Reality Check: Introducing the New SEC Marketing Rule
The new SEC marketing rule calls to mind the Peter Parker principle: "With great power comes great responsibility." (Any Spider-Man fans out there?) The marketing rule consolidates two outdated rules and accounts for updated technology, like social media. It was a long time coming, providing a much-needed update to advertising regulations in place since 1961 and cash solicitation rules in place since 1979. Now, advisers can choose whether to implement the rule on or after the effective date of May 4, 2021, or wait until the compliance date of November 4, 2022.
But here's the catch: advisers who act now must comply with the rule in its entirety; that is, no cherry-picking some rule requirements and ignoring others. It’s a big decision, and advisers aren’t taking it lightly.
Before making up your mind, make sure you fully understand the new rule. Read on as we start breaking it down for you. However, also keep in mind that there are several past no-action letters related to advertising that the SEC has yet to officially retire or comment on. Technically speaking, these are still in force and how they coexist with the new marketing rule has yet to be made clear.
While we await further updates from the SEC, this post is the first in a series we’re doing that covers the new marketing rule. We’ll describe the newly expanded definition of advertising and the seven general prohibitions that apply to all ads. Upcoming posts will examine technology implications of the new rule, testimonials and endorsements, presentation of performance results, third-party ratings, record-keeping and Form ADV requirements, review and approval of advertisements, and overall best practices. Let’s start at the beginning.
Expanding the Definition of Advertising
The new rule expands the definition of advertising by categorizing ads in two prongs: traditional advertising and compensated testimonials and endorsements, including traditional solicitations covered under the current solicitation rule. Here’s a high-level overview of the new, two-part definition of advertising, along with inclusions and exclusions for each category. Stay tuned for future posts that will take a deeper look at these issues.
Interpreting the Seven General Prohibitions
The new rule also outlines seven general prohibitions that apply to all ads which fall under either category discussed above. These prohibitions stem from historic anti-fraud principles and signal an important shift from a rules-based framework to a principles-based framework.
What does this mean for you? The takeaway here is that principles are typically more subjective than rules. In other words, complying with principles requires informed interpretation rather than strict adherence. For this reason, relatively small investment adviser firms with limited compliance resources need to be especially careful about navigating the nuances of the new rule. Consult with a compliance expert to ensure you’re interpreting the seven prohibitions correctly.
The new marketing rule represents a huge opportunity for advisers to capitalize on the range of advertising methods long available to other industries. But that opportunity comes with a cost: the responsibility to understand and implement the rule’s open-to-interpretation principles. In our next post, we’ll go into more detail on major technology implications of the new rule.
Take our two-question survey and tell us how you plan to implement the new marketing rule.