The month of November proved to be, if nothing else, an active month for the Securities and Exchange Commission (SEC), perfectly exemplifying their ongoing methodology for rulemaking and regulation enforcement. And while you likely saw the updates occurring in real-time, looking back with the full perspective of the actions throughout the month can help you identify the strategic patterns of the SEC, and how they might, in 2023, impact your financial advisory firm.
A recap of compliance updates from November 2022: SEC enforcement actions and new SEC rules and proposed regulations
1. New Marketing Rule
On November 4, 2022, the Securities and Exchange Commission’s (SEC) new marketing rule went into effect. The new marketing rule allows financial firms to include testimonials in their marketing materials and outlines a series of requirements that firms must follow if they opt to do so.
SEC Chairman Gary Gensler urged chief compliance officers to be “good counselors” at their firms by helping their colleagues adhere to the SEC’s new regulation.
While there remains some confusion around how to implement the new marketing rule, the SEC has made it clear, they will be prioritizing the rule in upcoming audits and exams. To help your financial firm remain compliant, here are some pointers to keep in mind in applying the SEC’s new marketing rule:
- No “cherry picking.” If an adviser decides to ask clients for testimonials, the adviser must ask all clients, not just those who might provide a positive review.
- Advisers must document and maintain records indicating all clients have been invited to provide a review, regardless of whether the client has had a positive or negative experience with the firm.
- Advisers must be fair and balanced when including testimonials in advertising material and must include any positive and negative testimonials.
- Testimonials included in marketing materials must accompany disclosures on the same page, which are as prominent as the testimonial itself.
- The rule outlines three disclosure types: whether a current client gave the testimonial, whether the person who gave the testimonial was paid for providing their testimony, and whether there is a conflict of interest in that person providing a testimony.
In preparation for the SEC’s new marketing rule, developed the NRS® ComplianceGuardian Marketing Review module to guide users, one step at a time, through the marketing review process to ensure that their firm is in compliance.
2. The SEC issued $6.4 billion in enforcement action fees
The SEC announced that it filed more than 700 enforcement actions in the last fiscal year, which ended in September, and collected $6.4 billion from those actions. This was a record fiscal year, as the SEC filed 9% more enforcement actions than the previous fiscal year, and the total penalties increased by more than 50%.
Much of the money collected stems from settlements and record fines against banks for their employees using outside messaging services like WhatsApp to conduct business.
SEC Chairman Gary Gensler reminded attorneys they will be under scrutiny for their role as “gatekeepers.” If they see a client getting close to committing a violation, they must quickly lead them away from doing so. This responsibility also rests on chief compliance officers, who must ensure their firms are in compliance with regulators to avoid violations and penalties.
3. The SEC’s environmental, social and governance (ESG) proposed regulation
The SEC’s controversial ESG proposed regulation has entered another comment period. Developed in response to growing concerns around climate, the proposed rule would require financial firms to provide certain climate disclosures in its registration statements and annual reports. If the rule goes into effect, not only will CCOs have to design policies and procedures accordingly, but firms will have to pay for the costs associated with complying with the SEC’s proposed ESG reporting rules.
These costs may increase many firms’ reporting costs from about $2 billion to $8.4 billion per year, a concerning increase for many firms and advisers. These costs could make it difficult for firms to scale economically. There is concern over whether the long-term viability of ESG-focused investing would justify these costs, especially for smaller firms who may not have the resources to adhere to the proposed regulations.
4. The SEC’s FY22-26 strategic plan
In late November, the SEC released their FY22-26 strategic plan, highlighting their goals for the coming years and the manner in which they seek to accomplish them. In the opening message, Chair Gensler stated, “Our Strategic Plan focuses on three goals that advance our mission:
- Protect the investing public against fraud, manipulation, and misconduct;
- Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and
- Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives.
We can’t take our leadership in capital markets for granted. Technology and business models always are changing, and it is important for our agency to evolve in kind.”
Staying on top of compliance can be difficult. Looking for additional guidance and support on what your firm needs to do? Let’s talk about how NRS can help!