Page 40 - Investment Advisor July/August 2021

COMPLIANCE VS. MARKETING Additionally, with the FAQ requiring drawn limitations with principles-based
Bates Group, a compliance consulting firm, that a firm comply wholly with the new provisions designed to accommodate
already is “seeing tension between com- rule rather than partially, how should the continual evolution and interplay
pliance and marketing desires at many of private funds comply wholly while in of technology and advice,” and includes
our firms,” Linda Shirkey, its compliance the capital raise period?” Shirkey asked. tailored requirements for certain types
managing director, told me in mid-June. “Would all prospective investors need of advertisements.
The SEC’s April 14 FAQ “requires that to receive the revised PPM (with addi- For instance, the rule will require
compliance to the new rule is binary — tional disclosures and approval) or only advisors to standardize certain parts of a
that a firm either has to fully comply those the firm marketed to after the firm performance presentation to help inves-
with the new rule, or continue comply- has implemented the new rule?” tors evaluate and compare investment
ing with the old one until full compli- The rule, Shirkey continued, “states opportunities, and will include tailored
ance is in place (one assumes before Nov. that any claims about the firm have to be requirements for other types of perfor-
4, 2022),” Shirkey said. “The compliance substantiated. Would firms need to sub- mance presentations, the SEC said.
people want to have time to talk “Advertisements that
through the ramifications of the “Advertisements that include include third-party ratings will
new rule — not just ‘do we want be required to include specific
to change things,’ but more spe- third-party ratings will be disclosures to prevent them
cifically, ‘if we want to change, required to include specific from being misleading. The
how do we do that effectively?’” rule also will permit the use
For instance, Shirkey said disclosures to prevent them of testimonials and endorse-
that “if disclosures have to ments, which include tradi-
be in any ads sent via social from being misleading.” tional referral and solicitation
media, how does one ‘layer’ activity, subject to certain con-
the disclosures? On the other —SEC ditions,” the securities regula-
hand, the marketing depart- tor noted.
ments want to be able to post testi- stantiate statements like [this]? ‘We help The SEC’s marketing and advertising
monials today, and believe this will our clients meet their financial goals.’ If rule is not applicable to mutual funds or
immediately increase sales.” so, how would these substantiations need business development companies, Lynch
Bates is noticing two strategies as to be documented in a meaningful way?” explained on the webcast. “It’s impor-
firms move ahead: first, “to implement Then there’s the issue of proving that tant to understand that because they
compliance as quickly as possible for third-party content was not endorsed or have their own advertising rules under
marketing reasons,” she explained, and approved by the advisor. “How would a the Investment Company Act,” she said.
the second “is to wait and see what firm document these negative actions?” “Previously, testimonials and
comes out in additional FAQs and take Shirkey said.Also, “discussing past spe- endorsements were only allowed for
time to make the decisions.” cific investment advice in a ‘fair and broker-dealers,” according to Lynch.
Lynch of FrontLine agreed that the balanced’ manner will be challenging Financial Industry Regulatory Authority
SEC likely will update the FAQ as the for firms (such as private equity funds) regulations “allow for testimonials and
Nov. 4 compliance date nears. “I certain- with few, if any, subpar investments,” endorsements as long as they [are] fair.”
ly do hope that they do. I suspect actually she added. “Now we have the SEC deciding that
that [the FAQ] will get updated in vari- Finally, how do firms “display the it’s time for our investment advisors to
ous ways in the coming months” as firms required disclosures (the SEC calls also be allowed to utilize these tools in
prepare and have questions for SEC staff. these ‘layered disclosures’) on testi- their marketing and advertising,” she
Bates’ advisory firm clients, Shirkey monials and endorsements so the dis- explained. “So it’s a big, a big jump
added, “would welcome more clarity.” closures do not overshadow the actual forward for the SEC to allow this. And
The rule states some of the mate- testimonial or endorsement?” Shirkey it’s good timing with the nature of the
rial included in a private fund’s private said “enforcement actions over time will industry and the way in which firms
placement memorandum would be con- further define many of these” questions. are promoting their services online via
sidered advertising, Shirkey said. social media.”
“Firms and their counsel will have MORE DETAILS
to navigate what needs to be vetted According to the SEC, the rule replaces Washington Bureau Chief Melanie Waddell can
(approved/disclosed) as advertising. the current advertising rule’s “broadly be reached at [email protected].

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