By Tiffany Magri – Regulatory Advisor at Smarsh
I recently had the opportunity to speak with expert compliance professionals Elin Cherry, CEO & Founder of Elinphant, LLC and Annie Kong, Managing Director of IQ-EQ. We discussed the new SEC Marketing Rule, which expands on the current books and records rule (Advisers Act Rule 204-2). The new rule continues to allow advisers to provide useful information to investors while providing clear guardrails around the use of new digital communication tools.
Key drivers of the new Marketing Rule
Interactions between advisors and investors have evolved.
The demand for text messaging, chat, social and mobile messaging has been trending upwards for years. The pandemic further catapulted the adoption of these communication tools.
“With so many new communication channels available, advisors have quickly realized the benefits of using them to reach their audiences.” says Cherry. “With people wanting to do business on social media, the floodgates are open. You’re not going to be competitive if you’re not doing these things.”
The outdated rules required a refresh to protect investors and equip firms with clear compliance guidelines.
Firms must understand how these changes could impact them and how the SEC’s Rules apply to their unique business. Cherry believes the updated Rule will help eliminate some of the guesswork associated with the old rules.
“I think the fact that the SEC addresses technology in the rule is important so that people can’t say, ‘Well, it didn’t apply to this, or it doesn’t apply to that.’ With so many different modes of communication, it’s important to note that the Rules will apply regardless of the technology used,” says Cherry.
With the clock ticking on the November 4 deadline for compliance with the new Marketing Rule, registered investment advisors (RIAs) are still preparing. A poll conducted during the panel discussion revealed that many participants either had not started updating their policies and procedures (25%) or were still working to meet the deadline (65%).
A risk-based approach
The new Marketing Rule provides the framework, but you should also review your policies and procedures to examine how they relate to the firm’s communications. This will help ensure that your compliance program and supervisory system adequately protect the business.
Firms should consider a risk-based approach to new elements of the rule. While the rule does not explicitly require the pre-approval of most communications, firms should evaluate riskier elements (e.g., external promotors or new performance measures) and include more oversight around them.
Anticipate that the SEC will be aggressive in its review. Review, amend, and test current advertising and marketing policies and procedures to reflect the new rule, particularly when adding anything new. Consider evaluating the following:
- Reassess current performance measurement criteria to ensure they comply with the new rules
- Adopt and implement reasonable policies to ensure you provide sufficient information to investors regarding calculations methodology and any assumptions made in the calculation of the hypothetical performance
- Address disclosure requirements regarding the limitations of hypothetical performance and its inherent risks in your policies and procedures
- Advisers should follow specific advertising standards and disclosure requirements when presenting hypothetical performance
- Include processes for third-party ratings that identify that you have a reasonable basis for believing that the preparation of the rating was fair and not prepared to produce any pre-determined results
- Clearly and prominently disclose specific information regarding the rating (e.g., time period, who produced the rating, and any indirect or direct compensation)
Testimonials and endorsements
- Assess the use of compensated testimonials, endorsements, and solicitation arrangements
- Include the supervision of promoters in your policies and procedures
- Reassess your outside business activities (OBA) policies and procedures to include guidance regarding promotions
- Train employees and any third-party promoters on the new rule
- Monitor and approve employees’ and promoter’s testimonials and endorsements
- Review and update disclosures requirements
- Review written agreements with the promoter to make sure they adequately capture the rule requirements
Firms must evaluate whether they are dedicating the right amount of compliance resources to these activities. Make sure to train your compliance team on any new communication channels. Kong noted that compliance teams should be familiar with the various features on the communication platforms they will need to monitor.
Cherry suggested that firms may want to containerize employee communication channels into professional or personal accounts: “Each account should be for one thing and one thing only – either business or personal.”
While prohibition policies and attestations are a good start, they are no longer enough. Consider implementing procedures that include reviewing prohibited networks.
“For active social media users, we typically suggest quarterly backtesting,” says Cherry. “But it could also be semi-annual or annual, depending on a risk-based approach. But some form of testing is needed.”
Finally, update books and records requirements to ensure all required records are retained, as regulators will look for proof that these elements meet the rule. Can you capture, retain, and supervise these advertisements in a way that meets your regulatory obligations across multiple platforms (e.g., mobile messaging, social, and websites)? Once you’ve captured these communications, you can ensure that the new practices are followed by setting up red flags or a risk-based review system.
About the author
As a Regulatory Advisor at Smarsh, Tiffany Magri monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.
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