There are seven advertising practices prohibited by the new marketing rule. These include making false statements, failing to offer fair and balanced treatment to risks and benefits, and providing misleading information.
The new rule bans the following:
- Making untrue statements: firms are prohibited from making untrue statements about material, including omitting key facts.
- Making unsubstantiated statements: if there is not a reasonable basis for believing that a claim could be substantiated to the SEC, the statement should not be made.
- Including misleading implications: information that is likely to cause a false or misleading inference to be drawn is not allowed.
- Not providing fair and balanced treatment to risks and benefits: a firm’s communication must clearly mention risks, as well as benefits. Any communication that focuses solely on benefits without covering potential risks is prohibited.
- Providing unbalanced investment advice: Any specific investment advice must be presented with a balanced approach.
- Purposefully excluding certain time periods: Communications presenting results need to do so in a fair and balanced manner. This means time periods that were statistically better than average should not be highlighted in a way that makes people think those results are typical.
- Including misleading material: Any information that is “materially misleading” is prohibited.
There are also certain rules pertaining to the testimonials and endorsements, that the SEC segmented into prongs. The marketing rule requires that testimonials and endorsements have prominently placed disclosures at the time they are distributed or beforehand. In addition to being close to the advertisement, the disclosure must include the following information:
- If the statement was given by a current client, investor, or another person
- If any cash or non-cash compensation was exchanged for the testimonial or endorsement
- If there are any conflicts of interest between the firm and the person giving the endorsement
Firms must also disclose the terms of compensation and the details about any conflicts of interest. However, this part of the disclosure statement is not required to be clear and prominent.
Disclosures are not required to be made in writing. And instead, they can be provided orally. The firm must retain a record of the disclosures provided. This can be a recording of the disclosure or memorialization of it, such as a script.
In addition, third-party ratings are not allowed to be used in advertisements unless specific disclosures are made, and certain criteria are met. For example, the surveys or questionnaires used to gather the data for the rating must not be designed in such a way as to solicit a certain answer. The questions may not present one firm as more favorable than another.
If a firm decides to include third-party ratings in an advertisement, the content must also include a disclosure that includes the following information:
- The date the rating was calculated, and the specific period covered by the rating
- The identity of the party who created the rating
- If any compensation was directly or indirectly exchanged for the rating or its use
The disclosures help investors know exactly how those ratings were made and who made them. They also tell them when the rating was made, so to ensure no one is misled by thinking an old rating was still in effect today.
Firms can begin complying with the new rules any time between the effective date and the compliance date, however, the SEC has offered guidance on the transition. Firms may not mix and match which set of rules they adhere to; for example, firms may not use both the new marketing rule and the old Cash Solicitation rule.
Additionally, since advisers are required to maintain records for the previous five years, it needs to be clear which set of marketing rules the firm was following for each set of records collected. This way, the SEC knows which set of compliance rules needs to be applied.
Download our whitepaper on, What the SEC’s Updated Modern Marketing Rule Means for Financial Services Companies to learn more about the new rule.
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