Amid Confusion, A Blueprint For The SEC's New Marketing Rule
More than seven months after it took effect, the SEC's new trading rule continues to create hurdles for advisers.
The complexities of regulation that companies face for the first time on Nov. 4 were made clear by panelists at the INVEST financial planning conference in New York earlier this month and a recent "risk warning" from the Securities and Exchange Commission. Confirmed.
In general, the new marketing law allows the use of testimonials from existing customers and recommendations of third parties such as celebrities . introducing new standards for reporting past investment performance; This forces companies to monitor their ads for false or misleading information.
The complexity of the law prompted the Securities and Exchange Commission to issue an earlier risk warning to advisers in March, warning them of potential failures .
In the latest warning, the Wall Street watchdog urged firms to remember their obligation to verify all investment performance claims made in marketing materials. It reminds companies that they have an obligation to monitor statements made on their behalf and avoid misleading or false information.
Businesses must disclose payment arrangements with prospective referral customers or investors unless the referral earns less than $1,000 per year. And they should conduct background checks on foreign patrons and avoid associating with people with bad backgrounds.
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John Carr, an attorney with Portland-based Carr Butterfield and one of the panelists at the INVEST 2023 conference, said his advisers are partly concerned about the first major changes to the old law. The Marketing Act, formerly known as the Advertising Act, was passed in 1961.
"They haven't updated their marketing base in 60 years," Carr said. "Microfiche was very advanced then."
John Cataldo, president and chief legal officer of Integrated Partners Advisory Services and another speaker on the panel, said the SEC also requires companies to develop detailed written marketing procedures and ensure that those policies are communicated to employee advisors.
"Where the trade rule is very good is 150% because it's a fundamentally changed rule," Cataldo said. "When you talk about meeting with customers, that's an area they really like."
Those looking for a table of how the SEC applies the trading rule can refer to the regulator's final implementation of the Electronic Communications Rule. In September, the Securities and Exchange Commission (SEC) fined some of Wall Street's biggest names — a total of nearly $2 billion — for improperly recording advisors' clients' text messages and other app-based calling services. .
According to Carr and Cataldo, it is not enough for companies to have written rules for their employees. In addition, advisors must receive certification that they have been trained in the regulations and have completed the training. According to him, monitoring is very important.
The Securities and Exchange Commission (SEC) has approved this in its electronic communications regulation. As seen in previous enforcement cases, well-trained companies ran into problems after employees who should have known better continued to send messages to customers over an unauthorized and unmonitored messaging system.
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"They have sanctioned companies and companies and investigated companies even though they have policies mandating the use of certain forms of electronic communication internally and with customers," Cataldo said. "Employees had systems they could use. And they got a thank-you letter to their internal staff saying, 'I know your policies.'"
"And if you have (SEC) systems, even if you're licensed, you can show people what you're teaching, people are still doing it by accident and you don't notice." He forbade them to do so," said Cataldo. .
External compliance experts have also stepped in to help. Compliance Adviser ACA Group announced on Monday that it will launch a new managed performance service to help advisers working on behalf of clients comply with trading rules and report investment performance.
Among other things, the new rules allow advisers to disclose the "gross performance" of a particular investment, as long as they can disclose the "net performance," meaning how much money it made in total. It shows how much money is earned after fees and other expenses are deducted.
Julia Reyes, a partner in ACA's performance services group, said it's not always clear to company officials what fees are included in those calculations. ACA's Managed Performance Services help ensure nothing goes wrong.
The new rule seeks to prevent advisers from "date picking" to make certain investments appear to be performing better than they actually are. For this, companies must provide performance data for specific periods of 1-year, 5-year and 10-year periods.
"Proof of investment activity and the books and records to support your performance can be a barrier for companies," he said.
The first line of defense is documentation, Carr said at INVEST 2023. The SEC's latest risk warning calls for companies to disclose their trading policies and practices in a document called Form ADV that they file each year.
"Does your DSP document have a disclosure component or part of it? That's a big deal," Carr said. Then execute the contracts you entered.
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