Survey: New SEC marketing rule leads investment adviser compliance concerns

The 2021 Investment Adviser Compliance Testing Survey, conducted jointly by the Investment Adviser Association (IAA), ACA Group, and Yuter Compliance Consulting, polled compliance professionals at 350 investment adviser firms. It asked respondents to share their top concerns, in addition to the testing practices and strategies they are using to address core compliance topics.

According to the survey, 58 percent of respondents identified advertising/marketing as the “hottest” compliance topic—up 33 percentage points from last year. Cyber-security and climate change/environmental, social, and governance (ESG) matters followed close behind at 53 percent and 45 percent, respectively.

Marketing rule background: In December 2020, the SEC adopted modernized rules governing—and effectively merging—the advertising and cash solicitation practices of investment advisers who are registered or required to be registered with the agency. The so-called “marketing rule” is “designed to comprehensively and efficiently regulate advisers’ marketing communications,” the SEC stated.

“Compared to prior years, there clearly is a trend of compliance getting more involved in the marketing and solicitation-related activities of firms. … I think that is a positive development, and I think that frankly is something the SEC, particularly the examiners, will be looking for.”

Sanjay Lamba, Associate General Counsel, Investment Adviser Association

The SEC also adopted related amendments to its books and records rule (Rule 204-2 under the Advisers Act) and to Form ADV, the investment adviser registration form. While the changes took effect May 4, investment advisers have an 18-month transition period—until Nov. 4, 2022—to come into compliance with the updates.

Among key changes, the marketing rule modifies the definition of “advertising” so it will “remain evergreen in the face of evolving technology and methods of communication,” the SEC stated in its final rule. Specifically, the rule broadens the scope of advertising to include “any direct or indirect communication” an investment adviser makes, including “all manner of social media.”

The final rule also makes clear, “[W]hen providing a testimonial or endorsement on a social media platform, an adviser must clearly and prominently label the testimonial or endorsement as being a paid testimonial or endorsement.”

Survey findings: “Clearly, this is an area that you are going to have to evaluate your current processes, protocols, procedures, and policies to come into compliance with the new marketing rule,” said Sanjay Lamba, associate general counsel of the IAA, in a Webinar discussing the survey results. “You’ll also have to look at your solicitation arrangements—ones that you’re working on now, ones that you have in place—to make sure they come into compliance with the new provisions related to solicitation-type activities that are in the marketing rule.

“In engaging with our members, it’s clear to me, at least, that folks are eager to take advantage of the new rule and many of the opportunities it presents.”

In response to the rule, most respondents (60 percent) said they plan to amend their marketing materials. Many also said they plan to increase their use of social media (27 percent) or testimonials (23 percent). While those changes were expected, Lamba said one surprising finding was increased use of “hypothetical performance,” cited by 11 percent of respondents.

For the first time, the SEC in the marketing rule has come out with a definition for what it considers to be “hypothetical performance,” which now includes targeted or projected returns. “To use hypothetical performance, you have to overcome a lot of hurdles, and you’ll have to have very specific policies and procedures,” Lamba said.

Compliance officer responsibilities: Asked what specific role compliance plays in their firm’s advertising and marketing activities, most respondents said compliance is, or soon will be, involved in new business/product development meetings (90 percent); approves all third-party solicitation engagements (88 percent); preapproves entry into new geographic jurisdictions prior to contact with prospects located in those jurisdictions (80 percent); and periodically participates in meetings with prospective clients (68 percent).

“Compared to prior years, there clearly is a trend of compliance getting more involved in the marketing and solicitation-related activities of firms. I think that is to be expected,” Lamba said. “I think that is a positive development, and I think that frankly is something the SEC, particularly the examiners, will be looking for.”

Policy and procedure controls: Respondents also were asked what types of controls their firms have in place or expect to adopt regarding marketing/advertising activities as they apply to policies and procedures. Top answers given included:

• Adopted and implemented record-keeping policies and procedures relating to advertising/marketing practices (92 percent);
• Adopted process for ensuring consistency of advertising and marketing materials with disclosures (e.g., Form ADV) (89 percent);
• Marketing materials are logged and tracked as they are prepared (89 percent);
• Written procedures regarding communications with the public, including the media (87 percent); and
• Written policies and procedures regarding the dissemination of advertisements by third parties (81 percent).

Leading the way, 93 percent said their firm has designated someone responsible for reviewing all advertisements to ensure they’re in compliance with policies and procedures. This is good practice, because the SEC will be looking for whether marketing materials comply with policies and procedures, Lamba said.

Review and approval processes: Asked what types of controls firms have in place or expect to adopt regarding marketing/advertising activities as they apply to review and approval processes, the top answers provided were:

• Maintain a copy of all written approvals of advertisements (82 percent);
• Employees must pre-clear interaction with the media (75 percent);
• Employees must pre-clear participation in, and presentations given at, third-party sponsored conferences/seminars (70 percent);
• Marketing materials require formal approval by the CCO prior to use (69 percent); and
• Maintain a checklist of required disclosures and other factors to consider in reviewing marketing materials (67 percent).

Training processes: Asked what type of training the firm provides employees regarding marketing/advertising practices, 67 percent of respondents said they currently “train employees to submit all marketing and advertising material for review before or after dissemination to clients or prospective clients consistent with our policies and procedures.” Another 60 percent said they “educate employees as to which material may be considered advertising for purposes of our policies and procedures.”

Other common responses included training all employees involved in the creation, review, or dissemination of adviser advertisements (58 percent) and training all marketing personnel and other employees responsible for interacting with clients and potential clients (50 percent). Fifteen percent indicated they currently do no such training at all.

Testing processes: Low-hanging fruit for SEC examiners includes looking at the firm’s Website, doing a Google search on the firm’s name, or looking at public-facing social media. It’s critical to ensure your materials are current and up-to-date and that testing is being done in each area.

Additionally, the SEC’s marketing rule for the first time includes specific provisions relating to the use of performance advertising. “For firms that are using performance,” Lamba said, “this is one area where you’re going to have to assess your controls and procedures to make sure you’re in compliance with the new provisions.”