Marketing rule ‘represents balance’ in mandate to back up claims: SEC official

An SEC regulation that governs how investment advisors advertise their practices requires that they back up their touts, but that doesn’t mean advisors have to keep a compendium of the claims they make, an SEC official said Monday.

The Securities and Exchange Commission’s marketing rule, which went into force in November, is the first overhaul of advertising rules since 1961. It updates them to address online videos and other social media that hadn’t been invented when the original rule was written.

The measure allows investment advisors to use testimonials and endorsements for the first time, and generally gives them more latitude to sell themselves.  

That freedom comes with myriad obligations governing advisor ads that are sprinkled throughout the 430-page rule. One of the general restrictions is that advisors must prove what they say in their ads when SEC examiners inquire.

But advisors don’t have to go overboard in maintaining the documentation, said Thoreau Bartmann, co-chief counsel in the SEC’s Division of Investment Management.

“This general prohibition represents a balance,” Bartmann told an audience of more than 500 at the Investment Adviser Association Compliance Conference in Washington. “It doesn’t require literally a bible or book of every single claim made in any ad ever to be retained forever. What it requires is substantiation about material statements of fact.”

Some firms may want to document the backup for each ad. Other firms may want to establish a general file for the claims used in most advertisements.

“There’s a variety of different means for meeting this prohibition,” Bartmann said. “But it is kind of critical for that compliance and exam function.”

Advisors have always had to have a reasonable basis for statements of fact. What makes the new rule different is that SEC staff can demand the backup all at once, and if it can’t be produced, there’s a presumption of a violation, said Mark Perlow, a partner at Dechert.

“A lot is going to depend on how deep the exam staff digs,” Perlow said, speaking on the conference’s panel about the marketing rule. “I don’t think it’s going to be realistic to expect there to be a file of all the data backing up every single factual claim in every single advertisement. But it is reasonable, I think, to have policies and procedures that say factual claims of this sort are backed up by the documents over here.”

Another panelist liked what she heard from Bartmann about substantiation compliance.

“We’re glad to have flexibility because it would be incredibly burdensome for us to try to comply with each individual advertising record, whereas we can have a general file,” said Danielle Nicholson Smith, vice president and managing legal counsel at T. Rowe Price Associates. “We really want to focus on our statements that could raise any question to what’s the data to support that.”

The IAA session also addressed another advisor concern about the marketing rule — restrictions on performance advertising. Earlier this year, the SEC released a frequently asked questions document about that aspect of the regulation.

Bartmann clarified what the SEC is seeking when results are displayed for a group of investments.

“When a table shows both gross and net [performance], it is not resolved simply by showing gross and net at the top,” he said. “You have to show it for each of the individual investments.”

The SEC has made the marketing rule an examination priority this year. But the agency has not announced the beginning of a sweep, Bartmann said.

Related Topics: Investment Adviser Association