For decades, investment advisers relied on an “outdated and patchwork regime” of rules, according to the Securities and Exchange Commission (SEC), governing advertisements, endorsements, solicitations, and other methods to help drum up new business and promote new investment opportunities.

The agency’s new marketing rule, promulgated and passed when Jay Clayton was chair, allows certain types of marketing, advertising, endorsements, and testimonials that were previously either prohibited by the SEC or so difficult to comply with that they were effectively banned.

“The rule was really antiquated and didn’t reflect the reality of technology and social media,” said Carlo di Florio, global chief services officer with ACA Group and a former SEC and Financial Industry Regulatory Authority regulator. “There was this labyrinthian scheme of no-action letters for people to try to follow.

“The new marketing rule pulls everything into one place, better reflects the reality of today, and can still apply as technology evolves. That said, there are a number of questions that continue to arise around the interpretation of the new rule as firms work to implement it, and I would imagine the SEC would want to continue addressing these through FAQs and other guidance as we move toward the compliance date.”

“There has been a lot of buzz (in compliance circles) about the rule, particularly about testimonials. Advisers are excited and encouraged. The previous rule was clunky. Advisers felt it put them at a disadvantage, compared to other industries.”

Andrea McGrew, Chief Compliance Officer, USA Financial

Navigating the new rule is top-of-mind for compliance officers at investment advisory firms, according to a recent study.

The 2021 Investment Adviser Compliance Testing Survey, conducted jointly by the Investment Adviser Association, ACA Group, and Yuter Compliance Consulting, asked 350 compliance professionals to identify hot topics in the investment adviser field. Advertising/marketing received the most votes at 58 percent, followed by cybersecurity (53 percent) and ESG matters (45 percent).

What has compliance officers worried about the rule—which has already taken effect but won’t be enforced until an SEC-imposed grace period expires in November 2022—are the wholesale changes to policies and procedures they will have to complete to help investment advisers navigate it.

Andrea McGrew, chief compliance officer for USA Financial, agreed creating new policies and procedures governing how to comply with the marketing rule has made the issue a priority for compliance professionals at investment firms.

“There has been a lot of buzz (in compliance circles) about the rule, particularly about testimonials,” she said. “Advisers are excited and encouraged. The previous rule was clunky. Advisers felt it put them at a disadvantage, compared to other industries.”

McGrew described complying with the new rule as a “big undertaking,” which the SEC recognized by giving firms nearly two years to comply.

Breakdown of changes

So, what’s new and different about the rule? First, it combines two regulations, the advertising rule and the cash solicitation rule, into one streamlined marketing rule for investment advisers.

In the new rule, the definition of an advertisement is significantly expanded, di Florio said, to include communications with private fund investors. It also includes any endorsement or testimonial for which an investment adviser provides compensation, directly or indirectly. This is intended to capture paid solicitation activities, but it also covers paid endorsements and testimonials.

Significantly, unlike the existing cash solicitation rule, the marketing rule includes both cash and noncash compensation. As a result, things of value like fee discounts, directed brokerage, and entertainment might trigger the rule if provided in compensation for a testimonial or endorsement.

Second, one of the most important substantive provisions relating to performance advertising is the new rule’s prohibition on the presentation of gross performance returns in any advertisement unless net returns are presented with equal prominence and in a manner that facilitates comparison. Discussing hypothetical performance, which had been mostly banned under the old rules, is allowed under the new rule.

However, there are strict requirements for disclosures, including all relevant criteria used and assumptions made in calculating the hypothetical performance. Enough information must be provided (or, for private fund investors, offered) to allow the intended audience to understand the risks and limitations of what is being presented.

Third, the new rule eliminates the flat prohibition in the current advertising rule against past specific recommendations, permitting current and past specific investment recommendations to be presented if done in a fair and balanced manner.

“I think firms and marketing teams will be spending a lot of time working to thoughtfully strike the right balance,” in crafting disclosures and complying with the new marketing rule, di Florio said.

The new rule includes seven principles-based general prohibitions that apply to all advertisements, di Florio said. Specifically, an advertisement may not:

  • Include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;
  • Include a material statement of fact the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
  • Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;
  • Discuss any potential benefits to clients or investors connected with or resulting from the investment adviser’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;
  • Include a reference to specific investment advice provided by the investment adviser where such investment advice is not presented in a manner that is fair and balanced;
  • Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; and
  • Otherwise be materially misleading

Using vendors

This is a tricky area for investment firms to navigate. Vendors are eager to help with marketing strategies and campaigns, generate leads, and set up appointments for potential new clients. But the onus for complying with the new marketing rule still falls on the investment firm.

Some vendors are choosing to become registered investment advisers with the SEC, McGrew said, which builds confidence the vendor will both understand the rule and comply with it. Vendors can also choose to become registered representatives of broker-dealers or to register as investment advisers in some states. But still, other vendors are choosing not to become registered at all, which can be a complicated and expensive process, particularly the first time.

“There’s a concern that if I choose to work with a vendor, will a regulator say, ‘You shouldn’t have worked with them because they aren’t registered,’” McGrew said. The answer, she said, is to formally come to an understanding about a vendor’s role and responsibilities as related to marketing for investment advisers. Ideally, this understanding should be put in writing.

“It can evolve and morph over time,” she said.

The bottom line is your firm must be able to defend and explain its decision to hire a vendor. The firm should conduct an analysis of the service to be provided, establish guardrails and obligations, and save those decision-making documents for regulators to review if necessary.

Social media

The old rules did much to discourage advertising for investment advisers on social media. Posting endorsements and other advertisements on social wasn’t banned outright—because the previous rules were written before social media existed—but it was practically impossible.

“This is an opportunity for the industry to unlock the voices of investors who are satisfied with their adviser.”

Brian Thorp, Founder and CEO, Wealthtender

Many firms will want to handle social media advertising themselves, McGrew said, to ensure each post prominently displays the proper disclosures.

“Historically, we’ve discouraged advisers from using general interest websites,” she said.

Social media campaigns will start at the firm’s website, and all posts generated by investment advisers will funnel potential new clients back to the firm’s website. There, endorsements and other advertisements can be read alongside the required disclosures.

For those investment advisers eager to use websites like Google My Business and Yelp to post advertisements, the rule gives them the latitude to do so. It says investment advisers are not responsible for comments, likes, and other social media reactions to their posts. They are responsible for their initial post.

But posting advertisements featuring client testimonials on Google and Yelp is problematic because the formats of those websites do not allow for disclosures to be prominently displayed, said Brian Thorp, founder and CEO of Wealthtender. Wealthtender is a vendor that publishes financial adviser testimonials that are compliant with the new marketing rule.

“Until now, investment advisers have not had the opportunity to leverage testimonials and reviews online to attract new clients,” he said. “This is an opportunity for the industry to unlock the voices of investors who are satisfied with their adviser.”

Doctors, lawyers, and other professionals have relied on online reviews for years. Investment advisers should be able to do the same to help consumers make more informed and educated hiring decisions, he said.

The SEC has yet to offer additional guidance about how to handle some facets of online reviews, Thorp said, leaving a gray area that might cause firms to inadvertently violate the new rule.