Pertaining to compliance can be one battle after another, where this year’s SEC rule changes contain a welcome relief and a tightened red-tape moment.
The SEC’s Marketing Rule is a bit of a beast for investment advisors as a guideline essential to maintain transparency standards that assist investors’ decision-making. It’s also not often that the regulator relaxes requirements, which happened in January.
Its Marketing Compliance FAQs saw two added rules under Rule 206(4)-1 around how investment advisors market their services to clients, and was assessed by a range of law firms.
The first FAQ addresses net performance calculations. In the 2022 release, the Marketing Rule stipulates the use of a model fee: essentially a hypothetical fee schedule whenever net performance is advertised. Now, advisors have more leniency in displaying fees’ effect on performance, so long as it does not mislead investors.
There is a catch here, naturally. In the common scenario whereby fund marketers are presenting to larger prospects at different rate cards, a fee an advisor expects to charge their intended audience for an ad could be higher than what current clients pay. A model fee is therefore needed to avoid any confusion.
Secondly, the testimonial-and-disqualification provision has also been eased. Now, advisors that run paid promotion may compensate a promoter who has a final order from self regulatory organisations (SROs, including FINRA) for disqualifying conduct in the past ten years (if certain conditions are met.)
Under prior restrictive times, plenty of firms will have flat-out avoided compensating any promoters with SRO disciplinary history.
So, what does this mean for fund marketers?
It is increasingly common practice for wealth managers and hedge funds to work with RIA-adjacent channels to run paid referrals, influencer- or promoter-based distribution. Many of these agreements will have been drawn-up under more ‘conservative’ interpretations that the Marketing Rule FAQs have addressed.
Revisiting promoters partnerships should be done, then, to see what is workable under relaxed notions. Elsewhere, though, should pitch decks, factsheets and ads that feature firm-wide net performance be audited. The fee assumption should match what the intended audience would be paying, a technicality that’s been hot on the risk alert agenda for SEC exam staff.
Four years on from the Marketing Rule taking effect, clearly the obligations are morphing organically in some areas, either to be less harsh, or looking further into minute details. Collateral that would have been non-compliant two years ago is now permissible.
This makes matters complicated for IRs and marketers tasked with understanding multiple regulations like sword jugglers, where staying alert to these changes and working with compliance teams can increase awareness, but also greater engagement potential for any near-future fundraising pushes.
Sources
Mayer Brown, “SEC Staff Publishes New Marketing Rule FAQs”
Dechert, “Practical Takeaways from the SEC’s Latest Marketing FAQs”
Alston & Bird, “SEC Updates Marketing Rule FAQs on Model Fees and Disqualifying Events”
