How are investment firms complying with SEC Marketing Rule?

In the fall, it will be two years since the compliance deadline for the SEC Marketing Rule for investment management firms, but how are firms ensuring that they stay within the rules?

A new report from the CFA Institute and the IAA reveals compliance practices of 189 firms, mostly smaller ($1B-$5B AUM), and mid-size ($50B-$250B AUM) firms with 90% claiming compliance with CFA Institute Global Investment Performance Standards.

Karyn Vincent, CFA, CIPM, Senior Head of Global Industry Standards, CFA Institute, said that the SEC Marketing Rule continues to be a hot topic of discussion among impacted firms and noted the substantial overlap between GIPS® and the SEC Marketing Rule.

“Until now, firms have had to rely on anecdotal information for insights into how their peers are complying. The survey results remove this uncertainty,” Vincent said. “As an example, the results show that a majority of investment firms are calculating composite net returns using model fees. This is especially the case for larger asset managers. We hope this new information offers a baseline of understanding for firms to use in assessing their policies for complying with the SEC Marketing Rule.”

The rule, which has been criticized as having ‘fallen short’ of industry expectations in a recent report, applies to SEC-registered investment management firms in the United States and those firms globally who market investment products in the US.

The CFA Institute/IAA report found that the biggest challenge for complying with the SEC Marketing Rule is determining which information is considered “performance” that must be presented on a net basis.

Other key findings include:

• When calculating net returns, model fees are more popular than actual fees, but 37 percent of firms are still primarily using actual fees.
• Roughly half of the respondents do not include contribution to return in marketing materials, and roughly half do not include attribution effects either. Many respondent comments indicate that this information was removed because of the Marketing Rule.
• There is no predominant policy for classifying attribution effects, contribution, or yield as performance.
• Most firms that are calculating investment-level net internal rates of return use the spread method.
• Approximately 74 percent of responding firms treat information submitted to databases as an advertisement subject to Marketing Rule requirements.
• Approximately 39 percent of firms do not present hypothetical performance.
• Of those firms that present hypothetical performance, most do so only on a one-on-one basis or in response to unsolicited requests.
• Firms take a variety of approaches for defining which prospect types qualify to receive hypothetical performance, with 36 percent classifying institutional investors as qualified.

There are more findings on the CFA Institute website.

“The SEC’s Marketing Rule remains a significant compliance focus for investment advisers and the performance related provisions continue to be the most challenging to implement,” said Sanjay Lamba, Associate General Counsel, IAA.  “The survey results should be helpful for firms to benchmark their compliance programs with how other firms are implementing the marketing rule.”