The SEC Marketing Rule: a short guide

Learn about what those requirements are, and how seriously the SEC has been taking this rule since its inclusion. 

Background on the SEC’s Marketing Rule

The SEC introduced its new Marketing Rule for investment advisors in 2020, in an attempt to differentiate between advertisements and advice. The murky waters of advertising in the industry meant that customers may have been misled and mis-sold products they didn’t need, because the recommendation came from a trusted regulated financial advisor.

The timeline of Congress meant that the final compliance deadline was in November 2022.

The new SEC Marketing Rule replaced two previous rules;

1. SEC Advertising Rule (1961)- focused on removing misleading advertising practices like promoting an advisor’s specific previous recommendation for profit
2. SEC Cash Solicitation Rule (1979) – prevented an advisor paying for solicitation (unless they satisfied certain exemption criteria), such as for referrals or recommendation

The replacement of these two old rules with the SEC’s Marketing Rule now means that investment advisory firms have more practical advice regarding their advertising. Plus, with a bank of regulatory infractions already, firms should have a clear idea of how to comply, and which advertising techniques to avoid. 

Details of the Marketing Rule

Here’s a summary of the rule:

1. Updated definition of advertising
2. The seven general prohibitions
3. Rules for testimonial and third party ratings

It’s also important to note that SEC marketing compliance applies to communications sent to clients or private fund investors, and not to Limited Companies.

Updated definition of advertising

The Marketing Rule starts by changing the definition of an advertisement from the previous Advertising Rule. It uses a double-pronged approach, which means that if a communication meets either of the conditions, it’s considered an advertisement.

1. First prong: if the advisor communicates offers of their services with regards to securities, excluding one-on-one communications

Second prong: if communications include any endorsement or testimonial which the advisor provides compensation for (either directly through cash or indirectly, such as through brokerage, awards or reduced fees) 

Seven general prohibitions

There are seven general rules each stating something that the advertisement cannot include.

They are: 

1. An untrue statement of fact, or the leaving out of information in order to make a statement misleading
2. An untrue statement of fact that advisers don’t have a reasonable basis to believe (or could prove to investigators)
3. Misleading or untrue information that could lead to someone drawing the wrong conclusion with regards to investment advice
4. Discuss benefits without providing a fair and balanced view of risks or limitations
5. Present advice in a manner which isn’t fair and balanced
6. Present performance results, or a timeline, which isn’t fair and balanced
7. Be misleading in any other way

Testimonials and third-party ratings

Testimonials are a bit of a gray area, since advisors are using third parties to promote their services. Within the SEC’s marketing rule policies, testimonials are allowed, but are subject to certain exemptions.

Third party rating systems include sites like Trustpilot. They are also allowed during financial marketing, but must be subject to certain branding and disclosure information.

Don’t get caught out: sweeping enforcement examples

In general, the rules are not prescriptive, and advisors are encouraged to set up their own policies and procedures for compliance.

In 2023, there were sweeping violations under the Marketing Rule, in which nine different investment advisors were penalized for their performance information while advertising.

In each case, hypothetical performances were advertised too generally, in that they were not targeted towards a specific audience whose circumstances were relevant to the scenario. It meant that the advertisements were misleading, since it was unlikely the results could be replicated.

Moreover, two of the firms failed to maintain copies of their advertisements for auditing purposes, which led to more marketing rule violations and a combined fine of $850,000.

The SEC’s Director of the Division of Enforcement, Gurbir Grewal, said: “Because of their attention-grabbing power, hypothetical performance advertisements may present an elevated risk for prospective investors whose likely financial situation and investment objectives don’t match the advertised investment strategy”.

Compliance considerations

Clearly, many financial advisor firms are struggling to implement the Marketing Rule, as the SEC brought out a page of frequently asked questions to provide more context.

In this, the SEC noted that gross performance and net performance returns must be calculated using the same methodology and across the same time period, for example. But access to the SEC only goes so far, and some firms need more personalized advice around compliance considerations for the Marketing Rule.

At Global Relay, we support regulated firms by proactively supervising your communications and capturing all comms for optimized storage and management. Book a demo to see for yourself how Global Relay helps to meet strict regulatory requirements.

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