Navigating Regulatory Standards for Financial Communications

The SEC IA Marketing Rule

While the USA governs state-level interactions, the SEC provides specific rules for SEC-registered Investment Advisers (IAs). The SEC defines "advertising" broadly as any communication made to more than one person that offers the adviser's services.

One critical distinction in the SEC rule involves the nature of the communication. While most one-on-one communications are not considered advertising, they do fall under the definition of advertising if they include hypothetical performance projections.

Social Media: Adoption and Entanglement

In the digital age, social media presents unique regulatory challenges. The SEC looks at two specific ways an adviser might become responsible for third-party content:

1. Adoption: This occurs when an adviser explicitly or implicitly endorses or approves third-party content, such as "retweeting" or "liking" a post that promotes their services.
2. Entanglement: This occurs when the adviser participates in the preparation of a communication, such as editing a post or approving comments made by a third party.

Exam Tip: Distinguish between "static" and "interactive" content. Static content (like a profile page) is often viewed differently than interactive content (like a live chat or comment section) where real-time engagement occurs.

Testimonials and Endorsements

The SEC distinguishes between different types of third-party statements, which is a frequent area of confusion for students.

• Testimonials: A statement provided by a current or former client or a private fund investor.
• Endorsements: A statement provided by someone who is not a client.
• Promoters: Individuals who receive compensation for providing these testimonials or endorsements.

Disclosure and Compensation Requirements

If a promoter is compensated, strict disclosure rules apply. They must clearly state:

• Whether they are a client of the firm.
• That they are being compensated for the statement.
• Any material conflicts of interest.

Furthermore, if the compensation for a testimonial or endorsement is $1,000 or more, a written agreement is required.

Performance Advertising Requirements

When an adviser shows how their strategies have performed in the past, they must ensure the presentation is "fair and balanced". This means they cannot "cherry-pick" only the best months or years to show clients.

Net vs. Gross Performance

A major requirement for performance advertising involves the disclosure of fees. If an adviser shows gross performance (performance before fees), they must also include net performance (performance after the highest fee charged by the adviser).

Standardized Time Periods

To prevent misleading clients, performance must be presented using standardized time periods. Typically, this includes showing performance over:

• 1 year
• 5 years
• 10 years

Recordkeeping and Due Diligence

Finally, all communications and advertising materials are subject to recordkeeping requirements. Firms must maintain records of their advertising to demonstrate compliance during examinations by the Administrator or the SEC.

When dealing with third-party ratings or awards, advisers must perform due diligence to ensure the ratings are legitimate and not part of a "pay-to-play" scheme. This ensures that the information provided to prospects is based on merit rather than undisclosed payments.