With the deadline for the SEC's new marketing rule fast approaching, many industry officials are confident that financial planners are well prepared for compliance.
But that doesn't mean everyone understands what to do in all circumstances to stay on the right side of the law.
Financial planners must begin complying with the Securities and Exchange Commission's final rule on marketing by investment advisers beginning Nov. 4. Among other things, the rule establishes a new definition of advertising by financial promoters, allows the use of testimonials from current clients, introduces new criteria for the past performance of investments and allows the use of marketing investment forecasts.
The rule officially went into effect on May 4, 2021, but it took consultants 18 months to comply. Overall, it is intended to revise the SEC's rules in light of changes in communications technology, while solidifying the many interpretations the SEC has made since the enactment of its original advertising rule in 1961. rule, for example, consolidates the SEC's prohibitions and guidelines on false and misleading advertising.
Jen Klass, co-head of the regulatory and compliance practice at the law firm Baker McKenzie, says the clients she's worked with on marketing rules seem to take them seriously and do a good job of complying with them. He said the rule largely accomplishes the SEC's goal of consolidating the agency's interpretations and guidance on marketing. And since most of the rules are summaries of existing practices, it shouldn't be completely uncharted territory.
However, Klass et al. anticipate situations where consultants will not have a clear idea of how to proceed. For example, the new rules allow advisers to advertise the "gross return" on a particular investment, meaning they can show how much money has been returned in total, only if they also advertise the "net return." This refers to how much money is earned after fees and other expenses are deducted.
Confusion arises when consultants try to decide which fees should be used for this purpose. Suppose advisors report on the performance of a portfolio of multiple asset classes, each with their own fees. In such cases, the rule allows to simplify its calculations, based on a "rate model". These fees should be set to the highest effective fee that the advisor will charge the target client. But with all the variables that affect the fee structure, it can be unclear what the exact amount is.
"Does the higher rate apply to a specific program or to all programs?" the class said. “Is it the highest for the existing customer base or historically over a period of time? So there's this interpretive question regarding model fees."
Sanjay Lamba, general counsel for the Association of Investment Advisers, agreed that some of the biggest uncertainties in the new rule are related to the recognition of fees advisers must use when announcing investment performance in their ads. . Despite repeated requests for clarification from his group, the SEC has been reluctant to provide further guidance, Lamba said.
This means that advisers must use their best judgment when reporting investment performance results. Fortunately, Lamba said, the SEC has been lenient in issuing rules in the past. In general, he said, regulators tend to avoid a "glass" approach in the months after a new regulation is implemented, instead looking for signs that a regulated entity is making a good-faith effort to comply.
This was the case when the SEC introduced a new rule on June 30, 2020, requiring registered advisors and broker-dealers to submit a client relationship summary form, or CRS, to clients annually. Initially, regulators were interested in ensuring that industry professionals were seeking to fulfill their responsibilities in the forms companies use to provide information about their services, customer relationships, and rates, while also enforcing regulations. . The expectation of strict compliance has come with time.
When SEC regulators conduct the first round of auditing consultants expected to comply with the new rule, Lamba expects they will be faced with a number of compliance questions with no easy answers. Most likely, he said, these experiences will prompt the SEC to provide more guidance or clarify what consultants should do in specific situations.
"It's also fair to say that SEC officials are likely to share their observations with the industry," Lamba said. "But I don't know when that will be."
Lamba said the Investment Advisers Association has held weekly meetings on the new rule for more than a year. Instead of panicking over new regulations, most companies appear to be taking a "comprehensive" approach to making sure they comply, he said.
Lamba agreed that the new rule is a big step in the right direction. In addition to changing the SEC's Advertising Rule of 1961, the Marketing Rule also incorporates part of the Agency Advertising Rule of 1979. This is where the new Permit to Witness comes into play.
customer references
Previously, the SEC did not allow consultants to use client testimonials in their marketing. That ban, says Bill Simpson, chief compliance officer at compliance technology firm Hearsay Systems, isn't well known in the industry.
Consultants looked enviously at banking and insurance professionals who could incorporate customer testimonials into their marketing and wondered why they couldn't do the same. A new SEC marketing rule allows them to use testimonials and recommendations from non-customers or former customers as long as they meet certain conditions. For example, you should determine whether the person making the statement is a current client, has received payment for a testimonial, or has a relationship with a counselor that could create a conflict of interest. Testimonials are also subject to the false or misleading information prohibition.
Simpson said he believes that, unlike many new SEC regulations, smaller companies will have an easier time complying with this aspect of the rule than their larger counterparts. With relatively few employees requesting proof, small businesses may not have the burden of ensuring that all of their marketing communications comply with the law.
"It's easy when you know five people you're monitoring," he said. "You're almost in his daily life."
Large companies, Simpson predicts, will need to use technology to fulfill their responsibilities. According to Simpson, Hearsay Systems offers a service that uses a two-step verification process to report suspicious witness statements. First, ask if the counselor requested a testimonial for a current or former client, if there was a fee for the testimonial, and if there was a conflict of interest with the person providing the testimonial. Then use technology to scan the testimonial's language to flag potentially problematic words. Only when red flags are identified are law firm compliance officers called in for further review.
While tracking evidence will undoubtedly be complex and tedious, companies that give up could pay a price, Simpson said. If the number of consultants who have asked the SEC for permission to use them is any indication, companies that choose to forego them could lose talented professionals to competition, he said.
"Especially in a remote work environment, often the best way to establish an online presence and trust is to create and enable testimonials," Simpson said.
online reviews
In addition to consulting advice, many clients search for consultants using online reviews posted on sites like Yelp and Google. In such cases, the new regulation clarifies that the consultants are not responsible for the content of the reviews, as long as they do not try to influence the content; When they do, Simpson says, they can be held liable for false or misleading comments. For this reason, Simpson recommends a simple online evaluation approach for consultants.
The new rule also allows companies to hire outside companies to conduct surveys of current and former customers and use the results for marketing. However, companies that do so need to pay attention to how much they paid for the survey and the methods used to collect the data. You must also ensure that the registered third party does not intend to obtain any specific results and that it is presenting its search results correctly and accurately.
Other provisions of the new marketing regulations.
- It defines advertising as a communication sent by a consultant to two or more current or potential clients for new consulting services. Individual contact is excluded.
- It prohibits not only false statements and material omissions of fact, but also statements that are likely to lead to misleading conclusions or conclusions.
- Ads that do not refer to consulting services, but to the corporate community or philanthropic activities, or simply display your name, are excluded.
- Among other things, it requires advisers to record all ads they approve, commissions paid for ads and testimonials, and data used to report investment performance.
- It requires consultants to answer a series of questions about their advertising practices when they annually issue their ADV form, which is used to register with the SEC.
Lamba said the marketing rule has certainly given consultants a lot to think about over the past 18 months. Fortunately, he said, many seem to be taking their new jobs seriously.
"Based on all the meetings we've had with our members, we should be fine," he said.