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A Closer Look at the SEC’s New Marketing Rule

On December 22nd, 2020, the SEC finalized the Modernized Marketing Rule, culminating a monumental shift in the way they will view advertisements and solicitations by investment advisers going forward. This landmark update – referred to simply as the “Marketing Rule” aims to create a more evergreen, consolidated set of guidelines for anyone subject to the SEC’s jurisdiction.  

The Marketing Rule combines the Advertising Rule and the Solicitation Rule, which have been in existence since 1961 and 1979, respectively.  Since then, most of the updates to the interpretation of these rules have been made through “No-Action” letters. In finalizing the Marketing Rule, the SEC has set up a framework by which it will mostly supersede preceding guidelines to create a more comprehensive rule that includes updates to many of the interpretations to align with more modern, digital practices.

The new rule – aimed at simplifying and harmonizing guidelines – provides a unified solicitation and advertisement rule under a single regulatory framework. The finalized Marketing rule is expansive, but we’ve distilled it down to four of the most salient updates for programs and the potential implications for client engagement going forward 

  • The SEC aims to offer a clearer, and wider, definition of what constitutes an “advertisement,” thus allowing for a better understanding of what the rule covers.  The rule also includes exceptions for certain types of communications, which provides some relief for compliance professionals. This means more communications will fall under the definition of “advertisement”, and firms will need to adjust the way they supervise to accommodate a more nimble, yet broader approach.
  • Testimonials and endorsements will be allowed subject to certain conditions and disclosure requirements. While this is a step in the right direction, the restrictions placed around how testimonials and endorsements are presented will present challenges in implementation. For many firms, this is a long awaited development, but ensuring clear/prominent placement of the disclosures will probably be problematic.
  • The revised rule provides guidance on performance presentations, specifically updates around the use of gross/net of fees performance and “non-standard” performance (related, extracted, hypothetical, and predecessor performance). Most firms have historically stayed away from posting this type of performance in a public-facing setting, but the new rule provides a path forward for those that stay within the (considerable) boundaries.  
  • Lastly, the rule updates and modernizes record keeping mandates and Form ADV requirements to provide clients with better access to an advisor’s data. This will mean an Adviser will be subject to more intelligent broad-reaching scrutiny during SEC audits, further underscoring the need to prioritize their adherence to the applicable rules and regulations.

This is an important and much-needed step forward that will modernize how the financial industry approaches its marketing activities. While the SEC has provided firms ample runway to conform, it’s critical that firms start to assess the implications now to stay ahead of the curve. We can help – Hearsay’s Compliance Advisory Practice helps firms deliver against regulatory changes like the Marketing Rule. Our experienced team of compliance practitioners can help evaluate the rule, consult on the path forward and develop plans to optimize an approach. 

Learn more about our Hearsay Compliance Advisory Services and stay tuned for more insights as we dig deeper into the SEC’s new Marketing Rule.

Compliance Must Embrace – and Understand – AI

Compliance teams are overstretched. It’s become imperative they find ways to leverage technologies to become leaner, more effective, and better able to handle increasing demands. But they’re not alone in these efforts; the most recent OCIE risk alert indicates that organizations are also responsible for compliance programs that are sufficiently supported with both staff and technology.

As we’ve discussed before, an over-reliance on manual functions means compliance teams are overwhelmed by low/moderate risk issues. Technology and automation have to be considered as part of the equation so that teams can focus on the riskiest issues that matter most to the business.

As technology gets more intelligent, an opportunity arises in artificial intelligence (AI) as a catalyst to enhance the efficiency of a program. As we’ve mentioned, this can lead to a more mature, impactful compliance program and increased trust throughout the organization.

However, as programs mature and manual processes shift into automation, compliance teams will need to understand automation more and more. AI is an important tool, but at some point, compliance will be asked to explain how they supervise and test these tools to know they’re functioning as designed and expected.

At its core, AI is designed to monitor a data set and when a logical trigger is set off, to translate that information into an action. In some instances, that translation is clear and easily understood. But in other situations, especially when the way the AI translates between data sets and actions is covered under a “Black Box” due to intellectual property concerns, it makes explaining it to a regulator more difficult.

As FINRA wrote in its June 2020 report on AI and again reiterated during its November Conference on AI, a compliance professional needs to understand how the AI they are implementing aligns with regulatory expectations. These steps include a documented understanding of the data set-to-action translation and a method to regularly test the system to validate it meets legal and regulatory requirements. When the algorithm informing your AI is hidden in a “Black Box”, this can prove difficult.

It might be time to evaluate your firm’s use of AI in its supervision policies. If in the course of your review, you have any questions on AI and how to prepare for a regulatory audit feel free to reach out to your Hearsay account team to help.

The Impact of Technology on Compliance Program Maturity

With newsworthy financial services regulations such as the Department of Labor (DOL) guidelines and Regulation Best Interest (RegBI), RegTech has recently come to the forefront. The reality is that technology has been rapidly evolving for some time to provide compliance professionals with the ability to leverage solutions designed to accelerate their programs. Yet, frustratingly, not all programs have taken full advantage of the technology available to them.  While the hurdles to adoption may vary from organization to organization, the impact of not fully utilizing the technology available to an organization are profound.

NAVEX, a consultancy that has specialized in assessing the intersection of technology and compliance, recently took a closer look at this matter in their 2020 Definitive Risk & Compliance Benchmark Report. The report delivers a number of important insights focused on the maturity of a compliance program by measuring how sophisticated, entrenched, and embedded a program is inside its organization. I’ve summarized highlights below:

  • The technology spend for organizations surveyed largely fell within consistent bounds across maturity levels. This is an important insight: the difference between maturity levels was attributable to the focus of their budget spend: lower maturity programs spent on manual processes, while high maturity programs focused on technology innovation.
  • Across the board, programs that were “Maturing” or “Advanced” were more likely to report “good” or “excellent” performance in all areas of the program, including trust, performance, outcomes and integrations with the business.
  • Less mature programs were often seen as “necessary evils,” while those that were more advanced were more likely to be seen as “partners” to an organization.
  • In addition, more mature programs typically had a higher level of trust and typically had a more substantial seat at the table for decision making in the organization.

Our takeaway? Organizations can achieve better partnerships between their business and compliance teams, increasing the levels of trust and performance of compliance, by refocusing their budgets on technology that eliminates manual processes.

There are a multitude of other important findings in the report, so I would encourage you to take a look through it. If it sparks any ideas or questions, please feel free to reach out to your Hearsay account team to drive a deeper discussion on the impact to your program.