RIA Compliance and Practice Management Blog

An Update on the Current Status of the new SEC RIA Marketing Rule

Posted by RIA in a Box

Feb 10, 2021 4:36:44 PM

SEC Registered Investment Advisors Ad Rule ChangesOn December 22, 2020, the Securities and Exchange Commission (“SEC”) finalized changes to the Investment Advisers Act of 1940 to adopt a modernized registered investment adviser ("RIA") marketing rule. The new rule creates a single rule to replace the current Advertising (Rule 206(4)-1) and Cash Solicitation (Rule 206(4)-3) rules. New related amendments to the Books and Records Rule (Rule 204-2) and Form ADV were also finalized. The Form ADV will now require RIA firms to provide additional information related to their marketing practices to assist the facilitation of the SEC’s examination and enforcement capabilities.

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Special Note: The new SEC RIA Marketing Rule was officially published in the Federal Register on March 5, 2021. The rule is now scheduled to become effective on May 4, 2021 and has a compliance deadline of November 4, 2022.

Our previous blog post provided a detail summary of the new Investment Adviser Marketing rule. However, we wanted to provide a brief update on the current status of the rule.

When the new SEC RIA Marketing Rule May Take Effect

The new rule becomes effective 60 days from its official publication in the Federal Register. As of February 10, 2021, the new rule has not been published in the Federal Register. Given that the rule has not yet been published, it appears the SEC has voluntarily chosen to follow President Biden’s “regulatory freeze memorandum” issued on January 20, 2021. The memorandum instructs federal agencies to withdraw the rule until “an agency head appointed by the President...reviews and approves the rule.”

The current working assumption is that the final rule is likely to remain but the “effective date” will be delayed. Under this assumption, it is likely that the rule will eventually be published in the Federal Register in the near future and that the new rule will take effect for SEC-registered RIA firms the spring or summer of 2021. Since advisory firms have 18 months after the rule becomes effective to comply, in this scenario, SEC-registered RIA firms would likely need to comply by late 2022. 

While unlikely, It is Possible the new Marketing Rule Could Be Modified

On December 22, 2020, the new Marketing Rule was passed with a unanimous 5-0 bipartisan vote from the five SEC commissioners. However, even though Commissioners Allison Lee (who is now the Acting Chair of the SEC following the resignation of former SEC Chair Jay Clayton) and Caroline Crenshaw voted in favor of the final rule proposal, they issued a joint statement expressing some concerns:

Last year, the Commission unanimously supported a recommendation from our expert staff to modernize the Commission’s regulatory framework for investment adviser marketing.[1] While there are many elements of today’s final rule that reflect improvements to the outdated and patchwork advertising regime,[2] there are also numerous provisions and guidance throughout the Release that retreat from commonsense elements that we proposed last year. Thus, today’s unanimous vote does not reflect a consensus about how best to protect investors from the risks of misleading adviser marketing, but rather our support of many of the rule’s provisions coupled with a concern that the final rule not shift even further from the wisdom of the proposal.

In particular, Lee and Crenshaw expressed concern related to the failure of the final rule to require pre-review of advertisements:

Notwithstanding the changes that would make pre-review more feasible, the Commission has abandoned the requirement entirely. Instead, it defers to advisers to create and implement their own procedures to comply with the rule. This despite the fact that just last month, the Division of Examinations (OCIE) specifically identified a pattern of compliance deficiencies relating to advisers’ adoption, implementation, and maintenance of compliance policies and procedures relating to advertisements. The decision on this aspect of the rule is a missed opportunity to promote better compliance in this critical area, and will likely place advertisements on the list of examination and enforcement priorities for years to come.

Thus, it is possible that the final rule could voluntarily choose to follow the guidance issued in the regulatory freeze memorandum and once again open up the rule to an additional comment period:

With respect to rules that have been published in the Federal Register, or rules that have been issued in any manner, but have not taken effect, consider postponing the rules’ effective dates for 60 days from the date of this memorandum, consistent with applicable law and subject to the exceptions described in paragraph 1, for the purpose of reviewing any questions of fact, law, and policy the rules may raise. For rules postponed in this manner, during the 60-day period, where appropriate and consistent with applicable law, consider opening a 30-day comment period to allow interested parties to provide comments about issues of fact, law, and policy raised by those rules, and consider pending petitions for reconsideration involving such rules. As appropriate and consistent with applicable law, and where necessary to continue to review these questions of fact, law, and policy, consider further delaying, or publishing for notice and comment proposed rules further delaying, such rules beyond the 60-day period.

What Should SEC-Registered RIA Firms Do Now In Regards to the new Marketing Rule

We continue to advise all SEC-registered RIA firms to not implement any adverting or solicitor-related compliance program changes until further guidance is issued. While it appears most likely that the final rule will ultimately go into effect in its current form, presently the rule is not in effect and advisory firms need to be careful to not implement any marketing-related changes until the rule does take effect.

What Should State-Registered RIA Firms Do Now In Regards to the new Marketing Rule

As of now, if it goes into effect, this new rule applies to SEC-registered, but not state-registered investment advisers. It appears likely that the new rule will ultimately apply to many, if not all state-registered RIA firms. However, the applicability and timing may vary by state as further information is disseminated. Some state statutes directly reference and follow the previous SEC Advertising Rule while other states have their own specific advertising rule. This, we strongly recommend that no state-registered firms look to utilize the new SEC RIA Marketing Rule until the relevant state(s) have provided specific guidance.

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As RIA compliance consultants, we highly recommend that the Chief Compliance Officer (“CCO”) and all advisory firm principals review the SEC's finalized marketing rule. Investment adviser regulatory compliance issues related to advertising are frequent and the firm’s CCO needs to establish and implement the proper policies and procedures to ensure proper compliance.

Be sure to check back soon as we continue to provide updates on relevant RIA regulatory compliance focus areas.

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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