SEC exams director reticent about how agency will probe marketing rule

Investment advisers are wondering how the SEC will test firms’ compliance with the marketing rule that recently went into force, but the agency’s chief examiner didn’t provide any hints this week.

Richard Best, director of the SEC’s examinations division, spoke Wednesday at the ComplyConnect conference in Austin, Texas. He mentioned the marketing rule in passing a couple of times in his prepared remarks. It did not come up in the moderated Q&A afterwards.

Best declined to comment when he was asked by InvestmentNews how the SEC intended to approach initial examinations of the landmark measure that overhauls how advisers can promote their businesses.

The SEC last updated its frequently asked questioned about the marketing rule in April 2021, and in September, it released a risk alert. John Walsh, a partner at Eversheds Sutherland, said Best didn’t provide any further illumination.

“I was listening carefully to Mr. Best this morning, hoping he would say something about it,” Walsh said during a conference panel following Best’s speech.

Walsh advised the compliance officials in Austin not to wait for more SEC guidance before fully adjusting their marketing efforts to meet the rule’s requirements.

“My expectation is that they’re going to be expecting full compliance from now, what are we, Day 4?” said Walsh, who worked at the SEC for more than two decades and helped establish its office of examinations, the predecessor to today’s division. “I would not expect any additional period to get ready. I would be ready right now.”

The rule allows advisers to use client testimonials and third-party endorsements for the first time. It also contains numerous disclosure requirements, prohibitions and restrictions. Many advisers were still trying to get their arms around the 430-page regulation as of the compliance deadline last Friday.

Some observers anticipate the SEC will give advisers a grace period of sorts along the lines of how the agency began examining and enforcing Regulation Best Interest, the broker-dealer standard of conduct.

For the first several months following the Reg BI compliance deadline in June 2020, the agency told brokers it was looking for good-faith efforts to adhere to the rule. Over time, the examinations have become tougher, and the first substantive enforcement case was filed earlier this year.

But Walsh told the ComplyConnect audience not to set its hopes too high for initial SEC leniency.

“I have heard nothing like that in regard to the marketing rule,” he said.

The new marketing rule gives advisers more latitude to drum up new business but also presents significant compliance risks that won’t be fully known until the SEC starts enforcing the rule.

“It’s both liberating and terrifying,” Mederic Daigneault, senior director of consulting at National Regulatory Services, said during a ComplyConnect panel.