SEC Warning to RIAs on Implementation of the Marketing Rule

Jun 7th '22

On May 23, as reported by FrontLine Compliance, the Securities and Exchange Commission (SEC) launched an email campaign to registered investment advisors (RIAs) with a warning regarding the new Marketing Rule (206(4)-1). The email indicates that the SEC plans to pursue actions against firms that fail to comply with the Marketing Rule come the November 4, 2022 deadline, and to expect targeted SEC sweeps and examinations to be a priority.


Among those who may be impacted by sweeps or examinations are RIAs who have elected to already engage in testimonials and endorsements. However, with the increased use of digital channels for business communications, including social media and web platforms, the definition of an advertisement in this context has expanded. And many firms have work to do if they want to be prepared for an examination. Let’s explore what’s required, and what you can do now to be ready for the SEC.


This first-of-its-kind mass email campaign by the SEC signifies that the regulator has served notice that it will aggressively pursue actions against firms that fail to comply with the new rule.” – THINKADVISOR


  • Are RIAs prepared for the new Marketing Rule?

Registered investment advisors must have their policies and procedures revised and updated prior to the November deadline. According to a recent report from Indyfin, many RIAs are not yet prepared to satisfy this requirement. Of those who filed an ADV amendment as of March 2022, 64% of RIAs left the Marketing Rule section on Form ADV entirely blank.


In a recent webinar discussion on supervising hybrid work, Melissa MacGregor, AGC and Managing Director from SIFMA, noted a seemingly delayed reaction from advisors and firms to the Marketing Rule for implementation.


“Firms are considering how they’re going to handle endorsements, testimonials, influencers, and performance data. Additionally, firms and advisors are trying to figure out where and when they can use third-party ratings. Everyone wants to say they have five stars or three stars, depending on the rating tool. It will be interesting to see when firms start to roll out those changes, but I wouldn’t expect it to be November 5th.”


The Indyfin report did indicate that a small group of firms (29%) say they are using performance reporting in their advertisements. But very few indicated that they are using testimonials and endorsements (2%) and third-party ratings (9%) in ads. This likely indicates that firms may be slow to adopt new advertising practices that they may deem still too risky. Many firms may decide to wait and see how other firms navigate the new elements of this new rule — and learn through enforcement actions what not to do.


Watch the full webinar: “Why Cyber & Hybrid Work Can’t Go Unsupervised


  • Who is at risk of an examination?

If you are already using endorsements and testimonials in your advertising (including emails, social media, web ads, etc.), you may be at a higher risk for an SEC sweep exam. But any registered investment adviser or firm could be on the hook.


Remember, you must now ensure that all advertisements meet recordkeeping requirements. The new Marketing Rule expands the current books and records rule (Advisers Act Rule 204-2), which requires advisers to retain advertisements that are sent to 10 or more recipients.


Under those obligations, firms can store records digitally (including cloud storage or with a third-party vendor), if the records are preserved in a non-rewritable and non-erasable format. Every advertisement must be retained for a five-year period (starting at the end of the fiscal year it was last published) and must be easily accessible to the advisor for the first two of those years.


Regulatory refresher: Investment Advisers Act of 1940, Rule 204-2


  • What are regulators looking for?

Firms must now maintain records for the following:


  • Written communications related to portfolio performance
  • Any documents used to determine the calculation of performance
  • Supporting records regarding hypothetical performance
  • Documentation of communications related to predecessor performance
  • A record of the intended audience for a hypothetical performance and model fee provisions
  • Documentation on the determination that any testimonial, endorsement or third-party ranking complies with the applicable rules
  • Evidence of disclosures delivered by the advisor or promoter
  • A copy of any questionnaire or survey used to prepare a third-party rating


All advertisements that are disseminated by RIAs (with some exclusions) will be subject to the Marketing Rule after the November deadline.


The amended definition includes three categories of exclusion from the rule:


  • Most one-on-one presentations, with the exception of presentations that include hypothetical performance that was not provided in response to an unsolicited request or to private fund investors
  • Extemporaneous, live, oral communications
  • Information contained in the statutory or regulatory notice, filings, or other related communication


  • Steps you can take now

Audit your current advertising practices and contentFirst, you should know the full scope of your current advertising landscape. Assess your use of testimonials, endorsements, and solicitation agreements. This is especially important if you are compensating someone to create them for you.


Identify gaps in your policies and proceduresLook at your current policies and procedures and compare them to the new rule to identify any gaps in your practices. You may elect to engage outside counsel or a consultant, and/or conduct a risk assessment to help you understand where you currently stand. Then evaluate how you can implement any new policies and procedures — if necessary — into your current practices.


Plan and implement social media policy updatesConsider updating your organization’s social media policies in light of the new requirements. This should include social media training, proactively monitoring employees’ social media accounts, and obtaining attestations regarding your company’s policies. Remember that merely prohibiting these activities is not enough. The SEC has stated that supervisors need to take active steps in preventing and detecting digital communications — to ensure policies are being followed and all records are being captured.


Allocate adequate compliance resourcesCompliance faces immense pressure from within the organization to implement new practices that they believe will be lucrative to the firm. Unfortunately, they are seldom provided with adequate resources or enough time to build out new policies and procedures – which can pave the way for risk. Enabling your compliance teams with a technology solution made for investment firms that helps them capture, archive and supervise communications on all channels will streamline their efforts and provide a single source of truth in case of an examination.


For more information on how to meet the requirements of Marketing Rule (206(4)-1), contact Smarsh here.


FEATURED WEBINAR – Why Cyber & Hybrid Work Can’t Go Unsupervised – Watch On-Demand


Source: Smarsh

Author: Tiffany Magri – Regulatory Advisor at Smarsh


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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