Compliance Shouldn’t Be the Sales Prevention Team

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Some of my best friends are compliance professionals.

Actually, they’re not. But that’s my way of saying that most of them are well-intentioned, competent professionals who perform a valuable function for the investment advisory community.

Then there are the exceptions.

We do a lot of content writing for RIAs who are SEO clients. Some of the comments provided by their compliance departments read more like subjective edits than regulatory concerns. They relate to non-material facts (stated accurately, but not sourced) or opinions.

You should know when to push back or accept the views of your compliance team.

The new marketing rule

The new “marketing rule” (Rule 206(4)-1 under the U.S. Investment Advisers Act of 1940) enacted by the SEC goes into effect November 4, 2022. It overhauls and modernizes the SEC’s “advertising rule” (Rule 206(4)-1) and “cash solicitation rule” (Rule 206(4)-3) and creates a single rule.

Among other changes, the new marketing rule expands the scope of communications deemed to constitute “advertisements” subject to the rule.

There is no doubt that content marketing falls within this definition.

Limitations on advertisements

The marketing rule places these limitations on communications which are advertisements. They cannot:

make an untrue statement of a material fact, or omit a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;

make a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC;

include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;

discuss any potential benefits to clients or investors connected with or resulting from the investment adviser’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;

reference specific investment advice provided by the investment adviser, where such investment advice is not presented in a manner that is fair and balanced;

include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or

be otherwise materially misleading.

Importance of materiality

According to the SEC, only matters of material fact need to be substantiated. Statements of opinion and those relating to immaterial facts are not subject to this requirement.

The marketing rule requires advisors to have a reasonable basis to believe they can substantiate material claims of fact upon demand by the commission.

Going forward (and, I would argue, even under the old advertising rule) requiring substantiation for immaterial facts or opinions is not required.

Defining “material fact”

What is a material fact?

According to one administrative decision by the SEC, “The standard of materiality is whether a reasonable client or prospective client would have considered the information important in deciding whether to invest with the adviser.”

This definition would exclude many statements, which in my experience are flagged by some compliance departments for clarification or sourcing.

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More Information

If you believe your compliance department is being overly nit-picky with your written content, you can push back by asking the following questions:

Is this a material fact?

Do you believe someone reading it would deem it important in deciding whether to retain us?

Isn’t this just an opinion, which is not subject to the marketing rule?

Here’s my basis for the statement. Do you believe, if the SEC requests substantiation, it will be sufficient?

Don’t accept the views of over-zealous compliance people who don’t want to take the time to understand what is permissible and what is prohibited.

Dan trains executives and employees in the lessons based on the research in his latest book, Ask: How to Relate to Anyone. His online course, Ask: Increase Your Sales. Deepen Your Relationships, is currently available.