Navigating the SEC Marketing Rule: Practical Compliance Tips for RIAs

The SEC Marketing Rule, introduced under Rule 206(4)-1 of the Investment Advisers Act of 1940 and implemented in November 2022, fundamentally reshaped the compliance landscape for registered investment advisers (RIAs). This rule, which replaces the outdated Advertising and Cash Solicitation Rules, reflects the SEC’s efforts to modernize compliance expectations to align with today’s digital-first marketing strategies.

While the Marketing Rule presents RIAs with exciting new opportunities to expand their reach, its comprehensive and nuanced requirements demand a disciplined and informed approach to ensure compliance. Below, I will outline the rule’s essential elements and provide practical strategies for avoiding common pitfalls, ensuring your firm remains compliant while leveraging the rule to enhance client engagement.

Key Elements of the SEC Marketing Rule

The SEC Marketing Rule redefines how RIAs communicate with prospective and current clients. It applies to various advertising mediums and introduces several critical compliance mandates:

1. Expanded Definition of Advertisement
   The rule broadens the scope of what constitutes an “advertisement,” now encompassing any direct or indirect communication intended to solicit prospective clients or offer advisory services to multiple individuals. This includes traditional media (e.g., print and broadcast) and modern channels like social media, websites, and email.
2. Performance Advertising Standards
   The rule establishes strict guidelines for presenting performance data:
   • Both gross and net performance figures must be shown with equal prominence.
   • Performance data must adhere to standardized timeframes, including one-, five-, and ten-year periods, where applicable.
   • Use of hypothetical performance data is permitted but only under stringent conditions, including detailed disclosure and limiting its use to an appropriate audience.
3. Testimonials and Endorsements
   For the first time, RIAs can utilize testimonials from clients and endorsements from third parties, provided the firm meets specific disclosure and oversight obligations. These include:
   • Disclosure of any compensation arrangements with endorsers.
   • Substantiating the truthfulness of statements made by endorsers.
4. Third-Party Ratings
   Firms may now reference third-party ratings in advertisements, but only if the firm adheres to conditions designed to prevent misleading practices. These conditions require clear disclosures regarding the basis for the rating and any compensation paid.
5. Anti-Fraud Standards
   The rule retains its emphasis on preventing false or misleading statements, mandating that all advertising content be fair, balanced, and substantiated.
6. Recordkeeping Obligations
   Firms must maintain detailed records of advertisements, including documentation that substantiates any performance claims or factual statements.

Practical Compliance Strategies

As firms adapt to the new rule, adopting robust compliance practices will be essential to avoid regulatory scrutiny. The following strategies can help RIAs effectively navigate the Marketing Rule’s requirements:

1. Develop Comprehensive Policies and Procedures

Establishing clear and enforceable policies is foundational. These policies should cover:

• Internal approval processes for marketing materials.
• Oversight of third-party endorsements and testimonials.
• Ongoing training to ensure staff understand and comply with the rule’s requirements.

2. Embrace Transparency

Transparency is not only a regulatory requirement but also a competitive advantage. Ensure your disclosures are:

• Prominently displayed and written in plain language.
• Thorough in addressing any conflicts of interest, particularly in endorsements or compensation arrangements.

3. Standardize Performance Reporting

Standardizing how performance data is calculated and presented reduces the risk of inadvertent non-compliance. Leverage industry best practices for calculating gross and net performance and ensure your methodologies are well-documented.

4. Leverage Technology for Compliance

Modern compliance technologies can simplify adherence to the Marketing Rule. Tools for automated review, archival, and tracking of advertisements help streamline processes while ensuring regulatory requirements are met.

5. Implement a Social Media Governance Plan

Social media is a powerful but risky channel for advertising under the Marketing Rule. A governance plan should address:

• Employee training on compliant social media use.
• Monitoring of posts for adherence to anti-fraud standards.

6. Monitor Third-Party Relationships

Firms must ensure that third parties providing testimonials, endorsements, or ratings comply with the same rigorous standards. Establish contracts and review mechanisms to mitigate risks associated with these relationships.

Avoiding Common Pitfalls

Despite its clear guidelines, the SEC Marketing Rule has proven challenging for many RIAs, as evidenced by recent enforcement actions. To avoid common mistakes:

• Substantiate All Claims: Performance data and factual claims must be fully documented and readily available upon request.
• Avoid Selective Disclosures: Do not “cherry-pick” data to present favorable outcomes without offering a balanced view of performance.
• Comply with Recordkeeping Standards: Maintain meticulous records to demonstrate compliance, including copies of all advertisements and relevant substantiating documentation.

Conclusion: Building a Culture of Compliance

The SEC Marketing Rule represents a pivotal moment for the RIA industry. While it introduces new opportunities to market services more effectively, it also raises the bar for compliance. By adopting a proactive, policy-driven approach, firms can meet the rule’s requirements while enhancing their credibility with clients.

At Corporate Nerd, we specialize in helping RIAs navigate the complexities of modern regulatory requirements. From comprehensive compliance training to cutting-edge eLearning solutions, we equip firms with the tools they need to succeed in today’s regulatory landscape.

To learn more about how the SEC Marketing Rule impacts your business, or to explore our training solutions, contact us today. Let us help you build a culture of compliance that fosters trust, growth, and long-term success.

For further reference: SEC Release No. IA-5653, “Modernized Marketing Rule for Investment Advisers,” adopted December 22, 2020, effective May 4, 2021, with a compliance deadline of November 4, 2022.