The SEC's New Marketing Rule Explained
The trading rules of the US Securities and Exchange Commission were approved in December 2020 and will become effective on May 4, 2021. Since then, registered investment advisers have an 18-month grace period until November 4, 2022 to fully comply with the change. Rules. This article explains how and why it came into effect, what changes have been made to it, and the next steps RIA compliance teams need to take as the deadline approaches.
what's the time
The appeal of updating the existing 206(4)-1 notification rule is obvious. In the year from its inception in 1961, through the internet, personal computers and most technology, to business in 2022, the era has changed little.
Consequently, the doctrine bears no relation to the landscape it governs. This has some implications for US RIAs (or service providers), and the updated iteration reflects current practices. That is, the high consumption of digital media and the number of channels through which this happens.
Needed for?
Clearly, under the new Securities Act, the SEC will operate by repealing any arbitrary regulation enacted as a temporary measure under the original Securities Act: “This revised provision will replace an outdated and fragmented regime that advisers have relied on for decades ", he said. recognized by the supervisory authority. This is a big shift, which is why companies have had 18 months to join.
Despite this generous grace period, it's hard to predict grace when November 4th rolls around. Instead, enough time is allowed to generate the necessary excitement so that the apology will bring less joy to the manager. In recent years, the flow of remote work has made it difficult to reprogram processes and systems, this obstacle has been taken into account when regulations are approved.
The SEC has indicated that the pandemic-related grace period has expired , which may indicate how patient it is willing to comply. The regulator appears to be serious about enforcing the new trading rule: RIA launched an email campaign in May to remind them of the upcoming deadline and the steps needed to meet it. Shouting at their bravery or pleading ignorance seems like a foolish act.
Most RIAs seem to agree. The Investment Advisers Association recently conducted their annual survey of 425 investment advisory firms. For the second year in a row, compliance with marketing legislation remains a top priority for RIA's compliance team. 78% of respondents named advertising/marketing as the “best fitting topic of 2022”, up 20% from last year. The approaching date is no coincidence.
The same survey found that 96% of advisors expect to be in compliance by the end of November, and 11% have already done so. Only 4% said they were unsure of the timeline for compliance. This is an urgent matter and the news seems to have reached most RIAs.
But what does the new marketing law mean and what should RIAs do differently?
1. Rule to dominate everyone
The new rule retains its wording (to reduce the previous differences) by merging two others: the current Rule 206(4)-1 of the Termination Act and Rule 206(4)-3 of the Monetary Claims Act.
2. What is advertising?
To facilitate this consolidation, the SEC changed the definition of "advertising" to cover two separate items.
The announcement now includes all communications, direct or indirect, from the Investment Adviser:
- Provision of security services to existing or prospective customers; where is it
- Includes any recommendation or feedback for which the consultant provides monetary or non-monetary consideration.
The effect of the above modification is very large. While 'advertising' used to be mostly limited to print media (brochures, catalogues) or TV and radio communications, it now extends to electronic communications, i.e. a variety of digital platforms (websites, email, instant messaging platforms ). etc.) are now under control.
The second point concerns different forms of communication (recommendations and reviews) that have always been important in the advertising world but have taken a different form, especially on social media platforms. These are very important tools in a company's marketing arsenal, and with the rise of influencers in every conceivable industry, companies need to be aware of whether the influence of the individual/organization is paid for in any way. Advisors must have a written agreement with advertisers/influencers and ensure they comply with the Marketing Act. The burden is on the consultant; There is no dispute about liability.
3. Seven general prohibitions
The SEC has replaced the existing prohibitions in the alert rule with seven new general prohibitions.
Investment advisers may not advertise:
- contains misrepresentations and omissions;
- Contains unsubstantiated statements of material fact;
- contains false or misleading implications or assumptions;
- It does not provide a fair and balanced treatment of material risks or material limitations.
- does not provide specific investment advice in a fair and balanced manner;
- select performance results or otherwise display results fairly and disproportionately; where is it
- This is misleading from a material point of view.
The Principles place a greater burden of proof on advisors and require them to have evidence to support their claims. In short, Advisors must catalog "Notices" to ensure compliance with the above regulations. This also applies to any communications/documents confirming their understanding of the correctness of the content of the advertisement, and the same applies to reviews and recommendations.
Associate Folder Role
Although many different messages now fall within the definition of "advertising," the Securities and Exchange Commission made "appropriate amendments to the Books and Records Act." RIAs must store and archive all communications they serve, which now includes email, websites and social media profiles. and an ever-expanding list of platforms." Importantly, ads are now defined by the message they convey, rather than the channel they are delivered on, to ensure the SEC isn't constantly catching up while digital ones continue to multiply channels.
When we visit a website we only see the form at that time, so long-term compliance cannot be guaranteed. While other channels (social media, email, instant messaging) provide easy access to historical data, these posts/messages are not stored permanently - they can be deleted or edited. The most efficient way to keep metadata in a compatible and unmodified format is to archive it.
Check compliance
The modernization of archaic rules has brought digital platforms under the purview of the SEC, and compliance requirements are likely to increase significantly.
RIAs must now familiarize themselves with what an "advertisement" is, because under the new marketing law, everything must be registered and recorded. The additional workload may impact internal compliance processes, more compliance teams, improved company-wide training programs, or outsourcing to third parties. First off, it's important to ensure companies are protected before the November 4 deadline set by the SEC.
Harriet Christie is MirrorWeb's Chief Operating Officer.
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