How to stay compliant and avoid big fines

By Harriet Christie, director of operations at MirrorWeb,

The U.S. Securities and Exchange Commission (SEC) marketing rule was approved in December 2020 and went into effect on May 4, 2021. From that point on, registered investment advisers (RIAs) benefited from a transition period of 18 months – until November 4, 2022. — to fully comply with its updated regulations. This article explains how and why it came into practice, the changes that were made, and the subsequent steps that should be taken by RIA compliance teams.

Why now?

The appeal behind the modernization of the existing advertising rule 206(4)-1 is clear. It has remained largely unchanged since its adoption in 1961, an era before the Internet, personal computers and much of the technology available to businesses in 2022.

Consequently, the doctrine is disconnected from the landscape it governs. This has a specific impact on RIAs based (or providing services) in the United States, and the updated iteration reflects modern habits; namely the massive consumption of digital media and the abundance of channels through which this happens.

Is it mandatory?

Under the new marketing rule, the SEC will operate on a clean slate basis, retracting any arbitrary guidelines that have been issued as an interim measure since the original advertising rule. The regulator acknowledges that “this amended rule replaces an outdated and disparate regime that advisers have relied on for decades.” It’s a major overhaul, which is why companies had 18 months to join.

Despite this generous grace period, it would be remiss to anticipate clemency upon the arrival of November 4. On the contrary, sufficient time has been given to ensure that the necessary upheaval takes place, and therefore apologies are less likely to appease the regulator. Although redesigning processes and systems has been made more difficult by the influx of remote work in recent years, this was taken into consideration when ratifying the rule.

The SEC has demonstrated that any leniency period imposed by the pandemic is now over, potentially indicating how patiently it is willing to be on compliance. The regulator appears serious about enforcing the new marketing rule – in May it launched an email campaign to remind RIAs of the upcoming deadline, as well as the steps they will need to take to get there. conform. Calling their bluff or pleading their ignorance seems like a foolish course of action.

Most RIAs seem to agree. The Investment Adviser Association recently conducted its annual survey of compliance staff at 425 investment advisory firms, sharing its findings in July. For the second year in a row, the implementation of the Marketing Rule remains the number one concern of RIA compliance officers. 78% of respondents cited advertising/marketing as the “hottest compliance topic for 2022”, a 20% increase from the previous year. The impending deadline is no coincidence.

The same survey said 96% of advisers expected to comply with the marketing rule on or before the November deadline, with 11% already doing so. Only 4% said they were unsure of their compliance timeline. This is a matter of urgency, and the message seems to have landed among the vast majority of AIRs.

But what does the new marketing rule mean and what should RIAs do differently? We will summarize the key points below.

  1. One rule to rule them all

The new rule delivers on its word (to simplify the current patchwork that preceded it) by combining two others: the existing advertising rule, Rule 206(4)-1, and the solicitation of funds rule, Rule 206(4) ) -3.

  1. So what is an advertisement?

In order to streamline this consolidation, the SEC redefined “advertising” to cover two clear points.

An advertisement now includes any direct or indirect communication made by an investment adviser that:

  • Provides securities services to existing or potential clients
  • Includes any endorsements or testimonials for which an advisor provides cash or non-cash compensation

The impact of the above change is huge. Whereas previously “advertising” was largely limited to print media (brochures, catalogues) or television and radio communications, it now also applies to electronic communications, which means that a significant number of digital platforms (websites, email, instant messaging platforms) are now under regulatory control.

The second point encompasses a variety of communications (recommendations and testimonials) that have always been essential in the world of advertising, but have now evolved into a different form, on social media platforms in particular. These are very important weapons in a company’s marketing arsenal, and with the growing legion of agents wielding influence in every conceivable industry, companies will now need to clearly disclose whether individual/organizational display has been paid any way. Advisors must also have a written agreement with the promoters/influencers and must ensure that they comply with the marketing rule. The responsibility rests with the advisor; there is no debate about responsibility.

  1. Seven general prohibitions

The SEC replaced the existing prohibitions in the Advertising Rule with seven new general prohibitions.

Investment advisers may not serve any advertising that:

  1. Includes false statements and omissions
  2. Includes material statements not based on fact
  3. Includes false or misleading implications or inferences
  4. Does not provide a fair and balanced treatment of material risks or material limitations
  5. Does not present specific investment advice in a fair and balanced manner
  6. Selects performance results or otherwise presents performance in a way that is not fair and balanced
  7. Is materially deceptive

The principles impose a higher burden of proof on advisers, requiring them to retain evidence to support their claims. In a nutshell, advisors will be required to catalog “ads” to prove their adherence to the above stipulations. This also applies to any communication/documentation that informed their understanding of the truthfulness of the content of the advertisement, and the same applies to testimonials and endorsements.

The role of communication archiving

As more varied communications now fall under the definition of “advertisement,” the SEC has issued “related amendments to… the Books and Records Rule.” RIAs must archive and maintain records of all advertisements they have served, which now includes emails, websites, social media profiles and an ever-growing list of platforms. Ads are defined by the message they contain as opposed to the channel through which they are delivered, ensuring that the SEC will not be constantly playing legislative catch-up as digital channels continue to proliferate.

When we log into a website, we only see its form at that moment, and therefore it is impossible to prove compliance over a sustained period of time. While other channels (social media, email, instant messaging) provide easier access to historical data, these messages/posts are not stored immutably – they can be deleted or edited retrospectively. Archiving is the most efficient way to preserve your metadata in a compliant and unalterable format.

Ensure compliance

The modernization of archaic regulations has seen digital platforms come under the jurisdiction of the SEC, and compliance requirements are about to increase dramatically.

RIAs need to familiarize themselves with what now constitutes “advertising” because under the new marketing rule everything will have to be captured and recorded. The additional workload will have implications for internal compliance processes, whether it’s strengthening compliance teams, improving company-wide training programs or outsourcing to third-party providers. Above all, it is imperative that companies ensure they are protected before the November 4 deadline set by the SEC.

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