Clock starts ticking on November 2022 compliance for SEC ad rule

Investment advisers registered with the Securities and Exchange Commission have until November 2022 to comply with the agency’s new marketing rule. But that doesn’t mean they can relax, because compliance will be a heavy lift that should start now, experts said.

The new regulation replaces the advertising rule that had been in place since 1961, as well as a rule on payments to solicitors that was established in 1979.

The final marketing rule — which allows testimonials, endorsements and third-party ratings as long as they comply with anti-fraud protections and other conditions — contains principles-based provisions that can apply to social media communications. The previous rule centered on written communications, television and radio advertising

The updated regulation was published last Friday in the Federal Register. It becomes effective on May 4, and the compliance deadline is Nov. 4, 2022.

“This is a sea change,” said Karen Barr, chief executive of the Investment Adviser Association. “This new set of rules bring advisers into the 21^st century.”

Advisory firms should dig into the 430-page rule now and formulate a compliance timeline.

“Even though it does seem like advisers have a long time to comply with the rule, they should take a deep dive into all the different aspects of the rule and inventory all the different ways they market their services,” Barr said.

Firms will have to assess their existing marketing materials and approaches, figure out how to adjust them to the new obligations in the marketing rule, establish policies and procedures and train staff, among other tasks, said Pamela Pendrell, chief compliance officer at GlobeFlex Capital.

“This is going to be a huge undertaking,” Pendrell said Friday during the online Investment Adviser Association Compliance Conference. “I’m expecting this is going to take a year. I would suggest a lot of thought and planning.”

The SEC approved the marketing rule unanimously — 5-0 — in late December. Although the agency is undergoing a leadership change with Gary Gensler’s nomination as chairman pending in the Senate, no one is expecting the commission to revisit the measure when it has a 3-2 Democratic majority.

“There’s a lot of support on both sides of the aisle for this rulemaking,” Sanjay Lamba, IAA associate general counsel, said during the organization’s compliance conference.

The marketing rule replaces decades of no-action letters from agency staff that formed the regulatory contours for adviser marketing. It permits past specific recommendations and testimonials, allows third-party ratings and establishes a framework for performance advertising.

But it is principles-based. For instance, it doesn’t explicitly address social media but it does set requirements that can apply to online advertising. It doesn’t require a preapproval process for ads, but the SEC likely will expect firms to have robust controls around marketing.

The SEC will seek compliance with the rule but won’t necessarily be nitpicking marketing programs, said Melissa Harke, senior special counsel in the SEC’s Division of Investment Management. The regulation will have a negligence standard rather than a strict liability standard.

“We’re looking for reasonableness here,” Harke said during the IAA conference. “A foot fault should not be something that you’re worried about under the new iteration of the rule.”

Despite the more expansive advertising allowed by the marketing rule, advisory firms aren’t likely to go the way of car dealerships that use local sports stars to promote their businesses.

“This is a community that gets most of their clients by word of mouth,” Barr said.