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SEC Expected to Be ‘Heavy-Handed’ With Marketing Rule Enforcement

By Melanie Waddell

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Compliance with the Securities and Exchange Commission’s new Marketing Rule is mandatory starting Friday, and Bill Simpson, compliance principal at Hearsay Systems, anticipates that the securities regulator “will likely be heavy-handed in its disciplinary actions for firms that are not in compliance,” as firms have had “roughly two years to comply.”

The SEC’s advertising and marketing rule has been in effect since May 2021.

On Sept. 19, the SEC announced in a Risk Alert that it would focus on compliance with the Marketing Rule in its 2023 exam schedule.

Simpson told ThinkAdvisor that the agency’s handling of marketing rule compliance will likely be reminiscent of the string of fines associated with Form CRS, “where the SEC clearly expected firms to comply and gave them ample time to do so.”

So far, the SEC has hit 42 firms with penalties for not complying with agency requirements pertaining to the Customer Relationship Summary form. “We expect a similar fact pattern to emerge in 2023” related to the new Marketing Rule, Simpson said.

We asked Simpson to weigh in on where firms are in their compliance and what to expect next from the SEC.

ThinkAdvisor: Where are firms in their compliance?

BILL SIMPSON: We’re seeing a pretty wide spectrum of preparedness across financial services; many of them are simply not prepared in spite of the lead time they’ve been given.

While disallowing testimonials complies with the Marketing Rule, these firms will still need to ensure and demonstrate adherence to this policy of prohibition. From a marketing perspective, this is an undesirable approach. Testimonials are proof points for an advisor’s online brand and advisors who are unable to leverage these will face a competitive disadvantage. Marketing-forward firms are leveraging technology in order to enable their field teams to use testimonials while remaining in compliance.

What has been the most onerous aspect(s) of compliance with the new rule?

The rule is creating a tremendous amount of work for compliance teams. Not only is the regulatory change itself onerous — as policies and procedures need to be reviewed and updated — but the implications of the rule will increase volumes as well.

With a broader definition of “advertisement,” firms will be required to apply a higher standard of review to more communications. Additionally, permitting testimonials represents a massive increase in supervision requirements, especially for large firms with thousands of advisors. Manually addressing these factors for tens of thousands of advisors will be impossible; firms must leverage technology to scale and automate their supervision processes.

Our forthcoming annual compliance benchmark report validates this finding: We found that whereas last year, firms were expecting to do more with less, this year the tide has shifted, and firms are demanding more compliance resources in order to meet escalating regulatory demands.

What is Hearsay offering to help in ongoing compliance with the rule?

To scale the supervision of testimonials, Hearsay has developed functionality that will permit advisors to categorize testimonials based upon inherent risk — whether they are unsolicited from current clients without conflicts, solicited from non-clients with conflicts, or any other flavor of testimonial. Our expectation is that most firms will initially want to review all testimonials — which we support — but will eventually want to treat different testimonials differently.

We want to confidently empower advisors to take advantage of this critical marketing tool, while helping compliance teams supervise the management of testimonials on social media.

Does the SEC need to provide more guidance?

It’s too early to tell. I expect that we’ll receive more intel after the SEC has begun its enforcement of the rule in 2023.

During that process, the SEC will see how firms are approaching compliance and issue further guidance on missteps that they’re seeing and how to avoid them.

Melanie Waddell

@Think_MelanieW

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