The SEC’s New Marketing Rule: How to Stay Compliant and Avoid Big Fines

The SEC's New Marketing Rule

As part of Solutions Review’s Premium Content Series—a collection of contributed columns written by industry experts in maturing software categories—Harriet Christie, the Chief Operating Officer at MirrorWeb, explains what the SEC’s new Marketing Rule is and outlines how companies can ensure their compliance with the new standards.

The U.S. Securities and Exchange Commission’s (SEC’s) Marketing Rule was approved in December 2020 and enacted on May 4, 2021. From that point, Registered Investment Advisers (RIAs) have had an 18-month transition period—until November 4, 2022—to adhere to its updated regulations. This article will explore how and why it has come into practice, the changes made, and the subsequent steps RIA compliance teams must take. 

Why Now? 

The appeal behind the modernization of the existing Advertising Rule 206(4)-1 is clear. It has remained essentially unchanged since its adoption in 1961, an era that predates the internet, personal computers, and a large proportion of the technology at businesses’ disposal in 2022. Resultantly, the doctrine is out of touch with the landscape it governs. It specifically impacts RIAs based (or providing services) in the United States. The updated iteration reflects modern habits, namely the mass consumption of digital media and the abundance of channels through which that occurs. 

Is it Mandatory? 

As part of the new Marketing Rule, the SEC will operate on a clean slate basis, withdrawing all of the arbitrary guidance issued as a stopgap since the original Advertising Rule. The regulator recognizes that “this amended rule replaces an outdated and patchwork regime on which advisers have relied for decades.” It’s a significant overhaul, which is why firms were granted 18 months to adhere. 

Despite this generous grace period, it would be remiss to anticipate leniency when November 4th arrives. On the contrary, ample time has been granted to ensure the necessary upheaval, so excuses are less likely to appease the regulator. While the revamp of processes and systems has been made more difficult by the influx of remote work in recent years, this was considered when the rule was ratified. 

The SEC has demonstrated that any period of pandemic-enforced leniency is now over, potentially indicative of how far they’re willing to stretch their patience on compliance matters. The regulator appears serious about enforcing the new Marketing Rule. In May, it launched an email campaign to remind RIAs about the upcoming deadline, plus the steps they’ll need to take to comply. Calling their bluff or pleading ignorance appears to be a foolish course of action. 

Most RIAs seem to agree. The Investment Adviser Association recently conducted its annual survey of compliance staff at 425 investment advisor firms, sharing their findings in July. For the second year, implementing the Marketing Rule remains the number one worry for RIA compliance officers. Seventy-eight percent of respondees cited advertising/marketing as the ‘hottest compliance topic for 2022’, an increase of 20 percent from the previous year. The impending deadline is not a coincidence. 

The same survey reported that 96 percent of advisers expected to comply with the Marketing Rule on or before the November deadline, with 11 percent already doing so. Just 4 percent claimed that they were unsure of their compliance timeframe. It’s urgent, and the message appears to have landed amongst most RIAs. 

But what does the new Marketing Rule mean, and what must RIAs do differently? We’ll summarize the key points below.

1. One Rule to Rule them All

The new rule makes good on its word (to simplify the current ‘patchwork’ that has preceded it) by combining two others: the existing Advertising Rule, Rule 206(4)-1, and the Cash Solicitation rule, Rule 206(4)-3.

2. So, What’s an Advertisement?

To streamline this consolidation, the SEC has redefined “advertising” to cover two clear points. An advertisement now includes any direct or indirect communication an investment adviser makes that: 

  • Offers their services regarding securities to existing or prospective clients 
  • Consists of any endorsement or testimonial for which an adviser provides cash or non-cash compensation 

The impact of the above alteration is enormous. While previously, ‘advertising’ was limited to print media (brochures, catalogs) or communications made through TV and radio, it now also applies to electronic communications, meaning that a significant number of digital platforms (websites, email, instant messaging platforms) now find themselves under regulatory scrutiny. 

The second point encompasses a variety of communications (endorsements and testimonials) that have always been essential in the world of advertising but have now evolved into a different form, on social media platforms in particular. They’re crucial weapons in a firm’s marketing arsenal.

With the growing legion of agents wielding influence in every conceivable industry, companies will now need to disclose if the individual/organization posting has been compensated by them. The advisers must also have a written agreement with promoters and influencers and oversee their compliance with the Marketing Rule. The onus is on the adviser; there’s no debate about where the accountability lies.

3. Seven General Prohibitions

The SEC has replaced the existing prohibitions in the Advertising Rule with seven new general prohibitions. Investment advisers may not circulate any advertisement that: 

  1. Includes untrue statements and omissions 
  2. Includes unsubstantiated material statements of fact 
  3. Includes incorrect or misleading implications or inferences 
  4. Fails to provide fair and balanced treatment of material risks or material limitations 
  5. Fails to present specific investment advice in a fair and balanced manner 
  6. Cherry-picks performance results or otherwise present a performance in a manner that is not fair and balanced 
  7. Is materially misleading 

The principles place a higher burden of proof on advisers, requiring them to maintain evidence to back up their claims. In a nutshell, advisers will be required to catalog ‘advertisements’ to prove their adherence to the above stipulations. This also applies to any communication/documentation that has informed their understanding of whether the content within the advertisement is accurate, and the same applies to testimonials and endorsements. 

The Role of Communications Archiving 

As more varied communications now fall under the definition of ‘advertising,’ the SEC has issued “related amendments to … the books and records rule.” RIAs must archive and keep records of all advertisements they have circulated, which now encompasses email, websites, social media profiles, and an ever-expanding list of platforms. Advertisements are defined by the messaging they contain as opposed to the avenue through which they’re conveyed, ensuring that the SEC will not permanently play legislative catch-up as digital channels continue to increase. 

When we log on to a website, we only see its form at that given time, so it’s impossible to prove compliance over a sustained duration. While other channels (social media, email, instant messaging) provide easier access to historical data, these messages/posts are not stored immutably—they can be deleted or edited retrospectively. Archiving is the most effective way to preserve your metadata in a compliant, unalterable format. 

Ensuring Compliance 

The modernization of archaic regulations has seen digital platforms enter the SEC’s jurisdiction, and compliance demands are about to increase drastically. 

RIAs should familiarize themselves with what constitutes an ‘advertisement’ as, according to the new Marketing rule, all will need to be captured and recorded. The additional workload will affect internal compliance processes, whether that means growing compliance teams, enhancing company-wide training programs, or outsourcing to third-party vendors. Above all else, businesses must ensure they are protected ahead of the SEC’s November 4th deadline.


Harriet Christie
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