Navigating the SEC Marketing Rule: Keyways to Compliance
Author: Compliance Solutions Strategies
The SEC’s new Marketing Rule that came into effect last year expanded the definition of advertising. It allows for marketing via new channels and enhances existing disclosure requirements. It will have significant compliance impacts on advertising and cash solicitations for investment advisers registered with the SEC.
Replacing both the old advertising and solicitation rules, the new SEC Marketing Rule is accompanied by a detailed, 430-page release and requires advisers to adopt the entire rule all at once by November 4, 2022. Yet, many firms are unprepared to meet the deadline which is only weeks away. During a recent webinar, we asked attendees to rate how prepared they are to meet the deadline. Only 18% said they are “ready to go”, while 64% are implementing a solution now and expect to be ready by the deadline. The remaining 18% were not sure they will make the deadline – or are hoping for an extension.
The SEC’s new Marketing Rule is not just a codification of existing rules; it introduces new performance language, processes and considerations that have never been considered before. Here are six keyways to simplify your firm’s compliance with the new Marketing Rule for a smooth transition.
- Implement advertisement changes
Do not wait until the November 4 deadline to make sure advertisements are updated to meet the new rules. Make changes to advertisements along with September 30th marketing decks. This way, you will be already complying with the rule while avoiding confusion about which deck version to use and when.
- Follow your policies and procedures
Your staff should be up to speed on the rules and how to implement them. Policies and procedures also make great training tools for new hires, or anyone transitioning into a new department. Have the appropriate resources and support in place, such as internal and external counsel and compliance consultants, to help wherever assistance is needed.
- Get specific with disclosures
In your pitch book, consider what references get placed in the body of the deck versus footnoted at the end to make sure disclosures are “clear and prominent” and that the information is relevant and understandable to the intended audience. Think about explicitly showing the reader what disclosure is for what content, and title and number them clearly.
- Become GIPS® (Global Investment Performance Standards) Standards compliant
The new Marketing Rule includes 26 references to the GIPS Standards and encourages firms to follow many of the same requirements. In short, GIPS compliance can get you the most bang for your compliance in two keyways.
First, completing the heavy lifting of composite creation makes complying with the marketing rule easier. Although the new Marketing Rule does not require composites, a composite will be needed to compare, justify and substantiate your use of a model account, or provide that composite or related performance. And second, most of your competitors likely are GIPS compliant and can check that box on RFPs. In fact, 72% of our recent webinar attendees said they were already GIPS compliant and 12% said they were “absolutely” taking extra steps to become compliant.
- Keep good records
As a best practice, firms should keep track of the following details and have an audit trail built around the entire process:
- Any participation in ratings or rankings to show your due diligence
- Standard content drafts and final approved versions
- Substantiated performance calculations and material facts
- Back-up support for claims made in advertising
- Your team’s experience and track record
- The status of individuals providing endorsements and testimonials, compensation (if any), and conflicts of interest
Also, make sure these records are stored centrally and easy to access when needed.
- Automate and streamline the process
Many advisers choose to do all their performance work in Excel, which can be rife with accuracy, efficiency, and audit problems. In our recent webinar, 59% of attendees said they are using a combination of in-house and external solutions, and 15% are using an external solution.
Having a system capable of managing composites can help you get into compliance with the rule faster, maintain that compliance going forward, and accommodate future changes. Look for a solution that:
- Incorporates net returns based on the actual fees, but also accommodates any model fee to different audiences.
- Calculates performance and statistics based on multiple fund/account level returns or different fee schedules for multiple time periods.
- Provides a reporting tool with the flexibility to add additional measures and statistics for additional time periods without intervention from the vendor.
- Has the ability to calculate numerous statistics, which may become a future requirement.
- Building a compliance foundation
While many of the new rule provisions are not completely new to the industry, many of them refine past definitions and rules, and center around requirements to avoid untrue, unsubstantiated, or misleading statements, and to have fair and balanced presentation material.
Although more clarification, staff interpretation and learnings will likely come to light in the next year or so, now is the time to get your compliance house in order. Make the best use of technology tools, counsel, and compliance experts to ensure you are ready to comply with the changes driven by the marketing rule – and any future ones down the road.
Disclaimer: The information contained in this communication is for informational purposes only. Confluence/StatPro is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.
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