SEC Marketing Rule Persists as Top Concern of Compliance Pros

For the third year in a row, implementing the Securities and Exchange Commission’s marketing rule for investment advisers remains the No. 1 worry for investment adviser compliance officers, but that concern seems to be easing a bit.  

According to the 18^th annual Investment Management Compliance Testing Survey—a joint project of the Investment Adviser Association, ACA Group and Yuter Compliance Consulting—advertising/marketing was identified by 70% of survey respondents as the “hottest” compliance topic.

While it remains the top concern, the results show that this is a drop from last year’s results, where 78% of respondents said the same, which was a 20-percentage point increase from the previous year after the rule was finalized.

The SEC in December 2020 voted to modernize rules governing investment adviser advertisements and solicitor compensation under the Investment Advisers Act. To give advisers a transition period, advisory firms had until November 2022 to come into full compliance with the rule.

When asked which policies and procedures they have updated because of the marketing rule, the top responses included:

• Removed our prior marketing policy and adopted a new policy to comply with the new marketing rule (47%)
• Revised our existing marketing policy to comply with the new marketing rule but did not adopt a completely new marketing policy (37%)
• Included a hypothetical performance policy within our marketing policy (24%)
• Removed our prior cash solicitation policy and incorporated our policy on endorsements in our marketing policy (23%)

Similarly, when asked which controls their firm has put into place with respect to marketing/advertising activities, the top responses included:

• Designated individual(s) are responsible for reviewing all advertisements for compliance with our policies and procedures (78%)
• Marketing materials are logged and tracked as they are prepared (56%)
• Adopted and implemented recordkeeping policies and procedures relating to our advertising/ marketing practices (52%)
• Compliance pre-approves marketing/advertising activities in new geographic jurisdictions (42%)
• Compliance approves all third-party solicitation engagements (40%)

Cybersecurity and E-communications

Meanwhile, issues concerning cybersecurity and electronic communications were next in line as top concerns. Cybersecurity followed with 52% and electronic communications surveillance climbed to third on compliance officers’ list of hot topics, named by 35% of respondents.

“The persistent dominance of the SEC’s Marketing Rule as the primary worry for investment adviser compliance officers underscores the critical need for proactive adaptation,” notes Carlo di Florio, Global Advisory Leader at ACA Group. “The close contenders, cybersecurity and electronic communications, demand proactive measures to safeguard client data and maintain regulatory compliance. Only through proactive efforts can advisers thrive amidst these pressing challenges.”

Additional Findings

In addition to the top compliance hot topics, the survey provides notable findings in other key areas, many of which align with the SEC’s exam, enforcement and rulemaking priorities. Those include the following.

• Advisers are less remote than expected with nearly half (49%) of respondents fully back or on their way back to operating as they did pre-COVID.
• The industry is focused on SEC exams, with 58% of respondents reporting that they are undergoing an exam or have been examined in the past five years. The top focus areas on recent SEC exams were: #1 (tied) Advertising, Books and Records, and Conflicts of Interest (48%), #2 Fees and Expenses (40%), and #3 Code of Ethics (31%).
• Investment advisers are enhancing their compliance programs, with 64% having conducted or intending to conduct a mock SEC exam, for example, as well as increased testing. More than 8 in 10 respondents (82%) reported that a mock exam prepared them for an actual SEC exam and helped identify issues and best practice enhancements.
• The top areas of increased testing include: #1 Advertising (69%), #2 Cyber (65%), #3 Electronic Communications (57%), #4 Vendor Due Diligence (44%), and #5 ESG (40%). As a continuing trend over the last several years, the report notes that these top areas are in line with SEC rulemaking and enforcement focus areas reflecting a proactive industry. What’s more, most respondents did not decrease testing in any area, other than decreased COVID-19-related testing.

“Investment advisers are enhancing their compliance programs to address new regulations and risks as well as to maintain their focus on their bread-and-butter compliance functions,” observes IAA President and CEO Karen Barr. “The survey reflects increased testing in critical areas as the workload for compliance officers continues to expand significantly.”

The survey findings are based on the participation of compliance professionals at 581 investment adviser firms. All firm sizes were represented—with 26% of respondents managing less than $1 billion in assets, 41% managing $1 billion to $10 billion, and 34% managing more than $10 billion. Close to half (42%) of responding firms reported having between 11 and 50 employees, consistent with industry data showing that most investment advisers are small- to mid-sized businesses. This year’s survey also revealed that the majority of CCOs (58%) continue to wear more than one hat (with 18% also serving in some legal capacity).

Services provided by responding firms spanned the full range of client types, including retail individuals with a typical account size of $1 million or less (35% of respondents), private funds (60%), ERISA assets/pension consultants (45%), institutional clients (58%), and high net worth individuals (56%).