SEC promises not to play ‘gotcha’ in early days of new marketing rule

When a new regulation that overhauls how investment advisers can market themselves goes into force in November, the SEC doesn’t intend to pounce immediately on suspected compliance lapses, an agency official said last week.

The Securities and Exchange Commission approved in December 2020 a 430-page marketing rule that would allow advisory firms to use testimonials, endorsements and third-party ratings for the first time as long as they comply with anti-fraud protections and other conditions.

The measure updates SEC advertising regulations that have been on the books since 1961 to reflect social media communications. Ever since the rule became effective last May, advisers have known they have a Nov. 4 implementation deadline. Even with the long runway, getting ready for the measure has become a top compliance worry.

Daniel Kahl, acting director of the SEC Division of Examinations, said last week the agency won’t come charging out of the gate immediately to ring up advisers for compliance shortfalls. If there are parts of the rule that advisers don’t understand, SEC examiners will work with colleagues in the Division of Investment Management to try to provide some clarity.

“Many, many directors have said they don’t believe the exam program is a ‘gotcha’ regulator. I don’t believe we are,” Kahl said Friday at an Investment Adviser Association compliance conference in Washington. “If you’re using a testimonial and not following the rule, that’s going to be a deficiency. But if it’s a clear interpretive issue – that you read the release, you read the [Frequently Asked Questions] – we’re going to take that back. We’re going to talk to IM. It might result in a deficiency, it might not.”

IAA general counsel Gail Bernstein liked that answer.

“I think that’s actually very comforting what you just said because we have identified a lot of interpretative issues a lot of issues that we feel … would benefit from some clarity, some guidance,” Bernstein said.

But Bernstein warned the in-person audience of about 400 advisers not to wait for the SEC to release more guidance and FAQs on the marketing rule before they implement it.

“A lot of this cannot just be turn the switch on overnight,” Bernstein said. “There’s a lot of re-papering. There’s a lot of renegotiating and training. So, it’s really good to hear that you're not going to sort of go in on Day One ”with guns blazing but rather “with some understanding.”