SEC Sends Email Warning on Marketing Rule Compliance

The Securities and Exchange Commission has launched an email campaign reminding registered investment advisors about the upcoming Nov. 4 compliance date for the amended marketing rule — and steps they’ll need to take to comply.

FrontLine Compliance warned Tuesday that “this first-of-its-kind mass email campaign by the SEC signifies that the regulator has served notice that it will aggressively pursue actions against firms that fail to comply with the new rule.”

The compliance firm said to “expect SEC targeted sweeps and exams to be a priority” once the compliance date hits.

While the SEC email — sent to all registered investment advisors on Monday — lays out helpful tips that advisors should definitely heed, at least one industry official says further SEC guidance is needed to help advisors navigate trouble spots that have cropped up.

As of Nov. 4, the SEC email states, RIAs “may no longer choose to comply with the previous advertising rule and cash payments for client solicitations rule or rely on the staff’s positions under those rules. Any advertisements disseminated on or after the compliance date are subject to the Marketing Rule.”

Also, as of Nov. 4, Advisers Act Rule 206(4)-7, the Compliance Rule, “will require SEC-registered investment advisers’ policies and procedures to be updated and revised, as appropriate, to ensure they are reasonably designed to prevent violations of the Marketing Rule.”

Further, the email continues, Advisers Act Rule 204-2, the Books and Records Rule, as amended, will require investment advisors “to make and keep certain records, such as records of all advertisements they disseminate, including certain internal working papers, performance related information, and documentation for oral advertisements, testimonials, and endorsements.”

The SEC directs advisors to review their Form ADV Part 2A brochure Item 14 (client referrals and other compensation) with respect to Rule 206(4)-3 (Cash Payments for Client Solicitations) being replaced by the Marketing Rule.

The securities regulator also recommends advisors review the following information on the SEC’s website:

• Adopting Rule Release No. IA-5653
• Marketing Compliance Frequently Asked Questions
• Rule 206(4)-1 

Industry Experts Weigh In

Since the rule went into effect last May, compliance experts have been cautioning advisors to tread carefully when using testimonials and endorsements before Nov. 4.

The law firm Eversheds Sutherland released a checklist in late February for advisors to use as they prep for the Nov. 4 compliance date.

Amy Lynch, founder and president of FrontLine Compliance, said in a video message Tuesday that the new rule will require “significant changes.”

“Firms should be taking action now to ensure a smooth transition to the new changes,” Lynch said.

Lynch highlighted key changes to the rule:

• The definition of advertisement now includes indirect communications, such as those produced or distributed by third parties;
• The absolute prohibition on testimonials and endorsements has been rescinded;
• All previous SEC no-action letters related to marketing have been rescinded; and
• The revised rule makes it clear that private fund managers are subject to the rule with specific applications and exemptions.

Lynch told firms to “conduct a targeted gap analysis to determine where to address updates and revisions based on the new rule.”

In a separate email message, Lynch told me that “firms are just now realizing that it’s time to take action. We are currently updating our clients’ marketing policies for the new rule. Most importantly, marketing personnel need training on the new do’s and don’ts. November will be here sooner than firms think so they need to start now. Especially, since more than one training session will likely be needed.”

Training should also be provided to “key employees,” Lynch advised on the video, and firms should utilize a “reputable outside party” with expertise in the Investment Advisers Act to assist and support the firm through the transition.

‘Stumbling Blocks’

Karen Barr, president and CEO of the Investment Adviser Association in Washington, added in another email that IAA “has been working with our members in navigating this major change to the marketing rule, including providing resources, education, regular member calls and a dedicated implementation group.”

Consistent with the SEC’s email campaign, Barr added, “we have been reminding members about the compliance date for quite a while, as the time and effort needed to comply with the new rule is significant.”

Sanjay Lamba, IAA’s associate general counsel, added that while advisors are “knee deep and hard at work” in trying to implement the new rule, “unfortunately, they are hitting stumbling blocks where the rule requirements appear to run into conflict with practicality. Further guidance and clarifications from the SEC would be helpful to address these situations. I suspect many firms will wait until closer to the compliance date in anticipation of this guidance.”

For instance, Lamba said, “the rule requires advisors to present performance net of fees alongside any presentation of gross performance. However, in some instances, a broad interpretation of this net of fees requirement may result in performance numbers that have no practicable meaning and in fact could be confusing to investors, contrary to the SEC’s intent.”

Max Schatzow, a partner with RIA Lawyers, told me in an email that the SEC email contains “helpful reminders from the [SEC] staff about upcoming rule changes to assist with compliance.”

Advisors, Schatzow said, “should absolutely take this reminder seriously. If they haven’t yet, they should be reviewing all current marketing material and the firm’s policies and procedures and bring it all into compliance with the new rule.”