Establishing Compliance with the New SEC Marketing Rule

For years, investment advisers have had their hands tied when it comes to promoting their success through the use of client testimonials. Such marketing efforts, such as positive client endorsements on LinkedIn, have long been prohibited from promotion. Now, with the New SEC Marketing Rule, which has a compliance date of November 4, 2022, such restrictions have been lifted.

Notably, the new Marketing Rule contains an updated definition for “advertisements,” new guidance for solicitors (who will hereinafter be referred to as “promoters”), and new principle-based regulation for performance advertising.  Before the compliance deadline, it is important to gain an understanding of these new compliance standards and to confer legal navigation and support with experienced legal counsel. 

The Former vs. New Marketing Rule

Within this 432-page rule, advisory firms are provided with guidance on what they can and cannot do in today’s advertising landscape. Though various components may be impacted to some degree, perhaps the biggest change is the permitted use of testimonials. The New Marketing Rule allows for testimonial promotion –so long as certain conditions are met. The New Marketing Rule provides a new, two-pronged definition of advertisement which reflects testimonial use. 

The first prong concerns hypothetical performance information, which must be shown to its intended office and be suitable for the end recipient. This means that firms will have to take steps to ensure their performance information complies with standards prior to promoting it. When showing performance, the rules are the same for retail and institutional investment advisers – in other words, growth and net of fee performance must be shown.

The second prong is perhaps the most impactful, because groups’ testimonials and endorsements under the definition of “advertisement,” open new avenues for adviser marketing efforts. While investment advisers were formerly kept from marketing their testimonials, the New Marketing Rule changes this – but certain compliance standards must be met.

Testimonials

Under the new rule, “testimonials” are defined to include reviews by current clients or private fund investors about their client experience. Prior to the rule, advisers were prohibited from having testimonials. In fact, advisory firms weren’t even allowed to promote positive client reviews on the firm’s website. But in today’s social media-driven world, the industry and its regulations have evolved to assist in modernizing adviser communications and advertisements to remain competitive in the financial services landscape. 

Endorsements and Solicitors to Promoters, Explained

Alongside these changes, the SEC New Marketing Rule contains new definitions of the term “endorsement”.  An endorsement is a review by a third party that is not a client and now falls under the second prong of the new “advertisement” definition. This in effect replaces the former solicitor’s rule, and now solicitors are referred to as “promoters.” Thus, the Solicitor’s Rule (Rule 206(4)-3) requirements are going away, and replaced with the conditions set forth in the New Marketing Rule. 

Promoter Compensation, “Bad Actors,” & Disqualification

There are now two requirements when compensating an endorser or promoter:

  • If cash compensation exceeds $1,000 annually, a Promoter’s Agreement is necessary.
  • The promoter must provide a promoter disclosure statement to the end client.

These steps ensure that your client is aware of their compensation, as well as any conflicts of interest – furthering the rule’s emphasis on firm transparency. 

Furthermore, with the new requirements under rule 206(4)-1, promoters who receive compensation must ensure that they’re not a “bad actor.” In other words, promoters must not be statutorily disqualified in order to earn compensation, since bad actors can’t act in any capacity under federal security laws.

Other Notable Changes

Hypothetical Performance

Another key change can be seen in the use of “hypothetical performance information.” The new Marketing Rule requires advisers to show such information to its intended office and demands that the information be suitable for the end recipient. Firms will have to take steps to ensure hypothetical performance information complies with these new standards. Importantly, despite industry comments, the SEC’s new rule remains consistent for showing performance both for retail and institutional clients.  In other words, regardless of a client’s sophistication, the same type of disclosures and compliance requirements must be complied with. 

Net-of-Fee Performance Required 

In order for investment advisers to promote their hypothetical performance information, there are certain standards to be met. Firms must first show their performance information to its intended office, and ensure the report is suitable for the end recipient. But most of all, the New Marketing Rule mandates that you show your firm’s growth and net-of-fee performance to compliantly promote hypothetical performance.

In their effort to modernize such adviser marketing provisions, the SEC released a broader, principle-based regulatory framework to replace no-action letters and other previously restrictive rules.

New Marketing Rule Compliance Deadline: Nov. 4, 2022

With the compliance deadline for the SEC New Marketing rule quickly approaching, advisers need to start making changes now. Whether or not your firm plans to use testimonials, engage a promoter, or use performance advertising,  below is a list of actions you can take to begin complying with the new rule:

  • Align your marketing policies and procedures with new standards, 
  • Consider disclosures in all of your social media, including your website,
  • Go back and update any social media posts that don’t meet new standards,
  • Inform your staff of any changes and retrain them accordingly.

Making these changes takes time.  From our experience at least three months on average is needed for advisors to establish full compliance with the New Marketing Rule, meaning non-compliant firms have little time to meet these new standards. The attorneys at Jacko Law Group, PC (“JLG”) are currently helping firms navigate these drastic changes, such as retraining staff on new compliance standards, and are here to assist you prior to the November 4th deadline. Contact us at (619) 298-2880 to schedule a consultation and avoid potential pitfalls on your way to compliance with the New Marketing Rule.

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