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Not Your Grandfather's Advertising Rule

Matt and Julie interview Eric Purple and Shreya Matt, partner at Stradley Ronon and director of product management at Morningstar respectively, about the new SEC marketing rule.


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In This Episode, You’ll Hear...

0:30 – The SEC Marketing Rule: The Nuts and Bolts

To understand how advisors will be affected once the SEC marketing rule goes into effect, let’s dive into some history. The historic advertising rule was put in place in 1961, when John F. Kennedy was sworn in as president and the IBM Selectric typewriter was first introduced to the market. Since then, there’s been a communications explosion—including the invention of social media—so the SEC recognized that it was time to modernize its view of solicitors and advertising in the context of marketing.

The SEC marketing rule is 430 pages, but here are the key takeaways:

– The approach to advertisements has shifted from a list of prohibitions to a series of principles.
– There is now more guidance on how to think about cash solicitations in the context of text endorsements.
– There are instructions around the use of hypothetical performance and under what instances it's permissible.

While the letter of the rule is very different than it was in 1961, the spirit is the same. At the end of the day, it’s about ensuring that financial professionals are honest and not misleading in their dealings with investors.

4:28 – How Will the SEC Marketing Rule Affect Advisors?

At first, advisors might experience the rule as a significant disruption in their businesses. But as they adjust, gradually the marketing rule will become just another rule. However, in the present, the challenge with the rule is understanding its parameters.

The SEC marketing rule is not an instruction list. Because it is principle-driven, there will be some flexibility and interpretation, and advisors will need to use their best judgment as they seek to implement it.

However, because the SEC has expanded the definition of advertisement, firms will need to update their policies and procedures accordingly, especially as they relate to sharing performance-related data and materials with clients.

7:30 – What’s Surprising About the SEC Marketing Rule?

As a lawyer, Eric found the inclusion of testimonials and endorsements in the SEC marketing rule surprising. In the original version of the rule, there was an absolute prohibition on testimonials, built on the assumption that testimonials are implicitly misleading. Under the new rule, advisors can now use testimonials if they satisfy certain requirements, including disclosing the financial arrangements that the endorser has and the person giving the testimonial.

In other words, the current mindset is that it is possible to share testimonials without being misleading if one adheres to the SEC’s listed principles.

10:20 – A Question About Hypotheticals

The SEC’s strong stance on hypotheticals came as a pretty big surprise to many firms. Most firms allow advisors to create and present clients with specific portfolios using hypotheticals, and these advisors will need to learn how to show performance in a way that’s compliant with the SEC marketing rule. The principles that govern the use of hypotheticals demonstrate a growing awareness that context matters, and advisors must be aware of how the hypothetical performance will be used to ensure compliance going forward.

In response, many firms are asking, “how do we know which clients are qualified to receive information about hypothetical performance?” The answer can get very nuanced, as it relies on the advisor’s holistic understanding of the situation, including the financial expertise of the end client and the assets under management.

13:29 – The Tension Between Responsiveness and Regulatory Compliance

Investment advisors are in a service business, and one key to success is being incredibly responsive and proactive. But under the new rule, actions taken out of a desire to be responsive could trigger different regulatory requirements. This creates tension between wanting to be as responsive and proactive to the client as possible but at the same time, needing to pull back and make sure regulatory compliance has been achieved.

15:18 – Moving Toward Clarity

The SEC marketing rule allows advisors to give more information to clients who are financially savvy enough to understand it. But how are advisors to identify their clients’ financial expertise? People are so nuanced that every case is going to be different, and traditional metrics of “accreditation” or “qualification” aren’t always accurate markers of knowledge and understanding.

As the SEC marketing rule continues to be implemented, Shreya believes that more guidance may emerge to help financial professionals build products for advisors that will help them respond to the marketing rule with clarity.

19:35 – Areas of Consensus and Divergence Around the Rule

Despite the new restrictions, advisors still largely want to continue using hypothetical performance. But an area of divergence is the use of interactive analysis tools—many firms have not accepted them, and only recently have some started to consider them.

22:22 – Is the SEC Marketing Rule Ultimately Better for Investors?

Any regulation can be disruptive, but by embracing these requirements, advisors are embracing greater transparency for the end investors. Transparency helps advisors build trust and investors to achieve better outcomes. The goal of the rule is to offer a clear view of how the advisor will act in the client's best interest.

24:52 – How Does the Evolving Regulation Landscape Fit into Product Strategy?

Shreya has split the core elements of her overall strategy into three impact themes: personalization, optimization, and regulation. Regulation is a key part of her product strategy, and her goal is to deliver flexible, extensible solutions that will help advisors comply with regulatory requirements, including the marketing rule.

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