Contents
On December 22, 2020 the Securities and Exchange Commission (“SEC”) adopted amendments under the Investment Advisers Act to modernize rules that govern investment adviser advertisements and payments to solicitors (“New Rule”). The aim of the amendments is to create a single modernized rule that regulates investment advisers’ marketing communications in today’s ever-evolving advertisement practices, technology and expectations.
The SEC also adopted related amendments to its books and records rule and to Form ADV. Advisors will have to disclose additional information related to their marketing practices to help facilitate the SEC’s inspection and enforcement.
The RIA Marketing Rule became effective on May 4, 2021 providing for a transition period of 18 months. Investment advisers have until November 4, 2022 to comply with the New Marketing Rule.
With the approaching of the new RIA Compliance date, the Division of Examinations of the SEC recently published a risk alert in which they share initial Marketing Rule exam initiatives and areas of review. These are discussed below.
Subject-matter experts with decades of experience put together this research, not freelance copywriters, content manager, or AI. Our advisors deliver fintech compliance and operations services to multiple RIAs using proprietory tools.
See also:
What are the main RIA Compliance implications of the New Rule?
1. Amended definition of “advertisement”
The RIA Marketing Rule expands the definition of advertisement and allows for marketing via new channels.
The definition of “advertisement” is modified to reflect two aspects, including any direct or indirect communication an investment adviser makes that:
Offers the investment adviser’s services regarding securities to prospective clients or private fund investors or offers new investment advisory services with regard to securities to current clients or private fund investors advised by the adviser.
Includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly.
Practically speaking, the New Rule now treats indirect communications, such as social media comments that an investment adviser endorses or promotes, as “advertisement”.
The SEC has given specific examples on what will not be considered “advertisement” under the New Rule. Below are some examples:
banners and branding materials;
regulatory filings and required communications;
general educational materials and market commentary (provided that they don’t contain an offer to provide advisory services);
transaction reports and other similar materials delivered to existing investors in private funds; etc.
2. RIA Marketing Rules - New Seven General Prohibitions
Under the RIA Marketing Rule investment advisors will be prohibited to:
Make an untrue statement or omission;
Make a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;
Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser;
Discuss any potential benefits without providing fair and balanced treatment of any associated material risks or limitations;
Reference specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
Include or exclude performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
Include information that is otherwise materially misleading.
These new RIA Marketing Rules put a higher burden of proof on the advisors, requiring them to maintain robust RIA Compliance programs.
Next to the general prohibition and with regards to performance advertising, the New Rule also prohibits the inclusion in any advertisement of:
gross performance, unless the advertisement also presents net performance;
any performance results, unless they are provided for specific time periods in most circumstances;
any statement that the Commission has approved or reviewed any calculation or presentation of performance results;
performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement;
performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
hypothetical performance; and
predecessor performance.
3. What is allowed under the New RIA Marketing Rule?
Testimonials and endorsements are allowed, as long as the adviser complies with certain disclosure and written agreements.
Disclosure
Under the RIA Marketing Rule advisors are required to clearly disclose whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. There are exemptions for SEC-registered broker-dealers under certain circumstances.
Written Agreement
Testimonials or endorsements made for a de minimis compensation, which is set to USD 1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months are allowed and no written agreement is required. Practically speaking, in such cases advisors are allowed to reference client names in marketing presentations (with client permission and disclosure that the client did not receive compensation), without having a written solicitation agreement in place.
Referencing of past recommendations, such as case studies, in marketing materials as long as the information presented is fair and balanced and appropriate disclosures are included.
Advisors that wish to use testimonials and endorsements will need to review and update their policies and procedures, develop a compliant process for requesting testimonials from clients, as well as develop a written agreement to be used with promoters that are paid more than the minimum threshold.
What are the examination review areas for RIA Compliance with the New Rule?
The Division of Examinations (“Division”) of the SEC will conduct a broad review through the examination process for compliance with the RIA Marketing Rule. The review will include but will not be limited to the following areas:
Marketing Rule Policies and Procedures
The Division will review whether advisers have developed and successfully implemented written marketing policies and procedures that are reasonably designed to prevent violations by the advisers of the New Rule.
Seven General Prohibitions
The Division will further examine whether the advisers comply with the performance advertising requirements provided for under the New Rule, including the seven general prohibitions.
Substantiation Requirement
The staff will review whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
Books and Records
The Division will examine whether advisors comply with the amended books and records rule and Form ADV. The amended Form ADV requires advisors to provide additional information regarding their marketing practices.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with RIA compliance, reach out to our regulatory experts today:
Published on Nov 2, 2022
Last updated on Aug 4, 2023
