Compliance May 5, 2022

November SEC Advertising Rule Compliance Date Fast Approaching

Experts with the Wagner Law Group say complying with the marketing rule can be a significant process, and firms need to make sure they are on track for full compliance by early November.

Reported by

In December 2020, the U.S. Securities and Exchange Commission voted to finalize key reforms under the Investment Advisers Act to modernize the rules that govern investment adviser advertisements and payments to solicitors.

The finalized amendments created a single rule to replace the previously distinct advertising and cash solicitation rules. According to the SEC’s leadership, the final rule is designed to more “comprehensively and efficiently” regulate investment advisers’ marketing communications. They say the reforms will allow advisers to provide investors with useful information as they choose investment advisers and advisory services, subject to conditions that are reasonably designed to prevent fraud.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

With its vote to finalize the new marketing standards, the SEC set a final compliance date of Nov. 4, 2022. Since then, in anticipation of the compliance date, the SEC has withdrawn or modified a significant number of No-Action Letters published under the previous advertising rule and the cash solicitation rule. 

In a new white paper assessing the state of the evolving adviser advertising landscape, Wagner Law Group Attorneys Seth Gadreau and Stephen Wilkes say the SEC’s actions represent a “substantial overhaul” of the now-defunct advertising and cash solicitation rules. Based on a firm’s current practices, they warn, compliance with the marketing rule can be a significant process. If firms have not done so already, they need to make sure they are on track for full compliance by Nov. 4.

“The technology used for communications has advanced, the expectations of investors seeking advisory services have changed and the profiles of the investment advisory industry have diversified,” the attorneys write. “The new marketing rule recognizes these changes and the SEC’s experience administering the current rules.”

As the Wagner attorneys explain, the framework taking effect in early November will expand the scope of communications that are considered “advertisements” for purposes of the rule. In this sense, while the rule permits more types of advertisements—including testimonials, endorsements, third-party ratings and hypothetical performance—these new strategies are subject to the marketing rule’s new principles-based regime. In other words, the forthcoming framework is far from a marketing free-for-all, and it still demands significant planning and diligence on the part of registered firms.

The SEC also instituted related amendments to Form ADV, the investment adviser registration form, and Rule 204-2, the books and records rule. The Wagner attorneys point out that the marketing regulation is the first significant change to these rules and has important implications for all investment advisers—particularly with respect to presentation of performance and solicitation activities.

The Wagner white paper explains that, under the marketing rule, the definition of “advertisement” now has two prongs. The first includes any direct or indirect communication an investment adviser makes to more than one person—or to one or more persons if the communication includes hypothetical performance—that offers the adviser’s investment advisory services regarding securities to prospective clients or investors in a private fund advised by the investment adviser. This same prong also defines an advertisement as any offer of new investment advisory services regarding securities to current clients or investors in a private fund advised by the investment adviser.

The second prong of the definition, as described in the white paper, generally includes any testimonial or endorsement for which an adviser provides compensation. Communications directed to only one person are included, the attorneys point out, as are oral communications. Compensation includes cash and non-cash compensation paid directly or indirectly by the adviser.

“A key to the SEC’s view of compensation is whether it is the basis of some form of quid pro quo for the testimonial or endorsement,” the attorneys say. “Attendance at training and education meetings, including company-sponsored meetings such as annual conferences, is not considered compensation if it is not provided in exchange for the endorsement or testimonial. The SEC declined to offer a bright-line test.”

Notably, for purposes of the marketing rule, the new advertisement definition does not differentiate between retail and non-retail investor communications and applies a uniform standard for both institutions and individuals.

The white paper points out that the marketing rule permits the use of testimonials and endorsements, subject to compliance with multiple conditions. The first pertains to disclosure: an adviser must clearly and prominently disclose, or reasonably believe that the person giving the testimonial or endorsement discloses, whether the “promoter” giving the testimonial or endorsement is a client of the investment adviser. Additionally, the adviser must disclose whether the promoter is being compensated, including both cash and non-cash compensation.

“Further disclosures are required for any material conflicts of interest on the part of the person giving the testimonial or endorsement resulting from the compensation arrangement and/or the adviser’s relationship with the promoter,” the attorneys warn.

Another condition requires that investment advisers enter into written agreements with promoters in connection with the use of a testimonial or endorsement. Investment advisers that use testimonials or endorsements in advertisements must also have policies and procedures to ensure compliance with the new marketing rule, the Wagner attorneys note.

Finally, an adviser will not be able to directly or indirectly compensate a person for a testimonial or endorsement if the adviser knows, or in the exercise of reasonable care should know, that the person giving the testimonial or endorsement is ineligible under the marketing rule at that time. As the attorneys explain, certain “bad actors,” as defined under Rule 506 of Regulation D, and other “ineligible persons” are prohibited from acting as promoters.

The Wagner attorneys emphasize that advisers will need to analyze the particular facts and circumstances of each advertisement when applying the general prohibitions of the marketing rule—including the nature of the audience to which the advertisement is directed. They point out that the SEC has noted the requirements’ similarity to FINRA Rule 2210’s general standards regarding communication with the public.

Compliance May 5, 2022

Senate Legislation Calls for Expanded Lump-Sum Payment Disclosures

The bill’s cosponsors say workers need better information about how the choice of a lump-sum buyout of their lifetime pension could undermine their financial future.

Reported by


Capitol Hill has been abuzz with retirement-related legislative initiatives recently, including the Securing a Strong Retirement Act, which has already passed the House by a wide margin, and the Enhancing Emergency and Retirement Savings Act.

The latest proposal to reemerge is the Information Needed for Financial Options Risk Mitigation Act.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

The bill, referred to as the INFORM Act, was reintroduced last week by U.S. Senators Patty Murray, D-Washington, and current chair of the Senate Committee on Health, Education, Labor and Pensions; Tina Smith, D-Minnesota; and Tammy Baldwin, D-Wisconsin. First introduced by Senator Murray in 2020, the legislation would require pension plan sponsors to provide retirees and participants with what they describe as “critical information” about the trade-offs involved when employers offer a lump-sum payment option from a traditional defined benefit pension plan that can be drawn in place of a lifetime annuity option.

“No one’s retirement planning should be put at risk because they didn’t have the information they needed before making a big decision about whether to trade their lifetime pension payments for a one-time buyout,” Murray says. “After working for decades to earn a retirement, people deserve to have better information about how a lump-sum buyout of their lifetime pension could undermine their financial future—and my commonsense bill will make sure they have that information so they can make an informed decision.”

The senators say lump-sum buyouts allow pension plans to make a one-time payment to retirees and participants in lieu of the lifetime payments to which they would otherwise be entitled. They suggest pension plan sponsors typically offer lump-sum payments to reduce their corporate liabilities, noting that the buyouts transfer all risk from employers to retirees. Buyouts also leave people on their own to manage the challenge of making these assets last as long as they are needed, the senators say.

The INFORM Act would require plan sponsors to send a notice to retirees and participants 90 days before the period in which they must decide on the offer. That notice must provide a comparison of benefits offered under the plan and the buyout offer, an explanation of how the lump sum was calculated, the ramifications of accepting a lump sum (such as the loss of certain federal protections) and details about the election period.

The legislation would also require plan sponsors to disclose lump-sum payment windows to the U.S. Department of Labor so that it can collect information on the practices.

Asked for comment on the proposal, Joe McCarty, retirement and income solutions vice president at Principal, says the firm believes in the spirit of the proposal and that pension plan participants should always have the necessary information to help make such a difficult and personal decision. He agrees that it can be challenging to balance the need to have disclosures that are both comprehensive but also easy to understand.

“The standard communication samples Principal provides to plan sponsors for their review already incorporate many of the items included in the INFORM Act,” McCarty says. “It is a stretch to say adding additional items would create an undue burden, but it would definitely add to what is already a lot of information.”

There are already some disclosure requirements in place when communicating with plan participants to help them understand how different benefit options compare. The core difficulty in making sure such disclosures resonate with pension plan participants is the potential complexity of the calculations involved, McCarty says. Because of this complexity, participants can benefit greatly from discussions about retirement withdrawal decisions with a financial professional. Advisers can help factor in other sources of retirement income and pose questions to help the participants consider their financial risk comfort level.

“At the end of the day, it’s not about adding burden to the employers or the providers. The focus should be on how to communicate to participants,” McCarty says. “We’ve spent a tremendous amount of time developing materials and have been thoughtful in our approach to help participants with this difficult decision. The challenge herein lies in the complex topic that is difficult to address for each specific situation, but with a mass communication.”

«