In December of 2020, the Securities and Exchange Commission released a new rule designed to “modernize” the advertising and cash solicitation rules, Rule 206(4)-1 and Rule 206(4)-3, respectively, More than forty years without an update, many advisors eagerly awaited the new rules, designed to replace the existing rules to better reflect the current digital landscape and the evolution of the investment advice industry. The rule now combines the current advertising and cash solicitation rules into one single rule, Rule 206(4)-1 or the “marketing rule.”
The Basics of the Marketing Rule
This new rule took effect on May 4, 2021 and includes a number of important changes to be aware of. In addition to incorporating the use of testimonials and endorsements into the definition of an advertisement, other changes include:
- Changes to the definition of an “advertisement” to cover additional communications to prospective private fund investors, and the inclusion of certain activities of a third party to the advisor to be defined as “indirect” advertising.
- The establishment of general prohibitions that all advertisements must abide by.
- Modifications to the disclosure requirements for advertisements.
- The establishment of standards for including performance information in advertisements.
- Amendments to the books and records rule.
- Advisors are required to amend Item 5, subsection 5.L of their Form ADV to provide additional information regarding their marketing practices.
The best part of it all? SEC-registered investment adviser representatives are now permitted to employ the use of testimonials and endorsements in advertising. Long permitted for insurance agents and broker/dealer representatives, testimonials have been prohibited by the SEC for investment advisor firms and representatives, and this new rule gives them the ability to be more creative in their marketing.
But not so fast…
Compliance Considerations and Readiness for the Marketing Rule
While you might be excited to take advantage of the new rule, we advise you to tread carefully when using testimonials and endorsements before the rule’s Nov. 4, 2022 compliance date, at which time the SEC will start enforcing it. Firms are required to monitor and supervise the use of such advertising, so it’s imperative that your compliance department is ready. It is not acceptable to launch this new marketing practice without also complying with the SEC’s additional supervisory requirements.
If you jump the gun without the required compliance procedures fully in place and operational, you can easily become a target of SEC examiners. Unfortunately, it’s not OK to simply “ease into” the new rule – it’s an all-or-nothing approach. Before the November 2022 compliance date, RIA firms must fully comply with the new rule or continue to abide by the old one, which does not permit testimonials and endorsements.
The SEC relayed this fairly clearly in their April 2021 FAQs, noting that “they don’t want firms to partially comply with this rule” before next November. With the SEC’s risk-based approach to regulatory exams, utilizing testimonials and endorsements early could put the firm at a higher risk, and potentially push them up on the SEC’s priority list for examinations.
State Securities & Marketing Rule Compliance
One final word – because this rule applies only to SEC-registered advisors and firms, those registered with state securities’ divisions will not be able to enjoy the benefits of this new rule until (and unless) one of the following occurs:
- The state has currently adopted the SEC rule.
- The state(s) where they are registered adopt similar rules.
- They qualify to register with the SEC.
Absent one of these conditions, smaller firms – many independent investment advisor representatives, in particular – will continue to be covered by the old rules instead. If you are a state-registered RIA firm or representative, be sure to confirm the rules in the state(s) in which you conduct business before considering testimonials and endorsements for your advertising.
And as always, ensure you have your compliance process in place or employ the services of a trusted compliance provider to stay up to date on future changes, revisions and effective dates.
As regulatory updates evolve and we receive more guidance of the regulatory compliance, DMI and our compliance partner, Summit Compliance will continue to provide information, resources, and support to agent advisors who are seeking to advance their operation, sales, and marketing strategies.
