Marketing Rule Lessons Learned

By Theresa Hamacher

April 6, 2023

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The compliance date for the new Marketing Rule is now five months in the rear-view mirror. How has the implementation process gone so far, and what questions still need to be resolved?

Marketing Rule lessons learned so far were a focus at the 2023 IAA Investment Adviser Compliance Conference, held in Washington, D.C., in March.

In a conversation with Gail Bernstein, General Counsel of the IAA, Natasha Vij Greiner, deputy director and national associate director of the Investment Adviser/Investment Company Examination Program of the SEC Division of Examinations, provided her perspective.

“I’ve heard people say it’s a big change; I’m not sure it’s a big change,” said Greiner. “Advertising . . . was always a focus of our exams.”

Even so, the Division was proactive in making sure that advisers were aware of the upcoming compliance date and the changes they needed to make in their policies and procedures. “We sent at least two emails,” she noted, and the Division issued a risk alert.

Summarizing the results of exams over the past four months that looked at Marketing Rule compliance, Greiner characterized them as “all in all so far, very good.”

More specifically:

• The majority of advisers examined are advertising, as defined under the new rule.
• Most advisers have fully updated their policies and procedures, though some were lagging a bit in tailoring their policies and procedures.
• Most advisers have a process for substantiating facts included in advertisements, even if sometimes these processes were informal and could be strengthened.
• Most advisers have procedures for reviewing advertisements, with some having established pre-approval procedures.
• Many, but not all, have training in place for relevant staff.
• A lot of advisers have made changes to preserve books and records appropriately.

In an earlier session moderated by Sanjay Lamba of the IAA, Thoreau Bartmann of the SEC’s Division of Investment Management, Mark Perlow of Dechert, and Danielle Nicholson Smith of T. Rowe Price discussed aspects of the rule that have been most confusing or challenging for advisers.

 

Gross and net performance

Not surprisingly, presentation of performance has been a major area of focus. Questions about the requirement to provide net performance in addition to gross performance when discussing individual holdings prompted the SEC staff to issue an FAQ in January.

Discussing the application of the FAQ, Bartmann noted that, as a “general principle. . . any time gross performance is shown, net performance must be shown.” In his view, this general principle applies to the presentation of any performance result and including the performance of the fund overall is not sufficient. For example, he believes that a table showing the gross performance of individual holdings must include the net performance of the individual holdings.

The presentation of attribution analysis raises even thornier issues, and the staff is assessing the need to issue an additional FAQ on this topic. Until then, Bartmann suggests asking the question, “Does the metric translate easily into dollars and cents?” If the answer is “yes,” in his view, the adviser would be required to present both gross and net.

 

Social media

“In a lot of ways, the guidance that’s in the adopting release pulls together either staff guidance and. . .industry practice. . . and codifies it in a single place,” noted Perlow. “In that sense, the social media guidance is perhaps more continuity than change.”

Yet even though the guidance has been fairly stable, adviser approaches to social media are changing.

Until now, noted Perlow, the majority of advisers prohibited the use of social media altogether, with much of the remainder requiring that all posts be pre-cleared.

Today, however, advisers are increasingly likely to establish training and monitoring programs that enable a small group to engage with the “immediacy and spontaneity that is the essence of social media,” he argued.

Smith reported that T. Rowe Price is giving their associates more leeway to use social media as a tool for creating and maintaining relationships with clients. She explained, “Where we’re allowing more flexibility is in interactions that don’t rise to the level of advertisements,” such as third-party content unrelated to the firm’s products and services.

 

Substantiation

Advisers have always been required to substantiate factual claims in advertisements, noted the panelists, and the new rule makes it clear that firms must supply that substantiation to the SEC upon demand.

Yet, as Bartmann phrased it, the new rule permits “a variety of different means” of maintaining the appropriate books and records.

For instance, firms could maintain a central file with data that supports all of their advertisements, or they could include supporting material in the file for each advertisement. (Smith reported that T. Rowe Price has opted for the former approach.)

 

References to specific advice

By contrast, in a significant departure from past regulation, the new Marketing Rule allows advisers to discuss past specific recommendations in their advertisements.

“This was a win for investors,” argued Perlow. “There was no provision in the old advertising rule that got more in the way of communication between advisers and clients.”

Even so, advisers need to be careful in selecting the past recommendations to be presented, by using either objective criteria or by balancing winners and losers, Perlow cautioned. Bartmann noted that the withdrawn no-action letters on this topic can provide helpful examples.