Six tips for staying compliant with the SEC’s new Marketing Rule

While initially introduced in December 2020, the Securities and Exchange Commission’s (SEC) New Marketing Rule officially went into effect on Mar. 4, 2021, with an effective compliance date of Nov. 4, 2022.

With this change in ruling, registered investment advisers (RIA) now have the ability to use client testimonials, past-performance illustrations and endorsements from third parties. However, these changes are complex and come with a number of restrictions, limitations and a plethora of new disclosure requirements. What did not change, however, is the antifraud provisions of the rule. In other words, be truthful.

In early November 2022, the SEC shared a warning with advisers, stating they needed to “tell the truth” in their advertisements in order to comply with marketing regulations. But what, exactly, does that mean? And how can advisers ensure compliance? Let’s discuss.

What does it mean to “tell the truth in ads” for advisers?

At its core, truth in advertising is about putting your clients’ interests first. While you want to put your best foot forward and stand out from the competition, you cannot do so if your personal interests affect your ability to advertise in an unbiased manner.

It’s your responsibility to eliminate any potential conflicts of interest and follow the seven general prohibitions of the rule and provide truthful information about your firm and its personnel without being misleading when offering advice or recommendations.

As you continue evolving your marketing efforts, your messaging needs to be accurate, fair, balanced and inclusive of the facts.

How have some RIAs strayed from telling the truth?

The regulations are complex, and they’re not always intuitive to follow. Because of this, firms do miss the mark on occasion. But failing to follow the SEC’s ruling on marketing and best interests can result in hefty fines or penalties.

For example, testimonials and endorsements are new additions to an RIA’s marketing toolkit. But failing to disclose compensation in exchange for a testimonial or endorsement can make these marketing strategies misleading to prospective clients. The inclusion of the positive and negative third-party reviews is required to meet the fair and balanced requirement. Additionally, sharing past performance in your advertisements, but omitting years or months of poor returns, is another way firms will deceive potential clients.

Six guidelines to help RIAs stay compliant with the SEC’s new Marketing Rule

Below we’ve identified six primary takeaways from the SEC’s marketing ruling. By following these guidelines, you can help set your firm up for success by staying compliant and telling the truth in your advertising efforts.

#1: Substantiate claims with documentation

If you’re going to make any type of claim regarding performance, returns, years of service or experience, you must be prepared to back that information up to the regulator with proper documentation. If you can’t back it up, don’t say it.

#2: Keep thorough records

Following the recent ruling changes, RIAs have new books and records requirements, and need to keep records regarding any type of advertisements they share including online, in print, radio ads, television ads, videos, etc. More specifically, they must provide records regarding performance claims, rate of return claims and securities recommendations. The SEC wants you to keep these records as you prepare the advertisement.

#3: Make sure all statements are accurate

If you have any doubts, or you aren’t 100 percent sure something is true, then avoid saying it altogether in your advertisements. Untrue statements are deceiving. This includes statements made which omit pertinent information which could skew its meaning or create a misleading assumption.

#4: Avoid potential misunderstandings or wrong assumptions

Along a similar vein, do not make statements which are purposely vague or said in a way which could cause a viewer to infer or assume something that’s untrue. Even if what you are stating is not technically untrue, the SEC may still see this as a compliance violation.

#5: If you’re mentioning the benefits, you must mention the risks, too

If you choose to discuss the potential benefits of a certain service or operating method, you need to treat the claim with fairness and balance. Provide evidence or facts regarding the risks and limitations associated with this opportunity as well.

#6: Never skew performance results

While it is possible to include performance results in your advertisements, you must present them fairly and give viewers the full picture. Do not mislead potential clients by removing or excluding certain time periods which yielded poor or undesirable returns. Specific time periods are required, as well as proper detailed disclosures.

The immense responsibility of staying compliant with evolving ad rulings doesn’t have to fall solely on your or your chief compliance officer’s shoulders. RIA in a Box is the leading provider of compliance solutions for RIAs and investment advisers. To learn more about how we can help your compliance obligations, get in touch with our team.