The Marketing Rule is Complex – Plan Ahead

One of the top compliance priorities for Registered Investment Advisors in the last half of the year is the SEC’s updated Marketing Rule for RIAs [SEC Rule 206(4)-1]. November 4, 2022 is the deadline to comply.

It is the middle of the 3rd quarter of 2022, and firms should consider that it is likely that 3rd quarter performance figures will be shown in November. As such, it will be important that those performance figures reflect the requirements of the new rule. Firms should understand the revisions needed for client materials that contain performance data in its many forms (i.e., gross vs. net, hypothetical, related, extracted, predecessor, and representative accounts).

Below are additional things to think about as you prepare to comply with the rule.

What are some of the major changes to the rule?

• An updated definition of an advertisement, which includes any communications that offer investment advisory services to prospective clients/investors, or that offers new investment advisory services to current clients/investors
• The general inclusion of compensated endorsements and testimonials in the definition of an advertisement
• Specific content standards and prohibitions
• Disclosure, oversight and written agreement requirements for testimonials and endorsements
• Specific requirements for the use of third-party ratings and performance information

What are the most important things for my firm to consider?

• Updating your firm’s Form ADV, compliance manual(s), disclosures, policies, and procedures on books and records retention
• Understanding the revisions needed for client materials that contain performance data in its many forms (i.e., gross vs. net, hypothetical, related, extracted, predecessor, and representative accounts).
• Understanding how to apply the new Rule’s “fair and balanced” principles standard
• Understanding and adopting the specific rules related to testimonials and endorsements including specific disclosure requirements and written agreement requirements.
• Certain tools using forecasting simulations such as Monte Carlo analysis are excluded from the definition of hypothetical performance under the Rule. As a best practice, firms should address these simulations in their policies and procedures while ensuring that clients understand assumptions used and their limitations.
• The use of predecessor performance has always been a complex undertaking. The new Rule brings this into focus and tightens the requirements for using such performance.

The updated Marketing Rule is very complex. Oyster’s consultants have developed a deep understanding of its requirements and are ready to help you prepare for the November implementation date. We can assist with updating your procedures, filings, agreements and disclosures, and we can review your marketing to ensure that it complies with the new requirements.