Why compliance experts embrace NASAA marketing rule

Various compliance consultants think advisors and clients alike would benefit if state regulators were playing from the same rule book as federal watchdogs when policing firms’ marketing statements.

Now they have a chance to see states’ laws on advisory firm advertising come in line with the federal marketing rule the Securities and Exchange Commission adopted in 2020 and began enforcing roughly two years later. A proposal from the North American Securities Administrators Association, which represents state and provincial regulators, would put forward a “model rule” that state lawmakers could adopt to bring their own advertising regulations in line with the SEC’s.

Amy Lynch, the founder and president of the regulatory consultant FrontLine Compliance, thinks that would be a step in the right direction. Lynch said the SEC’s marketing rule, which generally instructs firms to avoid misleading statements in their advertising, has largely been a success. Above all, Lynch said, it should be credited for consolidating the restrictions on advisors’ advertisements that the SEC had been issuing piecemeal since the 1960s.

Those rules, often promulgated through so-called no-action letters, had presented advisors with a perplexing array of documents to consult when they wanted to learn exactly what they could say in marketing messages. The 2020 marketing rule eliminated all of that.

“So all those no-action letters went away, and now we just have the rule,” Lynch said.

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The SEC had also previously barred advisory firms from promoting themselves using celebrity or social-media-influencer endorsements  and from posting client reviews. Those prohibitions clashed with separate Financial Industry Regulatory Authority rules allowing broker-dealers to use client testimonials, causing particular trouble for people registered as both advisors and brokers.

The 2020 marketing rule has largely eliminated that source of confusion, as well, Lynch said.

“I think it was again, trying to create more uniformity across regulators and different sides of the industry, because dual registrants, for example, would always get tripped up,” she said.

Have an opinion? Let NASAA know

Compliance experts see NASAA’s proposed model rule as serving a similar goal of simplification. Investment advisors registered at the state level — usually firms with less than $100 million under management — now face the prospect of having to comply with a different set of advertising rules any time they branch into a new state. Only about half the states have marketing requirements that mirror the SEC’s, according to a database from the advisor-search firm Wealthtender.

“These proposed amendments reflect NASAA’s efforts to provide a model for updates to state investment adviser advertising rules based in part on changes made by the SEC to marketing rules for SEC-registered advisers,” NASAA President Leslie Van Buskirk said in a statement. “We welcome public input and thank the Investment Adviser Regulatory Section Policy and Review Project Group for their work on this proposal.”

Advisors who want to weigh in on the proposal have until Aug. 28 to submit their opinions. They should send their comments to nasaacomments@nasaa.org.

Even if the NASAA proposal is formally adopted, there will be no requirement that states adopt the new model rule. State regulators are often quick to embrace NASAA initiatives, but there’s no guarantee they will take on this one.

The desire for consistent, well-enforced rules

Since taking effect nearly three years ago, the SEC’s marketing rule has resulted in some notable enforcement actions. In September, for instance, regulators hit nine advisory firms with roughly $1.24 million in penalties over allegations that they had made unsubstantiated claims in marketing materials or used outside testimonials and endorsements without making proper disclosures, among other things.

Brian Robling, a consultant at the compliance firm SEC³, said he is aware of no case in which state regulators have relied on a state-level marketing rule in a similar enforcement action. Regulators outside the federal government have always looked to the SEC and the Financial Industry Regulatory Authority, the broker-dealer industry’s self-regulator, for guidance on marketing requirements.

That should make for an easy formal adoption of the SEC’s rule by the states.

“I’ve never seen a state come out and say: ‘We’re going to make this exception to what the SEC and FINRA are saying,'” he said. “And I’ve never seen the SEC and FINRA explicitly disagree with one another. So, yeah, it’s going to prove to be scalable.”

Adam Gana, a lawyer representing aggrieved investors and the president of the Public Investors Advocate Bar Association, said greater uniformity would benefit not only firms but also their clients.

“PIABA welcomes clarity and consistency because it’s important that all regulators, at the SEC or under NASAA, must stay aligned to make sure consumer protection stays at the forefront

Gana said. “I’ve never understood why investment advisors, if they are state-registered and under $100 million under management, shouldn’t be subject to rules that are in harmony with federal rules.”

Confusion sometimes still creeps in

Although Lynch thinks the SEC’s marketing rule has largely served its intended purposes, she also believes some of its requirements result in puzzlement. One particular source of trouble is a provision allowing advisors to use their marketing materials to discuss the possible results from various investment options they may recommend to clients.

The SEC generally allows the advertisement of such “hypothetical performance” only if advisors also provide detailed information showing how they arrived at their projections. Lynch said the SEC is not always consistent in its interpretation of this requirement.

Some private funds, for instance, will have target figures representing how much they aim to return to investors in a given period of time. Some SEC examiners interpret those yield goals as falling under the rules for hypothetical performance, while others do not.

“I hope that the SEC understands that there is confusion among their examination team members on how to approach that part of the role when they’re doing exams,” Lynch said. “Hopefully they’re going to start training their people and creating more uniformity across the various offices.”

Robling said many of the seeming contradictions in the marketing rule were resolved in the frequently asked questions post that the SEC released in March. But he said the pitfalls are still many.

“I don’t recommend that firms run hypothetical performance unless it’s a very specific use case, and that they document the specific use case, that it was for this period with this group of people, because this is the question that they were looking to have answered, and this was the only way to achieve it,” Robling said.

Notwithstanding those minor flaws, the SEC’s marketing rule has generally been a boon for the wealth management industry, both Lynch and Robling said. Now they would like to see state-registered advisors enjoy the same benefits.

“We should stop having one rule for one firm and a different rule for another firm, especially if it’s just because it’s smaller,” Lynch said. “State-registered entities are doing the same activities. It’s just on a lesser scale. So we should have the same set of rules.”