The SEC Marketing Rule Just Kicked In. Are Financial Advisors Ready?
New business rules from the Securities and Exchange Commission create promising opportunities for continued practice, but also significant compliance challenges that are of concern to the industry.
"Advisers are overwhelmed by the complexity of the regulations," said Michael Kim, president of consulting and technology provider Assetmark. They know they need to act, but many don't know where to start, which can cause quite a bit of stress.
Survey data confirms this. In June, the Investment Advisers Association released a survey for the second consecutive year showing that the SEC's business rules are the top concern for advisers. 78% of respondents said advertising and marketing is the hottest compliance topic in their industry, surpassing other important topics such as cybersecurity, climate change and ESG investing.
"The reality is that advisors don't even know what to focus their attention on because the regulatory changes are so sweeping," says Kim. "The expansion of the meaning of advertising has created a lot of uncertainty, especially since it now also includes digital communication and social media to a certain extent."
One of the fundamental changes of the new law includes guidelines for the use of customer testimonials and recommendations and third-party ratings for advertising by advisors. The SEC sets guidelines that advisors must follow when using sponsorships and other marketing strategies featured on social media, the company's website, or in printed brochures. Consultants may enter select performance data as long as it is presented in a manner that provides accurate and meaningful context.
Kim and others say some of the new law's changes, like licensing and accreditation requirements, are long overdue and require a major overhaul of the agency's compliance protocols.
But the SEC had this in mind when setting the compliance date almost two years after the final rule was passed. An industry of compliance advisors has now sprung up to offer advice on how to respond to the rule, and the SEC itself has identified some potential challenges by ordering a series of targeted tests to examine how companies are implementing the rule.
Prime Capital Investment Advisors , a Barron's-rated RIA headquartered in Overland Park, Kansas, used the process prior to the rule's implementation date to update its policies and procedures and leverage advisor training courses. The Company's Chief Risk and Compliance Officer.
Tera McBride, Prime Capital's chief marketing officer, said the company plans to use third-party reviews and customer testimonials, which she sees as a "great extension" of casual conversations between customers and their friends or colleagues. Consultants are always an important part of how they build their practice.
"This business has grown through referrals," says McBride. "We plan to explore all avenues to add endorsements and sponsorships to our marketing mix."
Not all companies are so eager to take advantage of the new regulations. Megan Carpenter, CEO of communications firm FiComm Partners, which has published a marketing compliance guide, outlines a landscape where some tech-savvy companies may use regulatory opportunities to boost their online presence, while others will be more cautious.
"I think most traditional consultants sit back and don't immediately incorporate third-party testimonials, endorsements, or reviews into the marketing mix," says Carpenter.
"I think the wait-and-see approach is rooted in a lack of understanding of the power of consumer credentials in today's purchasing decisions," he says. "I've also heard quite a bit of complacency in the negative reviews, showing a general lack of understanding of the importance of, and ownership of, your digital presence."
Robert Sofia, chief executive of marketing consultancy Snappy Kraken, says most companies are overlooking the new law's growth potential. no way
"Multiple studies have shown that using social proof like this can significantly increase click, page conversion, and response rates," he said. “In other words, if consultants don't already have a strategy for collecting them and incorporating them into their websites, landing pages, and marketing collateral, they're already falling behind.
However, he would be surprised if "even 15 percent of consultants" would make use of the rule by the end of next year.
One of the advisors planning to introduce new exemptions under the Marketing Act is JL Smith Group, an Ohio-based independent consulting practice affiliated with Prosperity Capital Advisors RIA.
Matt Seitz, director of marketing at JL Smith, outlines the process of working with the firm's Chief Compliance Officer to determine which elements of the law to focus on, updating the firm's compliance policies, and then counseling in relation to to train these changes. That training comes in a variety of formats, Seitz said, including the company's weekly mentoring webinars and one-on-one sessions. The company has added a marketing law module to its annual compliance training course.
"We plan to include testimonials and endorsements in our marketing campaigns to demonstrate our value and reinforce our brand," says Seitz. "For me, this is an important part of the new law because it allows us to help our customers and partners tell our story."
Similarly, third-party rankings demonstrate JL Smith's brand building and lead generation efforts and can also play a role in attracting new talent to the company.
"I also find third-party qualifications useful for recruiting new consultants and staff to our team," he says. "People want to know they're joining a strong company with loyal customers."
Compliance experts stress that any company wishing to apply this rule should provide ongoing training for advisors and keep things relatively simple.
"A firm's compliance program is only as effective as the consultant's ability to meet requirements, and if it is too complex or disjointed, the firm sets the consultant on failure," said Alexandria McCarthy, Skience's chief marketing officer Wealth Management. consulting firms and technology providers.
Most of the provisions of the Marketing Act are fairly straightforward. Consultants are prohibited from making false statements or providing clients with any material that may create a "false or misleading implication".
When providing information about the performance of investment strategies, the SEC requires advisors to contextualize the information by emphasizing that net performance is integrated into gross performance. The SEC also recommends that consultants set a specific time frame for reporting performance results.
Seitz recommends including "equally familiar" one-, three-, five-, and ten-year returns in marketing collateral. "The most important thing to remember here is that consultants cannot artificially select data to display results," he says.
How the SEC will conduct investigations and anticipate enforcement actions against companies under its trading rules is an open question. The SEC has not responded to a request for comment on this story, although it has informed the industry that challenges to the rule are pending.
Mark Mattson, CEO of Mattson Money, which endorses the new law (and has recorded more than 20 hours of video customer testimonials), described the key initiatives the company took before the law went into effect. its policies and procedures and regulatory mechanisms.
"Not only do you have to rewrite the procedures, you also have to change the policy review and monitoring process because the SEC will be reviewing compliance," says Matson. "You must ensure that you make changes to meet these guidelines."
When the SEC conducts compliance audits of companies, many assessors expect those audits to have an educational component, as auditors look for companies that are making good faith efforts and providing feedback on their work. better than
Snappy Kraken's Sophia advises companies looking to use marketing code to review their compliance logs. When the SEC issued a regulatory risk warning in September, the industry interpreted compliance in this area as critical.
"Watch out," says Sofia, "because it's us." As they say, "With enforcement action increasing each year and advisors adding credentials, endorsements and qualifications to their markets easily identifiable, advisors who don't get it right run the risk of unwanted SEC action."
Write to advisor.editors@barrons.com
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