Are you Ready for the New Marketing Rule?

Main Contributor: Elizabeth Cope, CPA, CSCP, CIPM, CEO & Lead Consultant

Quick Note: Before you read the title and think “this doesn’t apply,” stop and take the time to confirm. Some advisors may be surprised by the ways in which it does apply, or at the very least they may be validated, which is never a waste of time.

Background

The SEC adopted the New Marketing Rule (the “Rule”) to replace the current Advertising and Cash Solicitation Rules, originally adopted in 1961.  Effective November 4, 2022, the Cash Solicitation Rule (Rule 206(4)-3)) will no longer exist, the previous list of prohibited items will be gone and replaced with a set of principles-based prohibitions, and prescribed requirements for performance reporting, third-party ratings, testimonials and endorsements, and books and records.  With a new rule comes a whirlwind of confusion and overwhelm, so you want to allow your firm plenty of time to address and prepare. Within this article, we have summarized some tips and tricks and various issues and concerns we have discovered with our clients as they are preparing.  For a more detailed summary of the new requirements, visit our website for a copy of our eBook.

Where Should You Start?

Familiarize Yourself with the Requirements

Always start by understanding the requirements.  You can read the Rule’s Release which provides context around the requirements (pay attention to the hidden gems found in the footnotes), the actual Rule itself, blog posts, and articles created and distributed not only by our firm but several other consultants and lawyers in the industry (a simple google search will get you all kinds of information), or attend webinars and/or compliance conferences. 

Inventory Current Materials and Modalities

Before you even draft your policies, take an inventory of the materials and modalities your firm is currently using or wants to start implementing.  This can include but would not be limited to, items such as fact sheets, pitch decks, quarterly commentaries, your website, social media accounts, podcasts, and blog posts.  Use this information to determine what will be allowed/not allowed and what procedures you will need to address in your policies.

Amend Your Policies and Procedures

Update your policies to incorporate the requirements of the new rule and tailor those requirements based on the deliverables your firm provides and the types of modalities used.

Train Your Staff

Start training your staff on the requirements that apply to your firm. Document the topics covered and attendees to substantiate support of training if requested by the Staff during an examination.

Update Your Materials

Using the inventory created in Item 2, take the time to review all of your materials, including your website, podcast, etc. to update as required under the new Rule. Keep in mind that if you have materials on your website, such as older commentaries, fact sheets, blog posts, or podcasts those will also need to be updated to comply with the new requirements or they can be removed.

Stay Tuned and Adjust as Necessary

Unfortunately, you cannot escape the fact that with any rule there will always be multiple interpretations and that fact will be exaggerated when a new rule emerges that has yet to be enforced by the SEC. I have no doubt that there will be many instances where the staff disagrees with firms on their approach and presentation of their advertisements. However, if your policies and approach are followed by sound professional judgment, usually the worst case is a deficiency letter for correction. My understanding is that the SEC is going to let the new Rule ride out for the next year, at which point they will follow up with either a risk alert, guidance, or FAQ for any areas they feel are being misinterpreted or will require further guidance. Sign up for SEC alerts and frequently visit their FAQs for the new Rule.

Review and Update

Have a process in place to review the materials periodically and adjust your policies or disclosures as necessary. Conduct regular training to remind your staff of the requirements – we all need a little reminding now and again.

Technicalities and Scenarios to Consider

As we have been working with our clients to prepare their firms for the new Rule, we have discovered some common areas and technicalities that require further consideration and review. I thought it would be helpful to address some of those areas here, in case you haven’t already thought about them:

Oral Testimonials and Endorsements

A testimonial or endorsement is going to be considered an advertisement if there is compensation, or if it’s been adopted and entangled by your firm.  What I have discovered, is that many firms that receive a referral will provide the referee a small gift, take them out to lunch, or invite them to their golf outing.  The way the Rule reads these actions would be forms of non-cash compensation that now make these referrals “advertisements” and require the person making the referral to provide the referred party disclosures at the time they made the referral.  What can make this challenging is sometimes the party making the referral is a client of yours or is conducted with a casual conversation, where the likelihood of whipping out a disclosure document and providing it to the referred party is not realistic.  Your firm will have to decide how you want to approach this situation.  Some advisors have created policies that simply prohibit any form of cash or non-cash compensation directly connected to a referral.  Some firms are going to create a disclosure document to provide to the people who tend to regularly refer clients and then find out verbally from the referred client if they received the disclosures.  I don’t have a solid solution here as I am not sure how the SEC is going to interpret this one, but you should think through the scenarios that may impact your firm and have a discussion to find a viable solution that allows you to comply with the Rule.  Additionally, I further recommend a solid procedure for tracking gifts and entertainment that are not directly connected to a referral (i.e., providing an explanation with each in the record) so they don’t become construed as a compensated testimonial and endorsement. 

Determining What Is Actually Considered to Be a Testimonial or Endorsement

Again, whether something is considered a testimonial or endorsement requires you to a) re-visit the definition and b) determine whether the firm has compensated, adopted, or entangled.  One example where we feel it could be deemed an advertisement would be responding to a Yelp review with a “thank you;” we are not sure how the SEC will interpret this scenario, but one could assume that you have adopted that review by responding and therefore would need to make sure disclosures accompany the response.  There could be multiple scenarios.  I don’t want you spinning your wheels and heading down that nasty rabbit hole – but it is worth a tabletop discussion with the people involved with new clients to find out what other possible areas you might need to review and consider regarding testimonials and endorsements.

Disclosures When Presenting Performance

If you are marketing performance numbers, besides adopting the prescribed requirements, take the time to re-visit your disclosures. The SEC did not provide prescribed disclosures for performance. You also need to make sure you comply with the 7 general prohibitions. Some common updates we have seen advisors making are adding more detail around the methodology being used, what is actually included in the gross and net returns, and any additional information necessary to interpret the net returns, such as billing in advance or arrears, whether you are using actual or model fees, and the timing of fees and how that impacts the performance. 

Updating the ADV

The SEC just recently sent out a mass email to registered investment advisors reminding them that if the ADV part 2A references the old cash solicitation rule 206(4)-3, then an other-than-annual amendment must be made prior to the November 4th effective date.  When reviewing your ADV, also consider if you need to make updates specific to the process that has changed, such as the requirement for the solicitor to provide your firm’s ADV and obtain a signed acknowledgment form from the referred clients.

Conclusion

We hope your firm is moving right along, implementing the new Rule in time for the November 4th implementation date, but if you have been struggling, we hope this article provides inspiration around some of those more challenging aspects of the Rule. Once you get your policies updated to comply with the rule’s requirements, ensure your practices match the updates by discussing any complicated areas with the appropriate teams and training your staff. As always, we are happy to consult with you and brainstorm any sticking points you may have. Just remember that we are all in this boat together, learning from the collective and interpreting the Rule with the information we have available to us!