Marketing and advertising in the mid-20th Century was very different then what exists in today’s world of social media. Marketing and advertising are constantly evolving. Today’s social media influencers, hashtags, comments, likes, and posts can all be used for marketing purposes. With this in mind, it makes sense that regulations should evolve as well and not be stuck in the past.

In December 2020, the SEC adapted regulations to better align with the 21st Century’s marketing environment. The 1961 Advertising Rule 206(4)-1 2021 combined with the Cash Solicitation Rule206(4)-3 will now be regulated under a single rule referred to as the New Marketing Rule 206(4)-1.

The New Marketing Rule went into effect on May 4, 2021 giving Advisers an 18-month transition period to comply. November 4, 2022 is just around the corner. Are you ready?

What’s ‘New’ about the Marketing Rule?

  • The New Marketing rule allows certain types of marketing, testimonials, endorsements and advertisements that were previously prohibited or just too difficult to comply with.
  • The previous rules for marketing were created for advisors operating in a performance-based world with mostly very wealthy clients. The new rule recognizes that the average client today wants to be able to read testimonials and research to decide if an advisor suits their needs.
  • The definition of an advertisement has been notably expanded containing two parts:
    1. Traditional communications – Advertisements to more than one person. Exclusions from the definition of an advertisement include:
      • Extemporaneous communications (as long as there is no compensation)
      • Hypothetical Performance only when in response to an unsolicited client request
      • Required Regulatory Notices and Filings (e.g. Form ADV Part 2 or Form CRS)
    2. Compensated Testimonials – experiences from current clients and Third-Party Endorsements – support from individuals who are not clients.
  • Advisors are now able to use testimonials, endorsements and third-party ratings as long as they comply with anti-fraud protections and other conditions. Endorsements must include potential conflicts of interest along with how much the individual providing the endorsement is being compensated.

How to ensure compliance with the New Marketing Rule.

The general theme of the rule is that marketing must be “fair and balanced”. How to comply is rather vague as the updated rule is principals-based which supersedes no-action letters which often provided guidance. Ultimately, no one will really know how the SEC interprets the new rule until enforcement actions are passed down, thus complying with the new rule can be a big undertaking.

While the New Marketing Rule allows advisors greater flexibility in how they advertise, with the new rule also comes new compliance responsibilities, specifically, Form ADV changes and amended recordkeeping rules.

Bookkeeping Requirements

The current recordkeeping requirements are significantly expanded. Advisers must make and keep records of all advertisements that are used to include but not limited to:

  • Written communications relating to performance and how performance was calculated
  • Hypothetical performance
  • Written or recorded materials used for all advertisements
  • All documentation exhibiting the reasonable belief that a third-party rating complies with the rule’s due diligence requirement
  • All documentation exhibiting the reasonable belief that an endorsement or testimonial complies with the rule’s due diligence requirement

Disclosure Requirements

  • Disclosures must be Prominent and include:
    1. The testimonial was given by a current client, or the endorsement was given by a person not a current client
    2. That a cash or non-cash compensation was provided
    3. Any material conflicts of interest on the part of the individual giving the testimonial or endorsement
  • Oversight and Compliance – All testimonials and endorsements that are disseminated by the adviser directly are subject to oversight. There must be a reasonable basis for believing that a testimonial or endorsement complies with the rule’s requirements. Also, there must be a written agreement with any individual who is provided compensation for an endorsement.

An adviser is expressly prohibited from compensating an “ineligible person” for a testimonial or endorsement. The disqualification rule states that if the adviser knows, or should reasonably know, that the person giving the testimonial or endorsement is an ineligible person, then the it is given in bad faith.

MasterCompliance provides expert consulting, outsourcing, and implementation tools in planning and budgeting for your firm’s compliance responsibilities. If there are any areas where you would like to explore additional assistance or services, please contact us.