SEC Marketing Rule To Be Enforced Next Week
The deadline for complying with the SEC's new marketing rules is approaching, and because of the way the SEC is enacting them, the adoption of the new definition of advertising and compliance with other new rules is urgent. .
The compliance date for the SEC's new marketing rules is next Friday, November 4. The new rules are intended to prevent investment advisors, including private fund advisors, from misleading clients by broadening the definition of advertising and increasing disclosure requirements for advisors.
These rules were originally enacted in December 2020 under the Investment Advisers Act of 1940. The rules came into effect in May 2021, but advisors have the option to follow the new rules or stick to the old ones. The new rules became mandatory on November 4, and according to the risk alert , regulators intend to start verifying compliance from that date.
The rules require that any listing containing the current gross profit on an asset must also provide a net return on the same asset, taking into account miscellaneous and other costs. Alternatively, a consultant can only deliver net results or no ads, according to Seward and Kissel LLP partner Dan Bressler.
The definition of advertising has also been expanded to include any communication to more than one person offering or describing consulting services. If a hypothetical return on a security or investment is included, it is considered an advertisement if it is given to only one person.
"significantly out of place"
The American Investment Board said in a June 2020 comment letter to the SEC that the regulation "needs not be prescriptive." Board comment letters are particularly relevant to discussions with clients, particularly those conducted by advisory employees, as they may require attorney permission before responding to client inquiries. They may have to rely on pre-agreed "stock" or marketing talking points, even when they don't fit the situation.
However, according to Bressler, "immediate impromptu verbal communication is excluded".
Alex Egan, CPA and practice director of risk advisory services at consultancy Kaufman Rossi, agrees, saying that direct or indirect verbal communication doesn't count towards marketing rules. However, if a consultant uses prepared talking points or presentations, that type of communication is likely to come under the new rules. Most one-on-one conversations with clients won't be covered by the rules unless they relate to hypothetical performance, according to Egan.
When the proposal was made, AIC raised concerns about its application to advertisements that included third-party content. The AIC argued that the rule should not apply when an advisor has no editorial control over the content and is only making recommendations. Consultants should also be allowed to make simple edits to third-party marketing content within clear guidelines without being responsible for the underlying content, they said.
Egan said that if an advisor submits or shares marketing material created by a third party in a way that expresses approval or endorsement of the material, the advisor is responsible for the material under the rules as if he posted it himself. Assistance in the production of material published by third parties also makes consultants responsible for content under the Rules.
Come on, quickly
Bressler says the rule is "a lot of work for advisors." Many have to review documents and even review some agreements. However, given the amount of time the SEC has given counsel to comply, the SEC is unlikely to sympathize with their application, Bressler said.
Egan noted that this regulation could be a "bigger boost than they expected," especially for consultants who do a lot of marketing. He added that "many advisors in the regulatory space take a wait-and-see approach" to find best practices and study regulatory documents before committing to an action plan. The SEC also often provides ongoing advice and answers to common questions during transitions, so the burden of compliance should not be seen as an ongoing hold off on advisors.
The Alternative Investment Management Association, in its preamble to its guide to implementing its marketing rules for private fund advisors, warned that the rules are “expected to have a significant impact on how SEC-registered investment advisors do not, they have to sell their services and investment advisors at lower prices. changes needed to comply with the new rules.
Forewords Shivani Choudhary and Karen Anderberg of ACA Group and Christy James and Laurel Neale of Dechert LLP also state that "change to comply with the new regime will not be an easy task, so it is important for companies to understand that preparation. Marketing rules cannot be implemented overnight. .
Among other changes, the new rules allow paid testimonial ads with a set of restrictions and disclosure requirements.
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