marketing as the “most pressing compliance topic in 2022,” an increase of 20% from last year. The approaching deadline is no accident.
The same survey found that 96% of consultants expect compliance with marketing regulations in the near future, and 11% have already done so. Only 4% said they did not know how long it would last. It's an urgent issue, and the message seems to have reached the vast majority of RIAs.
But what does the new marketing rule mean and what should RIA do differently?
1. One rule to rule them all
The new rule fulfills its word (to simplify the correction that preceded it) by merging two more; Current Declaration Rule, Rule 206(4)-1, and Claims Rule, Rule 206(4)-3.
2. What is advertising?
To simplify this merger, the Securities and Exchange Commission has redefined "advertising" to cover two specific points.
The so-called advertising now includes any direct or indirect communication from an investment advisor:
- provide its security services to existing or potential clients; where?
- Any endorsement or recommendation for which the Consultant provides monetary or non-monetary compensation
The impact of the above changes is enormous. When advertising was largely limited to print media (brochures, catalogs) or television and radio communications, it now extends to electronic communication, which means that a large number of digital platforms (websites, email, instant messaging platforms, etc.) Regulators control.
The second point includes various communications (likes and reactions), which have always been important in the advertising world, but have now taken a different form, especially on social media platforms. They are a very important weapon in a company's marketing arsenal, and with an increasing number of influencers in every imaginable field, companies must now clearly disclose whether the person/organization has been compensated. Consultants must also have written agreements with promoters/influencers and monitor their compliance with marketing rules. The advisor is responsible. There is no discussion of responsibility.
3. Seven general prohibitions
The Securities and Exchange Commission (SEC) has replaced the prohibitions in advertising rules with seven new general prohibitions.
Investment advisors may not provide advertisements:
- includes misrepresentations and omissions;
- contains unfounded statements of material facts;
- include false or misleading repercussions or conclusions;
- does not provide a fair and balanced treatment of physical risks or physical limitations;
- does not provide specific investment advice in a fair and balanced manner;
- Cherry chooses performance outcomes or displays performance in an unfair or unbalanced manner; where?
- Significantly misleading.
The principles place a greater burden of proof on counsellors, requiring them to retain evidence to support their claims. In short, consultants will be required to prepare checklists to demonstrate their compliance with the above provisions. This also applies to any communication / document informing them of their understanding of the truth of the advertising content, the same applies to testimonials and testimonials.
Message archiving role
Since the most diverse communications fall under the definition of advertising, the Securities and Exchange Commission has issued "amendments to comply with ... accounting rules." RIAs must archive and keep records of all the ads they serve, which now includes email. Emails, websites, social media profiles, and a growing list of platforms. Importantly, advertising is now defined by the information it contains, as opposed to the channel through which it is delivered, to ensure that the Securities and Exchange Commission does not continue to break the law as digital channels continue to proliferate.
When we enter the site, we only see what it looks like at that moment, so it is impossible to prove compliance over a long period of time. While other channels (social media, email, instant messaging) provide easier access to historical data, these messages/posts are not permanently stored; It can be deleted or modified retroactively. Archiving is the most efficient way to store metadata in a compatible and immutable format.
Compliance guarantee
Updating outdated regulations has put digital platforms under the jurisdiction of the SEC, and compliance requirements will increase dramatically.
RIAs need to get a feel for what advertising is now that everything has to be captured and registered under the new marketing rules. The additional workload will impact internal compliance operations, whether that is through strengthening compliance teams, improving company-wide training programs, or outsourcing to third-party providers. Above all, it is imperative that companies secure their defenses by the November 4 deadline set by the Securities and Exchange Commission.
Harriet Christie is the Chief Operating Officer of MirrorWeb.