SEC's New Marketing Rule: What it Means for You

The Securities and Exchange Commission added a new marketing rule in 2022. Is this good or bad news for both the advisor and the investor? Read on to learn how this rule applies to you.

What Is the SEC Marketing Rule and Why Should Investors and Advisors Care?

For decades, investment advisors and financial firms have been limited in terms of how and what they can advertise to their clients due to the Investment Advertisers Act of 1940. However, as of December 22, 2020, the US Securities and Exchange Commission or SEC adopted several amendments, which resulted in a new Marketing Rule. (Compliance of the amendments took effect November 4, 2022) 

The Marketing Rule has led to certain changes to advertising policies and legal procedures for investment advisors. Let’s take a closer look at the amendments to the Investment Advertisers Act of 1940 and explore what it means for financial advisors. 

Background – The Investment Advertisers Act of 1940, the Advertiser Rules of 1961, and the 1979 Solicitor Rules 

In the 1940s, the importance of advertising rules was just beginning to be understood. Prior to this, advertisers could play fast and loose with what was “true” or “likely” in their marketing materials like ads, newspaper interviews, and more. 

In order to prevent the abuse of public trust or and to protect consumers from misinformation, the Investment Advertisers Act of 1940 was implemented. This Act was then reinforced by the Advertiser Rules of 1961 and, later, the 1979 Solicitor Rules. 

However, these additions to the Act were very broad and prevented financial advisors from promoting using client testimonials. In the modern era, the Act and its amendments have long been thought of as overzealous or limiting, as they do not take any of the developments from digital technology and digital marketing into account. 

Why did the SEC Amend the Investment Advertisers Act of 1940? 

The SEC decided to amend the Investment Advertisers Act of 1940 to modernize it, especially where digital marketing is concerned. The Marketing Rule has a significant impact on SEC-registered investment advisors no matter where they operate. 

By modernizing the Act, the SEC had made it so that investment advisors no longer need to navigate a complex patchwork of rules and legal requirements when developing or launching marketing materials. Instead, they only need to refer to the singular “Marketing Rule,” which applies to all forms of advertising, including digital advertising materials like online ads, user testimonials, etc. 

In this way, the amendment to the Investment Advertisers Act of 1940 makes complying with SEC regulations easier and less confusing for investment advisors. This, in turn, will limit the chances of potential breaches of legal obligations and allow investment advisors to advertise more confidently to their potential clients. 

“This makes a huge difference in what a financial advisor is allowed to do in regards to marketing their practice. A few years ago, when I used to work at an academic medical center, I would often meet with my financial advisor and hear about her struggles with marketing, as she would have to submit everything to the legal department to get approval before creating any type of collateral on the Internet, whether it was a blog post, an article she wrote for Forbes, a Twitter chat, a YouTube video, a graphic with a few words on it on social media, anything really,” says Leonard Kim, the marketing director at AdvisorCheck. “This process could take days, and sometimes weeks, before legal would feel comfortable with approving it. Moreover, legal departments at investment firms tend to be quite overly cautious when it comes to creating anything on social media or the Internet, making the bottleneck even deeper at a lot of investment firms,” Leonard continued.

That additional confidence is a game changer not only for financial advisors, but to their potential investors as well, as the path one took to find the right advisor that worked for them in the past was so difficult, with the limited amount of firms who were comfortable enough with getting their messaging out there, even if it was designed to purely help the investor get on the best path to success.

SEC Marketing Rule Explained: Testimonials, Past Recommendations, and Digital Ads 

The Marketing Rule doesn’t make any sweeping changes to advertising policies or practices, especially as far as consumer protections are concerned. In a nutshell, the Marketing Rule “evergreens” or standardizes the definition of an advertisement, allowing the principles of the Marketing Rule to apply to digital marketing as well as other types of marketing. 

Furthermore, the Marketing Rule unifies policies around legal advertising actions and marketing materials, making them clearer and more interpretable. In theory, marketers of all types, as well as investment advisors, will only rarely need to ask the SEC for a "no action letter," which offers assurances or advice regarding how to interpret a marketing guideline. 

More specifically, the Marketing Rule allows advisors, such as investment analysts or firms, to promote their services through user testimonials. For example, if you want to use positive word-of-mouth to bolster your digital marketing strategy, you can now do so while you could not previously. You can incorporate testimonials into your social media campaigns, plus other advertising channels like pay-per-click or PPC ads. 

Other changes thanks to the Marketing Rule include: 

• New guidance for investment advisors who want to use social media to market to potential clients 
• Guidance for discussing specific holdings when advertising investment advising services. Previously, firms had to request a no action letter guidance from the SEC in order to discuss past specific recommendations for prior clients. Now the Rule uses a principles-based approach, allowing firms to discuss previous financial recommendations more easily 

What the SEC Marketing Rule Means for Financial Advisors

For Investment Advisors the Marketing Rule simply clarifies what were grey or unspecified area and gives them a better understanding of what they can do.  

By providing new guidance the Marketing Rule further expands how and to what degree advisors use social media to increase brand awareness and promotion.  

Additionally, advisors will be more willing to discuss previous financial recommendations providing them with the opportunity to give more specifics to support their track record and performance.  

Finally, through customer testimonials advisors will be able to enhance their credibility and trustworthiness, and ultimately help elevate their brand’s reputation assuming the testimonials are valued by prospective investors.  

What the SEC Marketing Rule Means for Investors

In a broad sense, the new Marketing Rule provides meaningful benefits for investors by giving advisors the tools to provide helpful and information in a broader range of communication channels.  

More specifically, the reforms brought about by the Marketing Rule mean that advisors will provide investors with more useful information as they choose between firms/companies. For instance, now that advisors know how to use digital marketing materials legally and effectively, investors looking for a new company will be able to filter through different firms more easily. 

As another example, the Marketing Rule requires advisors to standardize certain parts of their portfolio performance presentations. The point of this is to help investors make smart evaluation decisions when comparing investment opportunities. 

Additionally, the framework that regulates marketing indications for advisors will improve the quality of the information available to investors. Simply put, investors will be able to make wiser, sounder decisions when choosing companies or individuals to handle their portfolios.  

One potential downside for investors is the credibility of the newly allowed testimonials. While the benefit of a testimonial is that a perspective investor may now read the words of an actual client. A potential investor concern is whether a testimonial may be relied upon as it not likely to be verified. This additional information may lead to uncertainty and skepticism. 

Can You Trust Financial Advisor Testimonials Under the New Rule?

“There are ways that an organization and an client could validate the credibility of testimonials, however it is up to the institution and advisor if they want to work with an organization who helps bring out that level of transparency with their prospective customers,” said Leonard Kim “Aside from validation, additional ancillary benefits of having reviews readily available include an improvement in search engine results, the ability to be found or to find someone in your local community and accessibility in a space where both parties are yearning to meet with each other and potentially work together, but often do not cross paths due to the lack of material that was readily available on the Internet prior to this amendment being finalized,” Leonard continued.

SEC Marketing Rule Compliance Date: What to Know 

The Marketing Rule has already gone into effect. The amendments to the Investment Advertisers Act of 1940 were finalized on December 22, 2020. The Marketing Rule went into effect 60 days after publication in the Federal Register. As it is now 2022, the Rule has been in effect for nearly two years. 

However, the SEC has only required compliance as of November 4, 2022. As of this date, investment advisors can no longer choose to comply with previous rules and marketing guidelines. From now on, all SEC-registered advisors must follow the new Marketing Rule. 

Final Thoughts on the SEC’s New Marketing Rule for Financial Advisors

In summary, the Marketing Rule is an effective amendment to the Investment Advertisers Act of 1940. It unifies policies and definitions regarding things like advertising, fair and protective consumer marketing practices, and the types of advertising allowed for investment advisors. 

Thanks to the Marketing Rule, investment advisors can now use testimonials to advertise their services under certain circumstances. They also have more comprehensive, accessible guidance regarding the use of previous financial recommendations to attract new clients, as well as updated guidance to help them legally advertise through digital marketing avenues. 

Read through the new provisions of the Investment Advertisers Act of 1940 on the SEC's official website for a more detailed breakdown of the changes and of the scope of the new Marketing Rule. 

Written by: Billy Quirk

Disclosure  

The information provided in this article was written by the research and analysis team at AdvisorCheck.com to help all consumers in their financial journeys, by providing the resources and the insights to help improve one’s financial health, make it through recessionary and inflationary periods of time, and save their earnings to use them towards building a secure financial future. 

Unauthorized reproduction or use of this material is strictly prohibited without prior approval. Any parties interested in content syndication, references, interviews, or PR, please contact our marketing team at marketing@aimranalytics.com

AdvisorCheck.com is an independent data and analytics company founded on the principles of helping to provide transparency, simplicity, and conflict-free information to all consumers. As an independent company providing conflict-free information, Advisorcheck.com does not participate, engage with, or receive funding from any affiliate marketing programs or services. To become a free AdvisorCheck member, visit advisorcheck.com/signup. 

---