Advisers continue to wrestle with SEC marketing rule now in force

It's D-Day for the regulation that gives advisers latitude to use client testimonials to promote their practices.

Investment advisers have known for 18 months that the SEC marketing regulation would go into force Friday, but they’re still wrestling with the ramifications of the first major overhaul in a generation of the rules governing how they can advertise.

The Securities and Exchange Commission approved the final marketing measure in late 2020, and in March 2021 set Friday as the implementation deadline. The regulation allows advisers for the first time to use client testimonials and third-party endorsements, while modernizing the oversight framework to go beyond print, radio and TV to incorporate social media.

But with the latitude to put clients in ads comes a litany of compliance requirements in the 430-page rule. As of Friday, advisers face great reward and great risk in promoting their practices.

“Many advisers are still trying to understand what it means for them,” said Michael Kim, president of AssetMark, an outsourcing provider for independent financial advisers. “People are generally intrigued and cautiously optimistic about testimonials, but a lot more education is required.”

Some advisers are in a wait-and-see position as they let other firms jump into the testimonial waters first, said Brian Thorp, chief executive of Wealthtender, a digital marketing platform for advisers. But they may not be able to resist for long, as they see other firms tap clients to sing their praises.

“We’re going to see the use of online reviews start slowly, then ramp up quickly,” Thorp said. “Advisers will get comfortable with asking for reviews in their day-to-day [interactions] with clients.”

But they can’t just shoot a testimonial and post it or put it on the air. Each testimonial has to disclose whether the person touting the firm is a client, as well as whether the person was paid and whether there are any material conflicts of interest.

Another area that comes with promotional benefits and potential compliance pitfalls is highlighting past performance in advertising. The rule gives advisers more freedom to do so, coupled with several prohibitions and restrictions.

Things might get tricky, though, because there’s no agreed-upon lens through which to view performance.

“When the rubber meets the road, there are so many different ways investors want to see performance,” said Russell Sacks, a partner at King & Spalding. “Suddenly, it becomes difficult to say, ‘What is that performance net of fees?’”

As with testimonials, firms will take different approaches on past performance. Some will start using it immediately, while others may hesitate because of the restrictions.

“Some firms are taking a much more conservative approach and not using hypothetical returns, which is a dramatic departure” from what they were doing prior to the implementation of the new rule, Kim said.

It’s not clear how the SEC will examine and enforce the marketing rule. One reason is because it’s principles-based, meaning that it does not offer a specific way to comply. The SEC has not updated its frequently asked questions about the rule since April 2021. It issued a risk alert two months ago.

Sacks anticipates the SEC’s approach may be similar to the one it has taken with Regulation Best Interest, the broker standard of conduct that went into force in June 2020. The agency didn’t burst out of the gate with enforcement actions, but instead conducted examinations and is continuing to provide guidance.

“The playbook in this respect has been the SEC publishing best practices that they see in the field following a string of examinations,” Sacks said. “The market is calling out for guidance and telling the SEC staff, ‘We need you to fill in the blanks here.’”

But even the first enforcement cases will tell firms what to avoid, not what to do to comply.

“They’re not necessarily going to get that additional clarification,” Thorp said.

Kim said the basic thing the SEC will be looking for in adviser advertising is that it’s “factual and actual.”

That sounds simple. But it’s unlikely anything will be in the new regulatory environment.