Still curious about the new SEC marketing rule? Here is what we have compiled so far. Many questions still remain.
TIMELINE FOR SEC MARKETING RULE COMPLIANCE
November 4th, 2022 marked the official compliance date for the SEC’s revamped advertising and marketing rule, which was originally adopted in December 2020 and has been in effect since May 2021.
The new SEC marketing rule replaced the advertising rule adopted by the Securities and Exchange Commission in 1961 as well as a rule on payments to solicitors established in 1979.
Financial advisory firms have had “roughly two years to comply” and it is expected that the SEC will hold true to its commitment to audit firms starting in 2023.
Similar to the rollout of the Form CRS, advisory firms have been slow to act. A survey released in August of 2022 revealed that 35% of firms said they planned to adopt the new rule requirements only when compliance became mandatory.
Some experts say the SEC’s handling of marketing rule compliance in 2023 will likely be reminiscent of the string of fines associated with Form CRS, “where the SEC clearly expected firms to comply and gave them ample time to do so.” The SEC has hit 42 firms so far with penalties for non-compliance pertaining to the Form CRS (Customer Relationship Summary form). A similar pattern of SEC audits and fines is expected in 2023 related to the new marketing rule.
IF YOU’RE NOT READY
Most compliance experts in the financial services industry recommend that if an advisors’ policies and procedures do not satisfy the SEC’s requirements, they should consider suspending further marketing and advertising efforts until 1) they have sought legal help, 2) Form ADVs have been updated, 3) policies and procedures have been updated and 4) relevant staff members have been trained.
WHO THE RULE APPLIES TO
The new marketing rule applies to registered investment advisors of all types — including those to hedge funds, private funds and separately managed accounts.
From the SEC website:
Who must follow the marketing rule (Rule 206(4)-1)?
The marketing rule applies to any investment adviser registered or required to be registered with the Commission under section 203 of the Act that directly or indirectly disseminates an advertisement.
WHAT “ADVERTISEMENT” MEANS TO THE SEC AND THE MARKETING RULE
The marketing rule broadly defines “advertisement” to include communications with investors and potential investors about securities advisory services using testimonials, endorsements, and third-party ratings.
The definition 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.”
DEFINITION OF TESTIMONIALS
The SEC rule defines a testimonial as coming from a client and an endorsement as coming from someone promoting your services, like a CPA who refers or recommends your services and gives a positive review about you.
Testimonials are often left on third party platforms like Google local reviews; in fact, they are ubiquitous and consumers tend to rely on them. That’s what makes the new SEC rule so compelling.
From what we know so far, apparently you can request reviews from clients and link to where you would like them to be placed, but you cannot compensate the reviewing client in any way, nor can you tell the reviewer what to say.
With any request for a review, you should focus on your SERVICE and not investment PERFORMANCE. Here is a potential example, “If you would like to leave a review about the service you have received from XYZ Financial Advisory, please visit (link to Google, Yelp or another platform).
IMPORTANT NOTE: Please check with your compliance attorney before you do any of this, and see the important paragraph above titled IF YOU’RE NOT READY.
WHAT CONTROL DO YOU HAVE OVER TESTIMONIALS / REVIEWS?
At Quantum, we have noticed a big problem with spam/scam reviews on Facebook business pages which Facebook is apparently not removing regardless of how many times the reviews are reported as spam. You do have the option of removing the reviews tab altogether, which will also hide all the real reviews you may have received. It’s an unfortunate reality.
On LinkedIn, you can receive a recommendation on your personal LinkedIn page, but not your LinkedIn company page. You can either accept this recommendation as-is or make an edit and ask the reviewer to approve it. Check with your compliance attorney before you do either.
On Google, Yelp and the Better Business Bureau, consumers are allowed to leave reviews even if you haven’t created your own page—they can create one for you. Most consumers are savvy enough to see through spam reviews, but if your compliance attorney allows it, it is a best practice to answer every single one respectfully and truthfully. Here is an example for you if you receive a review in error: “Thank you for taking the time to leave this comment. We cannot find you on our client roster and worry that you have not found the correct firm for this communication. Can you please contact us at (phone number) in order to resolve this matter as soon as possible? Thank you so much!” If they do call, you can ask the reviewer to remove the review.
If you have received an actual negative review, or even a mistaken one, in most cases it will have to stay. Answering truthfully and respectfully goes a long way in the mind of a potential client. In some cases, you may be able to contact Google to get a review removed if it is abusive or is spam, but be aware that this is a difficult process.
If your compliance allows, you may be able to use reviews and testimonials on your website, and you may be able to edit for length or clarity or to correct grammatical errors. Always, always, get this approved beforehand.
THIRD PARTY REFERRERS: ENDORSEMENTS
From what we understand so far, apparently for arrangements prior to November 4, 2022, at least according to one article and BakerHostetler attorneys, “any compensation obligation for a referral/solicitation arrangement established prior to the effective date of the marketing rule [November 4, 2022] is permitted to continue.”
But “hold off on disseminating advertisements and suspending any third-party referral arrangements that started after the effective date of the rule (November 4th)” until [that firm is also able] to comply with the new rule because you may be held responsible for what endorsers say!
According to the BakerHostelter attorneys, “Advisors 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.’”
UPCOMING SEC AUDITS
The SEC’s Division of Exams said that it will “actively examine compliance” with the new rule through “a number of specific national initiatives.” The SEC will be looking for whether or not advisors have:
1) implemented appropriate written policies and procedures, ensuring your policies and procedures are up to date and that they are appropriately tailored to the business of your firm,
2) rolled out training and policy communications to the appropriate parties,
3) checked that there is a reasonable basis for believing you will be able to substantiate material statements of fact in advertisements;
4) complied with the rule’s performance advertising prohibitions; and
5) maintained the requisite books and records.