Still Not Ready for the SEC's New Marketing Rule? Here's What to Do

Among other changes, the marketing rule “broadly defines ‘advertisement’ to generally include communications with investors and potential investors on securities advisory services, including testimonials, endorsements, and third-party ratings, but in large part excludes tailored one-on-one communications with investors,” BakerHostetler said.

The SEC’s Division of Exams said that it will “actively examine compliance” with the new rule through “a number of specific national initiatives,” BakerHosteler said, noting a particular focus on whether advisors have:

implemented appropriate written policies and procedures;
a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements;
complied with the rule’s performance advertising prohibitions; and
maintained the requisite books and records.

The rule further defines “advertisement” as any direct or indirect communication made by an advisor that offers securities advisory services to prospective clients or new securities advisory services to existing clients, BakerHostetler explained.

This “sweeping definition,” BakerHostetler said, includes communications regardless of how they are disseminated — whether via emails, text messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, social media, or otherwise via digital or hard-copy means, or by consultants, other fund advisors, promoters, or other third parties.

“Subject to certain restrictions, this definition also includes compensated endorsements, testimonials, and other statements made by third parties as well as communications by advisers to investors in private funds,” the BakerHostetler attorneys write.

Advisors, the BakerHostelter attorney continued, “should also be aware that they may be held liable under the Marketing Rule for communications by third parties — including hyperlinks to independent webpages and public commentary on an adviser’s own website or social media page — if such communications constitute ‘advertisements.’”

New Rule a ‘Sea Change’

Compliance with the marketing rule “has not been an easy task,” Issa Hanna, partner at Eversheds, said in an email.  “Even if you put the more difficult, gray area issues aside, the more straightforward implementation tasks have still been a significant lift because of how much of a sea change the rule is for a lot of firms.”

For those running behind, Hanna recommended that they put “a laser focus on the fundamentals so that you can put the best possible foot forward if you are examined out of the gate.”

Practically speaking, Hanna continued, this means advisors should be “making sure your policies and procedures are up to date (and that they are appropriately tailored to the business of your firm), rolling out training and policy communications to the appropriate parties, and ensuring your advertisements comply with the rule’s big-ticket items, like the performance advertising requirements.”

Firms should also “pay attention to the items specifically called out” in the Division of Exams’ recent Risk Alert, Hanna added. The SEC staff “seems to be signaling that it will be vigorously examining for compliance with certain elements of the rule, including the rule’s requirement to have substantiation for statements of material fact, the rule’s requirements relating to performance advertising, and the associated amendments to the Advisers Act books and records rule.”

Expect Exams to Start

With compliance now mandatory, Sanjay Lamba, associate general counsel for the Investment Adviser Association, warned that SEC examiners will “start conducting” exams that focus on areas outlined in the Sept. 19 Risk Alert.

These exams will include making sure advisors “have implemented written policies and procedures to address the requirements of the Marketing Rule, particularly with respect to being able to substantiate material statements of fact in their advertising materials,” Lamba said.

Advisors “are also subject to new recordkeeping requirements relating to the Marketing Rule,” and “they should continue to assess their procedures and controls to ensure that they are working as intended and to address any further guidance the SEC staff may issue in the future.”