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SEC Reminds Advisors of Marketing Rules Compliance Deadline | Before ACA

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There are many aspects of 2020 that we would like to purge from our memories. Quarantining at home while homeschooling kids, sanitizing groceries, and promising a collective two-week effort to flatten the curve (which was slightly extended). In light of what we’ve all been through, the release of the SEC’s December 2020 Marketing Rule may not be among the highlights of what you remember from this year. Luckily for us, the SEC recently issued reminders to its registered advisers regarding the marketing rule. Although the rule went into effect on May 4, 2021, advisers were allowed to defer compliance with the rule. However, the SEC has taken an all-or-nothing approach to compliance, and as such many companies have chosen to wait and see what guidance might be issued before fully adopting the rule (and the compliance requirements that would come into effect immediately). On November 4, 2022, however, compliance with the new rule is mandatory. Advisors who as of this writing have not yet addressed updating their compliance manuals may still have lingering questions about what the rule entails, particularly regarding endorsements and testimonials. This article focuses on some (but not all) of the most requested marketing rule items.

Definition of advertising

The definition of an advertisement has two parts:

  1. any direct or indirect communication made by an Investment Adviser who: (i) offers the Investment Adviser’s investment advisory services regarding securities to prospective clients or private fund investors advised by the Investment Adviser ( “private fund investors”), or (ii) offers new securities investment advisory services to existing clients or private fund investors. The SEC specifically excludes most individual communications from this stream, with some exceptions.[1]
  2. paid testimonials and endorsements that include a similar scope of activity as traditional solicitations under the current solicitation rule. In fact, the SEC completely repealed the old funds solicitation rule 206(4)-3.

Testimonials and Endorsements

Most advisors are familiar with typical marketing requirements, such as no misleading or deceptive statements in marketing materials. That hasn’t changed. One of the most significant changes is that the new marketing rule takes previously prohibited activities (testimonials and endorsements) and adds parameters regarding their acceptable use.

To use testimonials and endorsements, disclosure is required at the time of posting. The disclosure must be clear and prominent and indicate whether the testimonial was given by a current client or investor, or by someone other than a current client or investor. The disclosure should also indicate whether cash or non-cash compensation was provided for the testimony or endorsement, if any; and must include a brief statement of any material conflict of interest on the part of the person giving the testimonial or endorsement resulting from the advisor’s relationship with that person. If there has been a compensation arrangement, the material terms and description of the compensation provided or to be provided, directly or indirectly, must be disclosed. The compensation arrangement represents a conflict of interest on the part of the person giving the testimonial or endorsement, and that conflict must also be disclosed.[2]

Adoption and entanglement

The above is straightforward in terms of the marketing materials you generate and control. However, what happens when the testimonials or recommendations are generated and/or published by a third party? This is a common question that comes up when determining whether an adviser has a duty to disclose, as required by the Rule. In many cases, you cannot control what third parties do. But in some cases, counselors may “get entangled” in or “adopt” a third-party testimonial or endorsement. When discussing the analysis it would perform to determine whether an adviser is required to comply with the Marketing Rule (with respect to third-party content), the SEC refers to “entanglement” and ” adoption”. If the SEC determines, based on the specific facts and circumstances, that the adviser adopted and/or became entangled in the material, then the rule applies to the adviser, disclosure is required and the adviser will be responsible for the content. as if he produced the content himself. Here are examples of adoption and entanglement:

  • Adoption – the adviser explicitly or implicitly endorses or approves the information. Hypothetical examples include an advisor posting third party reviews on its website or incorporating information received from a third party into its performance advertising.
  • Tangle – the adviser is involved in the preparation of the information by the third party (this requires a level of “prepublication”, which would be weighted by the SEC). Some hypothetical examples would include a scenario where an advisor pays for a positive review, tells a customer what to write in their review, and/or has the ability to “approve” a review before it is posted. , etc. The more the advisor is involved. is in what is published, the more it will be perceived that it has become “entangled” in the material, and the SEC will consider the material as that of the adviser.

Arrangements with a lawyer

As mentioned earlier, the new marketing rule also ended the old cash solicitation rule in its entirety. The new rule effectively combined previous requirements of the Cash Solicitation Rule, such as prohibiting certain “bad actors” from being able to receive compensation for referrals, while adding a de minimis threshold of $1,000 out of the 12 previous months before a written agreement is required. Although a signed client acknowledgment is no longer required, it would be difficult to demonstrate conflict of interest disclosure without one. As such, obtaining a signed disclosure is highly recommended. On the plus side, however, the attorney is no longer required to provide the prospect with a copy of the advisor’s Form ADV Part 2A disclosure brochure. Note, however, that these changes do not affect whether a state requires an attorney to be licensed and registered.

Conclusion

Advisors are encouraged to assess their marketing and advocacy practices to understand how the Marketing Rule will affect them. Compliance is required as of November 4, 2022. While you still have some time to refresh your memory of the specifics of the marketing rule, the window will close soon.

[1] See Rule 206(4)-1(e)(1) of the Investment Advisers Act

[2] 206(4)-1(b)(1)

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