New times, new rules.
The U.S. Securities and Exchange Commission’s long-awaited Marketing Rule is here and the final compliance date coming up in November 2022. The Marketing Rule is set to make a significant impact to the way that SEC-registered investment advisers market their services and investment advisers should not underestimate the changes that will be required to achieve compliance with the new rule. Also, an “all-or-nothing” implementation requirement means that advisers cannot take advantage of some of the freedoms without embracing the Marketing Rule’s requirements in their entirety.
The new rule marks the first substantiative amendments to the SEC’s Advertising and Cash Solicitation Rules since 1961 and 1979, respectively. The old rules were adopted under the Advisers Act in a time and market that were completely different from today. Social media did not exist; the internet itself was more than 20 years away. When the Advertising Rule was released in 1961, marketing meant TV ads, newspaper articles, billboards and little else. These rules were not written with digital marketing in mind. As a result, compliance has been difficult to manage, to say the least. Policies have been pieced together from the original rules and almost 100 changes to interpretation through cases, no-action letters and one-off guidance statements issued by the SEC.
The new Marketing Rule is written with a principle-based approach to compliance, replacing the current Advertising Rule’s “broadly drawn limitations”, thus marking a shift in rulemaking approach in this area. Contrary to popular belief, while the Marketing Rule does seek to create a unitary framework for adviser compliance, it is more than a mere codification of existing rules and guidance. In addition to providing clear definitions for the terms “advertisement”, “testimonials”, “endorsements” and “third-party ratings”, the Marketing Rule sets forth a prescriptive framework for the presentation of performance.
Perhaps most notably, the Marketing Rule reverses the previous ban on the use of testimonials in adviser advertising. While many are particularly eager to jump in, advisers first need to fully understand the required disclosures, records and the complex concepts regarding adoption and entanglement with third-party content. Unsurprisingly, there is less enthusiasm regarding the requirements for performance presentations. The SEC is still skeptical regarding the presentation of hypothetical and predecessor performance. As a result, there are higher hurdles to present this type of performance information.
Making the changes to adhere to the new regime is not going to be a simple undertaking therefore it is crucial that firms understand that preparations for the Marketing Rule cannot happen overnight. Investment advisers will need to create or update their policies and procedures to address how they will comply with any relevant portions of the final Marketing Rule (including the corresponding amendments to the Books and Records Rule and to Form ADV). In addition, advisers will need to inventory all their marketing materials to assess any risks associated with current marketing practices and their current marketing materials. This exercise will include identifying all marketing materials that qualify as an advertisement and applying the necessary changes to satisfy the Marketing Rule. This Guide, produced with the assistance of the ACA Group and Dechert, is designed to provide a concise overview of the requirements under the new Marketing Rule and serve as a guide for advisers as they navigate the new regime.
Shivani Choudhary Karen Anderberg
Christi James Laurel Neale
ACA Group Dechert LLP
Managing Director, ACA Group
Principal Consultant, ACA Group
Financial Services Partner, Dechert LLP
Associate, Dechert LLP
AIMA's Implementation Guide
Adoption of this comprehensive new Marketing Rule is not a simple undertaking, nor can it occur quickly. Investment advisers must first understand how the specifics of the Rule may apply to their business practices, weigh approaches to the more principle-based elements, and determine how it all will shape their conduct and products going forward.
This publication, produced with the assistance of the ACA Group and Dechert, is designed to provide AIMA members with a concise overview of the requirements under the new Marketing Rule. We trust that it will serve as a practical guide for investment advisers as they navigate the new regime.
Notable aspects of the Marketing Rule include:
- A concise definition of what is, and what is not, an “advertisement” for the purposes of treatment under the Marketing Rule (see Section 1 of the Guide).
- A more principles-based approach to aspects of advertisements, including discussions of investment performance (see Section 2 of the Guide) and specific investments (see Section 5 of the Guide), among other topics.
- A clear framework for the use of testimonials, endorsements and third-party ratings, and useful examples to help advisers determine what statements are covered by the rule (see Section 3 of the Guide).
- Provisions related to solicitation activity that apply to cash and non-cash compensation, requiring both disclosure and adviser oversight of these activities (see Section 4 of the Guide).
- Clarity and guidance for use of social media in a manner that accommodates many advisers’ practices and intentions (see Section 6 of the Guide).
- Specific guidance for the use of hypothetical performance, related performance and extracted performance (see Section 7 of the Guide). In many respects, the guidance provides more flexibility to advisers when presenting performance, though there are certain enhanced or more prescriptive requirements around performance presentation as well.
There remain a number of areas in the Marketing Rule that require further SEC clarification, and certain aspects of the Marketing Rule may spur requests for no-action relief absent further guidance. However, on the whole, the Marketing Rule should be viewed by most advisers as a welcome replacement to the former construct governing adviser marketing and advertising activity.
Watch the webinar replay
Click below to watch the replay of The SEC’s modernized marketing rule: implementation and challenges of the revised requirements, a discussion of the practical aspects of implementing the new rule and the challenges arising from the new requirements as well as AIMA’s Implementation Guide, sponsored by ACA Group and Dechert LLP.