Most financial advisors would rather network with clients than worry about RIA compliance. However, an unexpected SEC inspection could cost you a fortune if it finds that your firm has slackened in some of its compliance practices.
At the end of 2020, the Securities and Exchange Commission announced a series of adjustments to the Investment Advisers Act of 1940, to be effective May 4, 2021. The intent would be to achieve more comprehensive and efficient regulation of marketing strategies that investment advisors use.
What does this statement mean in practice, and how will it influence the marketing options of financial advisors.
In a Nutshell
The recent amendment, known as the Marketing Rule, is the first significant change to the Investment Advisers Act of 1940 in over four decades. It is important because it:
- More broadly defines “advertisements” as they pertain to marketing by RIAs
- Defines more clearly what does not count as advertising in RIAs’ communications with prospective clients
- Forbids certain practices for advertisements
- Expands the definition of solicitation
- Makes changes to advertisement disclosure requirements—e.g., when using third-party ratings
- Provides a standard for using performance information in advertising.
The new Marketing Rule’s goal is to prevent fraud by enforcing stricter regulations across all communication channels, many of which (such as social media) did not exist when the Investment Advisers Act first came into effect more than 80 years ago.
What Counts as Advertisement?
Under the new SEC Marketing Rule, “advertisements” include all:
- Direct or indirect communications by the adviser offering investment advisory services to prospective clients or offering new services to existing clients
- Indirect communications, like pre-recorded videos
- Third-party comments, testimonials, and endorsements for which the adviser provides any form of direct or indirect compensation
The Marketing Rule also specifies what does not count as “advertisement,” such as spontaneous live communications
Prohibited Advertising Practices
The reformed SEC marketing rules prohibit financial advisors from engaging in the following practices while advertising their services:
- Untruthful statements and material omissions. Financial advisors or their third-party representatives cannot provide false information or omit relevant facts while advertising.
- Unfounded statements. Every statement an investment adviser makes must have solid factual backing (such as performance statistics, etc.)
- Misleading implications and inferences. This can include anything from fostering unrealistic expectations in clients to presenting only gross performance without net performance.
- Cherry-picking. The adviser must present all information in a fair, balanced form, including investment results, growth charts, graphs, etc.
- Failure to disclose limitations and potential risks. While discussing the benefits of their services, the financial advisor must also present a balanced view of material limitations and risks.
Additionally, the updated SEC marketing regulations include a catch-all clause that forbids including any materially misleading information in advertisements.
Disclosures in Testimonials
Testimonials are an exciting opportunity for an adviser to gain higher credibility. However, testimonials and endorsements must include clear and prominent disclosures that state:
- The promoting party’s status and relationship to the financial advisor
- Specification of any compensation the promoter received
- Any material conflict of interest if it exists
A financial advisor cannot hire and pay a person to solicit prospective clients if they have a previous conviction for specific unlawful behavior that would disqualify them under SEC regulations.
The bottom line is that financial advisors who advertise their services must act with integrity and present truthful, accurate information with solid factual backing. This may mean that any use of promoters (previously known as solicitors) will require extra careful planning and clear policies and procedures to ensure that your promoter is not otherwise disqualified from being a promoter.
What Happens If You Fail to Comply With the Reformed Investment Advisers Act?
Suppose investment advisers fail to adhere to the Securities and Exchange Commission compliance procedures. In that case, they may suffer heavy financial penalties, damage to their reputation, and even an irrevocable loss of business.
Such devastating consequences aren’t always the result of malicious intent. Compliance regulation can be difficult to follow, especially during a post-reform transitional period.
Acclimatizing to the New Regulations
To allow investment advisors time to adjust, full compliance with the new Marketing Rule becomes obligatory on November 4, 2022. Advisers may start complying with the updated regulations sooner, but any compliance must be complete – an adviser cannot adopt convenient parts of the reform while ignoring other clauses.
To make sure your RIA compliance program follows the latest amendments, be sure to consult a lawyer that focuses on compliance regulations. Investing in compliance counseling will keep you from getting lost in legalese and free up more time to build your business.
My RIA Lawyer: Good Compliance Is Good Business
Don’t let an SEC exam knock you off your feet. Create a safety net by allowing our “regulatory compliance geeks” to take care of your RIA compliance program. At My RIA Lawyer, we help financial advisors and firms navigate the legal complexities of the RIA world.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.