SEC New Marketing Rule: The Compliance Clock is Ticking

The U.S. Securities and Exchange Commission’s (SEC) current rules on advertising have been in effect since 1961. For the last 60 years, there has been little to no amendments to these rules, even with a constantly changing world. However, the long-awaited modernization of Rule 206(4)-1 under the Investment Advisers Act of 1940 (Advisers Act) became effective on May 4, 2021, with a final compliance date of November 4, 2022. The new Rule 206(4)-1 (Marketing Rule) consolidates the current Advertising and Cash Solicitation rules into a single Marketing Rule.  

The new Marketing Rule imposes a number of significant changes on the framework for investment adviser advertising. These changes will have material impact on SEC registered investment advisers (wherever they are based in the world), in some cases affording more flexibility and in others imposing new conditions. The 430 page Adopting Release provides considerable guidance on how registered investment advisers can ensure compliance with the new Rule.

One key reason for the modernization of this rule is the current patchwork approach to marketing, meaning that firms needed to comply with the Advisers Act as well as rely on various no action letter guidance when drafting marketing materials. The new Rule aims to provide one singular set of standards for firms to comply with.  

Prior to this new Rule, guidance around how to apply the Advisers Act to marketing material content came from a series of no action letters. If firms are unsure how to apply a specific rule, they can propose a set of facts and circumstances and ask for comfort that the SEC staff would take no action against the firm based on that particular rule interpretation and set of facts and circumstances. The SEC staff then can issue a no action letter which will provide this assurance based on a specific set of conditions outlined in the letter. 

The new Rule will codify some of these no action letters.  Further, it is important to note that the Marketing Rule also applies to firms based out of the U.S. who are either registered with the SEC or required to be registered and must be adhered to in any marketing materials that would be distributed in the U.S. 

A common challenge with current guidance on marketing materials is the discussion of specific holdings as there is a risk of cherry-picking the best performing holdings to highlight how well the portfolio did. Under the current landscape, in order to discuss past specific recommendations, firms needed to rely on no action letter guidance.  Moving forward, the new Rule utilizes a fair and balanced principles-based approach with respect to the discussion of specific holdings, which will provide firms with more flexibility in the discussion of specific holdings. 

Another challenge the new Marketing Rule addresses is the increased use of other media, such as websites and social media, that did not exist in the past. Examples of this include the use of endorsements or third-party rankings in social media.  To help provide some clarity around this, the Adopting Release provides guidance for advisers use of social media, which will hopefully allow more firms to utilize these channels for marketing. 

Generally, the SEC does not issue too many large sweeping regulatory changes. The industry receives guidance on the application of the Advisers Act in the form of risks alerts or staff letters. Therefore, this new Rule and it’s Adopting Release provides a significant change and guidance in the SEC framework. Registered investment advisers were provided with an 18-month period to comply with the new Rule given the significant changes.  

Firms will need to implement a significant number of revisions to current compliance policies and procedures, in order to prevent future violations of the amended marketing rule. This is evidenced by the fact that firms are also required to maintain a copy of all past compliance policies and procedures in effect at any time within the previous six years. Given the significant updates and changes to consider, firms should begin preparing now to meet the November 2022 compliance deadline.

Article first published on Thomson Reuters Regulatory Intelligence on 2 December 2021 (subscription needed to view).

Questions

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Further resources

On-Demand Webcast: SEC New Marketing Rule: All-Change Please

With only a few months left before the final compliance date, this on-demand session examines the SEC’s new Marketing Rule and how firms should prepare, covering:

• The pivotal changes to the SEC’s rules and requirements that firms will need to comply with by November 2022.  Including:
  • the definition of an advertisement;
  • use of testimonials, endorsements and third party rankings;
  • use of social media;
  • past specific recommendations; and
  • the presentation of performance

Watch on demand here

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