Biggest advisor compliance challenge: SEC's new ad rule
Firms also want the SEC to conduct investor testing on Form CRS and rewrite the Custody Rule, an IAA poll finds.
Registered investment advisors view the Securities and Exchange Commission’s new marketing and advertising rule as the “hottest” compliance topic this year, with the second-hottest being cybersecurity, according to a recently released Investment Adviser Association poll.
IAA’s 2021 Investment Management Compliance Testing Survey, conducted with ACA Compliance Group, also found that firms would like the SEC to conduct investor testing on its Customer Relationship Summary Form, or Form CRS, and that the agency should conduct a comprehensive review and rewrite of the Custody Rule, Rule 206(4)-2 under the Advisers Act.
ACA and IAA announced Thursday that they’ve entered into a strategic partnership. “As a strategic partner, we are excited to collaborate further with the IAA on delivering thought leadership and guidance on how to address topical challenges for the benefit of our shared member/client community,” said Carlo di Florio, Chief Services Officer at ACA Group, in a statement.
The SEC’s advertising and marketing rule has been in effect since early May, but compliance experts are cautioning advisors to tread carefully when using testimonials and endorsements before the rule’s Nov. 4, 2022, compliance date.
The use of testimonials and endorsements “before the firm is fully compliant and updating its compliance [policies and procedures] … that is a huge risk to the firm,” Amy Lynch, founder and principal of FrontLine Compliance, said on a recent webcast held by ThinkAdvisor.
Daren Domina, a partner in the Investment Management and Private Equity Practice Groups at Haynes and Boone in New York, who also heads the Broker-Dealer Regulatory Practice Group, told BenefitsPRO’s sister publication ThinkAdvisor Thursday in an email that “because of the Marketing Rule’s permissibility of use, I expect to see more adviser arrangements and presentations with testimonials and endorsements, including increased use of social media.”
Said Domina: “Given the SEC’s reframing of advisor solicitations arrangements, and that the SEC denied suggestions to provide grandfathering relief, advisers will also have to convert their existing agreements under the now defunct ‘Cash Solicitation Rule’ to the new paradigm of compensated endorsements (and testimonials, as applicable), along with increased material conflicts of interest disclosures.”
It’s important to note, Domina warned, that an advisor “may not phase in parts of the Marketing Rule at different times; each adviser must be prepared to internally select, and to identify to the SEC, the effective date that such adviser is complying with all aspects of the Marketing Rule.”
The marketing rule “not only effectively codifies certain existing interpretations and [SEC] no-action letters, but also introduces new requirements,” Domina said.
Attorneys at BakerMcKenzie warned in a recent client alert that the SEC “is ramping up its examination and enforcement focus on cybersecurity at financial institutions, including scrutiny on actual implementation and deployment of published procedures in response to discovery of cyber breach incidents.”
The SEC, the attorneys said, also “appears to signal its expectation that multi-factor authentication (‘MFA’) for email accounts containing sensitive client and customer information should be in place.”
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