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The SEC Marketing Rule: What you need to know

Here are the basics of the new SEC Marketing Rule: how it's different from previous guidelines and its impact on investment advisers.

The “Marketing Rule,” 17 C.F.R. 275.206(4)-1, finalized by the SEC in 2020 pursuant to the Investment Advisers Act (the “Act”), regulates the marketing communications of investment advisers. The Marketing Rule became effective on May 4, 2021, but provided an 18-month transition period for advisers to comply, with a final compliance date of November 4, 2022.

What rules did the new SEC Marketing Rule replace?

Prior to the adoption of the Marketing Rule, advertising by investment advisers was regulated under the Advertising Rule, adopted in 1961, and the Cash Solicitation Rule, adopted in 1979, both promulgated under the Act. Neither was substantially updated since adoption, and both have been replaced by the Marketing Rule.

In 1961, when the Advertising Rule was adopted, the SEC was primarily focused on misleading advertising practices. As such, the Advertising Rule prohibited or placed conditions on the inclusion of certain items in advertisements, including:

  • The use of testimonials concerning the adviser or any advice, analysis, report, or other service rendered by the adviser;
  • The use of advertisements that include an adviser's past specific recommendations which were or would have been profitable to any person; and
  • The publication, circulation, or distribution of any advertisement containing any untrue statement of a material fact, or which is otherwise false or misleading.

Because the Advertising Rule stated broad principles but generally did not go into specifics, advisers regulated under the Advertising Rule would often seek additional guidance in connection with advertisements, and the SEC issued a number of no-action letters in response. These letters have now been largely withdrawn in response to the Marketing Rule’s adoption. Many, but not all such letters were incorporated into the Marketing Rule.

The 1979 Cash Solicitation Rule prohibited an adviser from paying a cash fee, directly or indirectly, to a solicitor unless the adviser and solicitor satisfy the conditions outlined in the rule. For these purposes, the rule defined a “solicitor” as any person who, directly or indirectly, solicits any client for, or refers any client to, an investment adviser. 

Details of the new SEC Marketing Rule

The conditions of the Cash Solicitation Rule were largely adopted as part of the Marketing Rule, with certain modifications. For instance, the Marketing Rule effectively loosens requirements for a person providing a testimonial or endorsement, but imposes disclosure and oversight requirements on the adviser.

Broadly, the Marketing Rule includes the following changes, relative to previous regulations:

  • An “advertisement” is defined more broadly, as any direct or indirect communication that (i) offers the investment adviser’s investment advisory services with regard to securities to prospective clients or investors in a private fund advised by the investment adviser, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. However, most one-on-one communications and communications to retain existing investors are excluded from the definition, except with regard to compensated testimonials, endorsements, and hypothetical performance information. Extemporaneous, live, oral communications; and information contained in a statutory or regulatory notice, filing, or other required communication are also excluded.
  • The Marketing Rule applies to certain communications sent to clients and private fund investors, but not to advertisements about registered investment companies or business development companies.
  • A set of seven principles-based general prohibitions drawn from historic anti-fraud principles will apply to all advertisements.
  • Advertisements may include testimonials and endorsements, subject to: required disclosures; adviser oversight and compliance; and, in some cases, disqualification provisions.
  • An adviser’s advertisement may include a third-party rating, if the third-party rating clearly and prominently discloses certain information.
  • Performance advertising is subject to the Marketing Rule, which, along with other detailed conditions related to specific types of performance, requires presentation of net performance information whenever gross performance is presented, and performance data over specific periods.
  • The Marketing Rule does not require investment advisers to review and approve their advertisements prior to dissemination but instead allows advisors to establish their own policies and procedures to prevent violations of the Rule.

Download the ebook | AI insights survey: Adopters, skeptics, and why it matters.

Overall, these changes are intended to update the definition of “advertisement” as well as to account for industry changes and to address the use of social media. Due to its replacement of previous rules, the Marketing Rule encompasses regulation of both traditional advertisements and solicitation activities. By consolidating the 1961 Advertising Rule and the 1979 Cash Solicitation Rule into a single rule, the SEC has effectively brought both traditional advertisements and solicitation activities under the broad header of “marketing,” despite the traditional separation of the two for regulatory purposes. Advisers who have developed their policies and procedures under the old system will likely need to consolidate their approach going forward.

New SEC Marketing Rule enforcement actions

2023, the first year of enforcement for the Marketing Rule, saw charges announced against nine investment advisers for advertising hypothetical performance to the general public without implementing policies and procedures required by the New Marketing Rule. These cases charged that due to a lack of required policies and procedures, each investment advisor had disseminated hypothetical performance in advertisements to a mass audience rather than presenting hypothetical performance relevant to the likely financial situation and investment objectives of the intended audience. Additionally, two of the firms failed to maintain required copies of their advertisements. All nine firms agreed to settle the SEC’s charges and to pay $850,000 in combined penalties.

The speed with which the enforcement actions were brought, following the compliance date, suggests that the Marketing Rule is a priority for SEC enforcement. A mention of the SEC’s “ongoing investigation” of Marketing Rule violations in its press release regarding the enforcement actions bolsters this likelihood. And the 2024 examination priorities, published by the SEC’s Division of Examinations in October, announced a particular examination focus on whether advisers have, among other things, adopted and implemented reasonably designed written policies and procedures to prevent violations of rules under the Advisers Act, including the Marketing Rule. As such, it’s not difficult to project that additional enforcement actions in 2024 are likely and will continue to be a priority for the SEC. Read my take on the SEC's 2024 exam priorities here.

Implications of the new SEC Marketing Rule

Going forward, it is apparent that investment advisers will need to keep the Marketing Rule in mind, not just for the types of communications traditionally labeled as advertisements, but for a broader range of other communications as well. And, the consolidation of traditional advertisements and solicitation activities under the broad header of “marketing” will likely require reworking of internal policies and procedures. Any statement that could be construed as describing hypothetical performance should be carefully scrutinized. As the SEC’s recent enforcement actions and stated priorities make clear, vigorous enforcement of the Marketing Rule should be expected for 2024 and beyond.

Find out how compliance and marketing leaders at U.S. financial institutions are thinking about and using AI → AI insights survey: Adopters skeptics, and why it matters.

 

The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

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Mark Roszak

Regulatory & Compliance Advisor to Saifr
Mark started his career in financial services regulatory roles in Washington DC, working both for the Financial Industry Regulatory Authority and as an Associate at K&L Gates. He then continued his career working with legal tech and fintech startups based out of San Francisco. Mark now runs 1121 Law, a boutique fintech law firm focusing on providing corporate and regulatory counseling to both capital allocators and operators.

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