When the SEC adopted its updated Marketing Rule, it changed the game, enabling firms to leverage digital platforms and social media marketing like never before. As a part of those changes, investment advisers are now able to use past performance data to create compelling advertising materials for current and future potential clients.
To do it compliantly, however, you’ll need to navigate the SEC’s stringent requirements.
Here’s a quick recap of the performance advertising rules, along with 6 best practices for keeping compliant with your marketing materials.
Compliant Performance Advertising: Rules You Need to Know
The SEC Marketing Rule update introduced several key requirements regarding performance advertising:
- You must present net performance alongside gross performance. The term “gross performance” refers to the performance of an investment before fees and expenses are taken into account. “Net performance” is the performance after those fees and expenses have been deducted.
- The SEC mandates prescribed time periods for performance. To include the performance results of an investment, you must present the performance over a 1-year, 5-year, and 10-year period. If the portfolio is less than 10 years old, then performance data must be provided for the life of the portfolio.
- You must use caution when extracting certain performances from a portfolio. The SEC prohibits cherry-picking only certain results of a subset of investments from within a portfolio – you also need to provide the performance results of the entire portfolio.
- Use hypothetical performance with extreme caution – or not at all. The SEC is notoriously scrutinous over advertisements that use hypothetical performance. When releasing the final ruling, the SEC noted that any advertisement with hypothetical performance should be shared only with investors “who have access to the resources to independently analyze this information and who have the financial expertise to understand the risks and limitations of these types of presentations.” This means that dissemination of hypothetical performance to the general public is prohibited.
Burdened by manual marketing reviews? Check out this new guide for insights into automating your marketing review processes using existing tech and systems.
6 Best Practices for Compliant Performance Advertising
With a better understanding of how the SEC’s updated ruling changed the performance advertising landscape for investment advisers, let’s take a look at a few ways you and your firm can ensure compliance in your marketing materials.
1. Create clear and prominent disclosures
The key to disclosures? Making them readily available and transparent for your clients and prospective clients.
In your Form ADV Part 1, you’ll also find a new Item 5.L called “Marketing Activities,” which relates to your performance advertisement. You’ll be required to answer “yes” or “no” to questions regarding use of performance in your advertisements, as well as testimonials and endorsements.
2. Ensure performance data is accurate and complete
If you’re going to use a portfolio’s previous performance to showcase your firm’s abilities, make sure the data is accurate, up-to-date, and aligned with the advertising rulings – namely, no cherry-picking.
The SEC may ask you to “show your work” and prove the data used is accurate. If you’re unable to verify its accuracy, you could face fines and penalties.
3. Always present net performance alongside gross performance
As we mentioned above, showcasing gross performance alone can be misleading to clients and investors. Net performance considers common fees or expenses, such as advisory fees.
By providing the net performance alongside gross performance, you’re avoiding the risk of misleading investors about the actual return on certain investments.
4. Avoid making misleading statements
The SEC’s performance advertising rules were established to help protect investors against making decisions based on false or misleading information. You should never make statements that could mislead your audience.
As an example, advisers are prohibited from saying any performance result is approved or reviewed by the SEC in an advertisement.
5. Conduct regular compliance audits and reviews
With the performance advertising rules still relatively new to advisers, it’s never a bad idea to review your existing compliance policies to ensure they still align with the latest guidance. Compliance technology platforms, like COMPLY, offer review and auditing services that leverage the help of experienced compliance consultants.
6. Document and maintain adequate records
Records are always a top priority for the SEC, so it comes as no surprise that the Recordkeeping Rule (Investment Advisers Act of 1940, Rule 204-2) has been updated to reflect the new performance advertising record rules.
You should be prepared to thoroughly document all advertising practices, including those that leverage previous or hypothetical performance. Beyond documenting the advertisement, note that the SEC is also requiring advisers to maintain records of all relevant data and calculations used to determine performance.
Performance advertising can help your firm grow your book of business and attract new prospects – but all marketing materials you use must comply with regulatory requirements. With these 6 strategies in place, you’re better equipped to successfully navigate performance marketing compliance.
Master Marketing Compliance with COMPLY
While the SEC’s new Marketing Rule opened new avenues – and platforms – for firms to grow their client base, it also created additional compliance complications.
But, with the support of a trusted compliance partner, you can master Marketing Rule compliance, growing your audience and client base without increasing your compliance risk.
Ready to master Marketing Rule compliance? Let’s talk.