New SEC Marketing Rule is Here: What Investment Advisors Need to Know

By: Alisha Slaughter, VP, Alliance Marketing

Here’s a fun topic to kick off the New Year: Compliance! 

Okay, not everybody’s favorite topic, but this is the time of year when it rises to the top of mind for registered investment advisors of all types. Your 2022 year-end reporting should be behind you, and now firms are getting up to speed on compliance challenges that lie ahead in 2023 – chief among them the new SEC Marketing Rule that went into effect on November 4, 2022. 

I recently moderated a webinar on the regulatory issues impacting compliance in 2023 with a panel of experts: Joshua Mika of compliance consulting firm Optima Partners and two general counsels from alternative investment firms, Rory Cohen of Veradero Capital and Lisa Roitman of Pollen Street Capital. We led off the conversation by polling attendees on their readiness for the new advertising rule. It was heartening that 22% said they were “done” with their internal due diligence to ensure compliance, while 78% were “so close” to completing it.  

The new rule contains seven general prohibitions: 

  1. Untrue statements and omissions
  2. Unsubstantiated material statement of fact
  3. Untrue or misleading implications and inferences
  4. Failure to provide fair and balanced treatment of material risks or material limitations
  5. Anti-cherry-picking provision A: references to specific investment advice
  6. Anti-cherry-picking provision B: presentation of performance results
  7. Otherwise materially misleading

At a high level, our panel didn’t find these particularly earth-shaking – they have guided industry practices for a long time. However, firms should anticipate greater regulatory scrutiny than ever around marketing and advertising – broadly defined – and should be prepared in the event of an audit.  

Much of our discussion centered on the operational and procedural implications for firms heading into the New Year. Here are a few of the key takeaways: 

 Assume Everything is Advertising 

What constitutes advertising? A fair question firms often wrestle with. For purposes of compliance, assume it is every piece of communication that goes out to anyone outside the firm, whether it’s a pitchbook, performance claims, a case study or a one-off email.  

  • Make sure you have back-up substantiation, disclosures and disclaimers for every statement, and that everything going out the door has been subjected to a scrupulous review process.  
  • Follow strict conditions governing the use of testimonials. Provide full disclosure of the relationship between the firm and the individual making the endorsement with your testimonials. Was the testimonial solicited or voluntary? Was the endorser compensated in any way? 
  • Keep track of gifts, travel and entertainment, as they may be deemed compensation in the regulators’ eyes. 
  • Keep a record of everything that was said, by whom and to whom, and when.  
  • Don’t forget that the rules also apply to third parties engaged in marketing activities on your firm’s behalf. 
  • Perform frequent and thorough compliance due diligence on your ‘vendors’ - their marketing materials need to be reviewed and approved. What are they telling prospective investors? What are they handing out? 

And of course, the new amendments are largely in response to the radically altered landscape of electronic communications and social media. Some firms are going so far as to issue company-only mobile phones to capture employees’ text messages and emails. Even the sidebar chats in a Zoom or Teams presentation should be retained.  

Bottom line: now is the time to put systems in place and assess your risks, identify any gaps, and develop a plan to close them. 

Keep Compliance an Everyday Practice  

This is a general compliance observation, but it’s particularly relevant to advertising and marketing. Once you’ve updated your code of ethics, performed the initial training, and audited your communications materials, you can’t call it a day. Compliance is everyone's responsibility, and it should not be an annual, quarterly, or even monthly event, but needs to be integrated into everyday activity.  

Training is an essential part of compliance, but it needs to be more than a slide deck. Conduct information sessions with everyone who interacts with investment partners and prospects. Be sure they understand how the advertising and marketing rules apply to them and their jobs, using real-life scenarios. Train people to look at their work through the regulator’s lens. In the event of an exam, regulators will not limit their interviews to the compliance and legal teams. They will want to talk with everyone that communicates with current and potential investors. Be sure everyone is prepared. 

Cross-Border Marketing Presents Unique Challenges 

How do the SEC’s rules apply to funds marketing to investors outside of their own domiciles? How do they affect multi-national firms with operations in the US? Essentially, the panel agreed that the rules apply to funds originating in the US and overseas funds targeting US investors. US-based funds marketing overseas then need to “overlay” the requirements of any jurisdictions in which they have or are seeking investors.  

Standards for calculating and quoting performance figures are a key point of contention, as these can vary among different jurisdictions. To be safe, any fund that falls under the SEC rules should quote both gross and net performance and show a one-, five- and 10-year track record. Apply a consistent calculation methodology and document it rigorously. 

But Wait, There’s More 

While the SEC Marketing Rule dominated our webinar discussion, the panel delved into other regulatory issues looming on the horizon, including proposed new rules for vendor due diligence and revised Department of Labor guidance for ESG investing in retirement plans under the Biden administration. Meanwhile, although the amended marketing rules are now in effect, the panel agreed it will likely take a few months of actual SEC exams to gain clarity and understand exactly what the regulators are looking for. To summarize, the key recommendations from the panel are: 

  • Build evergreen systems to help you collect the data you will need in the event you are audited.  
  • Put in place training, substantiation, archiving, and review processes across the entire firm to ensure compliance. 
  • Prepare your teams to work with your CCO to avoid regulatory scrutiny.  

If you want to get your 2023 compliance program in sync with the changing regulatory environment, I invite you to watch the full webinar for a good starting point. It’s just under an hour and time very well spent. 


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