“A Huge Undertaking”
The New Marketing Rule | Seven Implementation Challenges
March 23, 2021
“This is going to be a huge undertaking,” said Pamela Pendrell of GlobeFlex Capital about her firm’s implementation of the SEC’s new marketing rule. “I’m expecting that this is going to take a year.”
Pendrell was speaking at the 2021 IAA Investment Adviser Compliance Conference panel discussion The New Marketing Rule for Advisers. The session, which was moderated by the IAA’s Sanjay Lamba, also included speakers Melissa Harke of the SEC’s Division of Investment Management and Michael McGrath of K&L Gates.
At the opening of the session, Lamba discussed the advantages of the new rule. “The SEC struck just the right balance between understanding the need for firms to market their services and investor protection concerns,” he noted. At the same time, the principles-based approach of the rule means that there are no longer any per se prohibitions on using past specific recommendations, testimonials or third-party ratings in marketing material.
In addition, he explained how the new rule eliminated one of the “pain points” of the previous regulatory regime, namely the “patchwork” of the regulation. The new marketing rule combines the existing advertising rule, the current cash solicitation rule and the guidance included in a myriad of no-action letters. (Harke noted that she expects that the SEC will withdraw most of these letters soon.)
However, for most advisers, the new rule will require significant changes to marketing materials and the policies and procedures that govern their production. Advisers will also need to invest in training team members on those revised policies and procedures.
The panelists highlighted seven areas that are changing under the new rule that compliance officers will want to look at:
- Templates. Under the new rule, templates are advertisements, subject to all the disclosure and other requirements that apply to advertisements. Therefore, materials that include templates – even if they’re otherwise outside the definition of “advertisement” – might need to be treated as advertisements.
For example, one-on-one presentations to an institutional client would generally not be an advertisement. However, if those presentation materials used elements from a master presentation that could be considered a template, the presentation might be an advertisement. Similarly, an outreach email sent by a sales rep to a single prospect might be an advertisement if it includes standardized language about the firm.
- Fair and balanced. The new rule requires that advisers provide “fair and balanced” disclosure of material risks and limitations whenever there’s a discussion of potential benefits. “But what falls into the camp of a ‘discussion of potential benefits’?” asked Pendrell, “And is the pitch book as a whole considered the ‘discussion of benefit,’ or does an adviser need to go through each section and determine if there are individual ‘discussions of benefit’?”
- Performance. Under the new rule, all advertisements with performance information must include returns for 1, 5 and 10 years (though advisers have the option of including performance results for other time periods). If gross performance is presented, gross and net returns must be given equal prominence.
Firms that are using representative accounts rather than composites will need to make an analysis of materiality to demonstrate that they are not cherry-picking account performance.
- Hypotheticals. The new rule includes an expansive definition of “hypothetical performance statements” and requires among other things that they be accompanied by related disclosures. A statement like “we would expect to outperform by 300 basis points over a full market cycle” is now a hypothetical, noted Pendrell.
- Testimonials and endorsements. While testimonials and endorsements will no longer be entirely prohibited, as they were under the current rule, the specific conditions governing their use vary based on particular facts and circumstances. For example, additional requirements would apply to compensated testimonials similar in scope to traditional solicitations under the current cash solicitation rule. The panelists provided a summary chart clearly comparing the conditions that apply to the particular uses of testimonials and endorsements under the new rule.
- Employee social media. In adopting the new rule, the SEC suggested that advisers consider adopting a policy designed to prevent firm employees from using personal social media accounts to market the firm’s advisory services. The SEC also suggested that advisers consider adopting policies and procedures involving oversight, training, and periodic review of employee accounts that are publicly available. However, explained McGrath, an adviser that implements effective policies and procedures and trains employees around the appropriate use of personal social media accounts will not likely be held accountable if an employee does not comply with the “no promotion” standard.
- Intended audience. Much of the new rule is “contextual and based on the nature of the audience,” noted Harke. Therefore, advisers should be sure that they can demonstrate that a specific communication is appropriate for the intended audience.
“You need to have an answer for the Division of Examinations examiner,” said McGrath. “If you have a manager with both institutional and individual clients, that manager might want to take extra steps to document the difference.”
In terms of the implementation timeline, the compliance date for the new rule is November 4, 2022. Firms can comply early any time after the May 4 effective date, though Harke cautioned that they can’t “pick and choose” which sections of the rule to comply with. “Once you flip the switch, you’re flipping the switch entirely,” she added.
Even though advisers have 18 months to get ready for compliance, Pendrell explained that she is getting started now. Her first step will be to read and digest the rule’s adopting release which, she notes, contains many insightful examples. She then plans to inventory her firm’s existing materials. Once she has this background, she plans to make a presentation to senior management with next steps.
Compliance teams need to be prepared, stressed McGrath. “Under this rule, compliance officers and in-house counsel will be called upon to make more judgement calls,” he explained. Harke echoed this thinking, noting that, because the rule is principles-based, it provides “more flexibility, but less certainty.”
TAGS: Compliance Conference, Takeaways, Marketing Rule