SEC Marketing Rule Emerges as Top Compliance Concern

J@vier M@rceli

Implementing the Securities and Exchange Commission’s recently finalized marketing rule has cropped up as the No. 1 concern for investment adviser compliance officers.  

According to the Investment Adviser Association’s 2021 Investment Adviser Compliance Testing Survey, advertising/marketing was identified by 58% of survey respondents as the “hottest” compliance topic—up 33 percentage points from last year. 

The SEC voted in December 2020 to modernize rules governing investment adviser advertisements and solicitor compensation under the Investment Advisers Act. Among other things, the rule will require advisers to standardize certain parts of a performance presentation to help investors evaluate and compare investment opportunities. In addition, advertisements that include third-party ratings will be permitted, as long as the adviser provides disclosures and satisfies certain criteria pertaining to the preparation of the rating to “prevent them from being misleading.” To give advisers a transition period, advisory firms have until Nov. 4, 2022, to come into full compliance with the rule.

Most firms indicated that they plan to comply with the new rules at some point during the transition period, prior to Nov. 4, 2022. Additionally, most firms indicated that they plan to amend their marketing materials to comply with the regulatory requirements. Compliance officers also cite periodically participating in meetings with prospective clients as one of the changes they anticipate because of the rule.  

Other Top Issues

Cybersecurity followed as the No. 2 compliance concern, with 53% respondents saying so. Now that it has become a top priority for the SEC, climate change/ESG jumped to third in compliance officers’ list of hot topics, named by 45% of respondents (up from 14% last year). Rounding out the five hottest topics were COVID-specific business and continuity plan concerns (17%) and digital assets (17%).

Now in its 16th year, the survey is a joint project of the Investment Adviser Association, ACA Group and Yuter Compliance Consulting. The findings are based on the responses from compliance professionals at 350 investment adviser firms, representing a cross-section of all firm sizes, from those with less than $1 billion in assets to those managing more than $10 billion. In addition, services provided by responding firms spanned the range of client types, including retail individuals with a typical account size of $1 million or less (42% of respondents), private funds (50%), ERISA assets/pension consultants (49%), institutional clients (68%) and high net worth individuals (67%).

The brightest spot in the survey findings was in relation to the impact of COVID-19, according to the IAA. While the pandemic continues to disrupt businesses and firms have had to address new concerns and issues related to their risk assessments and compliance programs, the industry appears to be “passing the test,” the IAA notes. According to the findings, no survey respondents reported material compliance violations because of COVID-specific business and continuity planning. 

With respect to the breakdown of employees teleworking, most firms had all personnel working from home (62%). Other firms reported having only certain employees teleworking (37%). Slightly more than a third of firms (35%) reported having the office temporarily closed.

For the first time, this year’s survey asked compliance officers to rank their priorities for regulatory and legislative action affecting investment advisers. The most frequently named were:

  • Unified, federal data privacy and cybersecurity laws: Federal regulators should work together on uniform data privacy and cybersecurity laws, for example, to create a single, national data breach notification regime that would make it easier for affected companies to comply with the law while ensuring that clients and customers are protected.
  • Sustainable investing/ESG: To preserve the ability of investment advisers to act in the best interest of their clients, regulators should defer to the expertise of investment advisers and not require them or limit their ability to consider a particular set of factors when making investment decisions.
  • Custody rule: The SEC should conduct a comprehensive review and rewrite of the Custody Rule (Rule 206(4)-2 under the Advisers Act).  
  • Electronic delivery: The SEC should further promote the use of e-delivery as a reliable and cost-efficient means for advisers to deliver required disclosures to clients (i.e., making e-delivery of required disclosures the default option for investment advisers). 
  • Form CRS: The SEC should reassess Form CRS (e.g., by conducting investor testing) to determine whether the form is meeting the stated goals of educating investors about the differences between investment advisers and broker-dealers and is in fact helping investors make informed decisions. 
  • Proxy voting: The SEC should revisit prior guidance that makes it more difficult and more expensive for investment advisers to engage in proxy voting on behalf of their clients and use proxy advisory firms. 
Next Post

Convenient High-risk Processing from Dedicated Merchant Service Providers

If you run a business that processes payments online, then you know your business depends on your merchant account provider. A merchant account provider enables you to process credit card payments from your customers whenever they purchase from you. But have you heard about the possibility of being categorized as […]
Convenient High-risk Processing from Dedicated Merchant Service Providers