AssetMark | Blog

SEC Marketing Rule: A Simple Guide to Compliance

Written by AssetMark | Oct 8, 2022 1:08:56 AM

As an investment advisor, you have until the November 4, 2022 compliance date to adopt the necessary changes in how you promote your services. The U.S. Securities and Exchange Commission (SEC) adopted amendments to the SEC marketing rule 206 (4)-1 that affect investment advisor advertising, marketing activities, and the use of testimonials in marketing materials.

In this article, we bring you key highlights of the new marketing rule, how it impacts your business, and what you need to do to stay compliant.

What is SEC Marketing Rule 206(4)-1?

Section 206 of the Advisers Act generally prohibits investment advisors from engaging in any fraudulent, deceptive, or manipulative conduct. Rule 206(4)-1 regulates marketing practices to help reduce instances of market manipulation and protect investors so they can make informed decisions.

The SEC was created in 1933 as a byproduct of the Stock Market Crash of 1929, which ultimately led to the Great Depression of the 1930s. The SEC’s primary purpose is three-fold: to protect investors, maintain fair and efficient markets, and facilitate capital formation. The SEC aims to help advisors follow fair practices by regulating their actions.

Initially, the  Investment Advisers Act of 1940 provided governing guidelines for professional advisors. Later adaptations for advertising rules in 1961 (206(4)-1) and cash solicitation rules in 1979 (206(4)-3) changed how advisory services could be promoted. Now, after 60 years, the SEC has published a modernized and consolidated regulatory update in a single rule that redefines advertising.

Who Needs to Comply with SEC Marketing Rules?

All financial advisors who directly or indirectly advertise their investment advisory services must comply with the ruling. It is not limited to registered investment advisors (RIAs) but extends to include advisors who are required to be registered with the Commission under section 203 of the Act.

The 430-page release has advisors and compliance officers across the nation concerned. According to a recent Investment Adviser Association Study, implementing the marketing rule is the number one worry for RIA compliance officers, with 70% having already detected compliance issues that require attention.

Why Was the SEC Marketing Rule Amended?

After six decades, many things have changed including technology, the investment market, the advisory industry, and marketing practices. While updates have been a long time coming, three factors sparked the SEC’s new marketing rule:

  1. Investment Profiles
    A much wider range of solutions and services now exist for clients to consider. As clients examine their options, advisors should provide accurate reporting that offers clear comparisons to other professionals.
  2. Referral Practices
    People like giving their opinion on services—both positive and negative—and now have third-party ratings and social media platforms where they can easily do so, like Google, LinkedIn, and Facebook. Clients often use these reviews and recommendations to find an advisor they want to work with.
  3. Technology
    Tools today have changed the way people shop, research, and communicate. Additionally, advanced reporting and projection tools have changed what advisors can do.

Adopting a new principles-based approach, the SEC aims for the new marketing rule to continually account for future changes in the investment or marketing industries as well as any advances in technology.

Key Updates to SEC Marketing Rule 206 (4)-1

The new changes are largely intended to standardize the approach to advertising and cash solicitations, ideally creating fair and positive changes for investors.

It’s important to note that each updated area includes many nuances and details, so advisors should learn the qualifications surrounding each change. While the new rule makes general prohibitions—for example, making a material statement of fact without substantiation—it primarily impacts marketing and bookkeeping for investment advisors in the following five ways.

1. Hypothetical Performance

A common practice addressed by the new performance information rule is the creation of model portfolios to provide examples of market growth for potential investors.

The new marketing rule intends to address instances when communication includes hypothetical information to solicit business from existing or prospective clients. In other words, advisors must be careful in the way they offer examples of imagined portfolio performance over the years.

Exceptions from this rule could include live, off-the-cuff discussions and one-on-one communications that don’t include hypothetical performance discussions. Marketing rules also don’t apply to account statements, educational materials, and regulatory filings. Hypothetical performance statements are acceptable if they are in response to unsolicited requests asking for this kind of information.

Most importantly, if you do use any hypotheticals, they need to be very plainly explained as such. The intended audience should clearly understand the risks and limitations of hypothetical performance so they can make an informed investment decision.

It is important to also review with your legal counsel or compliance consultant how the changes around related performance, extracted performance, and predecessor performance will affect your firm displays performance return related information.

2. Time Periods for Performance Advertising

Previously, there was no clear rule for what date ranges advisors used to show performance results.

With the SEC’s new marketing rule, timelines for the presentation of performance are standardized, with 1-year, 5-year, and 10-year return periods. If those time periods aren’t available, advisors must also show performance results of the total portfolio from the portfolio’s inception.

The rule specifically outlines “anti-cherry-picking provisions,” which prohibits the selection of date ranges that offer the most favorable numbers while omitting unfavorable ones. Additionally, gross performance is no longer acceptable, unless the net performance is also presented within the same time period and follows all stipulations of the rule. Additionally, returns should be shown as net of advisory fees.

3. Testimonials and Endorsements

Before the amended rule, advisors were not allowed to use testimonials for advertising purposes.

The new marketing rule from the SEC permits advisors to solicit reviews from their top clients. Additionally, advisors can use these testimonials as long as they disclose any compensation arrangements or conflicts of interest, among other requirements.

Endorsements and solicited approval from a non-client can be used in the same way. Endorsements could also include something like a salesperson’s experience with the investment advisor that didn’t include using the services as a client.

Formerly referred to as solicitors, promoters will need to enter into a new written agreement. Note that the marketing rule delineates disqualification provisions that prohibit ineligible people from acting as promoters.

The SEC marketing rule updates how advisors can use testimonials and endorsements with the understanding that people often seek these kinds of reviews before choosing an advisor.

4. Disclosures

Disclosure requirements now state that investment advisors need to update Form ADV by March 2023. This change should include full disclosures for—among others—the following advertising practices:

  • Performance advertisement
  • Specific investment advice
  • Testimonials and endorsements

Broker-dealers are exempt from the disclosure requirement when using testimonials with retail customers and when soliciting non-retail customers.

5. Recordkeeping

Advisors must maintain records of all advertisements. Adequate books will track things like compensation for testimonials or performance reports used in ads. Working papers or other documents may be required to demonstrate how the rate of return was calculated for performance advertising. Advisors should also keep records of testimonials or endorsements including non-cash compensation provided to investors.

The final rule requires that records be maintained in an easily accessible place for at least five years.

3 Tips for SEC Marketing Compliance

To meet the changing expectations of the SEC going forward, professionals can start with these three helpful steps.

1. Organize Marketing Records

The SEC marketing rule changes how advisors approach their records and bookkeeping. Advisors need to keep track of all advertisements they disseminate. Records should be clear, organized, and easy to access.

Ideally, advisors should have digitized records and a central hub to store and track information. Your secure data management system may offer organization support for storing records surrounding SEC marketing compliance. You will need to establish best practices surrounding recordkeeping and data management for your team to keep information readily accessible and easy to find.

2. Seek Out Compliance Support

To maintain SEC compliance, advisors must understand the specific ways that the rule impacts their unique business, including the flexibility afforded by the allowance of testimonials and endorsements that can give your firm an edge.

Practices surrounding hypotheticals and performance advertising must change to align with the new rule. Businesses must implement appropriate policies and procedures to remain compliant. Training can help get your team on the right track and avoid misunderstandings surrounding the change in expectations.

3. Outsource with Efficient Tools

To produce the right reports and information, businesses should use platforms and software that are compliant with the SEC marketing rule. You can streamline your business by outsourcing certain tasks with modern tools and third-party services. AssetMark can help you find the tech and support that meet your business needs and goals.

With so many tools available, it’s important to use ones you can trust. AssetMark offers tailored guidance to help you navigate changes in your business—helping you not only be compliant with minimum disruption to your business but also leverage the changes in ways that put your firm ahead. We can save you time on back-office tasks so that you can focus on directly supporting your clients.

AssetMark is Committed to Acting on a Principled Basis

Compliance with the new SEC Marketing Rule will be of critical importance for all Investment Advisers in how they communicate with their clients moving forward. Please consult with your Compliance and Legal advisors regarding your firm's particular situations to ensure your firm’s practices are in compliance. We are working to adapt our reports and tools to align with this new rule.

Do you want reports and tools that can scale with your company. Talk to our team today.