Compliance with the Securities Exchange Commission’s (“SEC”) new Marketing Rule (“Rule”) will be required on November 4, 2022. Below are some highlights of what to know about the Rule, and how these changes affect you. Please note that the changes to EFA’s policies and procedures discussed below are not in effect, yet, but will be effective prior to the November 4th deadline.
THE “OLD” RULES
Current SEC Rules[1] consider it to be a violation for any Investment Adviser to publish a “testimonial” concerning the adviser’s advice, analysis or other services. This means that, today, ESI Financial Advisors (“EFA”) and its Investment Adviser Representatives (“IARs”) cannot publish advertisements, on social media or otherwise, with statements such as:
- “Hello, I’m John Smith, public school teacher. I’ve worked with Mary Shields at EFA for forty years. She’s always been there for me, and she’s helped me to plan for a more comfortable retirement. You should call her. She can probably help you, too.”
- “I’m star quarterback Max Power, and I love my Advisor at EFA, Reed Rothchild. Don’t drop the ball! Call them today and open up an account!”
Notwithstanding this ban on testimonials, referrals of a specific client to an IAR or advisor are generally permitted if the solicitation rules are complied with.[2] Specifically, an Advisor is permitted to pay a cash fee to a solicitor who refers business to them, as long as there is a written agreement with the solicitor and the advisor, the solicitor distributed the advisor’s ADV, and the solicitor provided their own disclosure document (which discussed, among other things, the solicitor’s compensation).[3]
Additionally, as long as the person making the referral did not base it on an individual’s specific investment needs, impersonal referral arrangements are generally not considered to be solicitations by the SEC, and are permitted without complying with the solicitation rules and their disclosure requirements.[4] As a result, people like Dave Ramsey are allowed to have a network of “Endorsed Local Providers” that they refer business to, and you yourself may have similar informal networking arrangements. For example, you may agree with a CPA to send clients to him or her, if the CPA agrees to send clients your way.
THE NEW RULES
In December 2020, the SEC approved amendments to Rule 206(4)-1, which combines new regulatory approaches to advertisements and solicitations. These changes take effect November 4, 2022.
Promoters: The new rules introduce the concept of a “Promoter,” which is a person or company that provides “testimonials” or “endorsements,” whether or not they receive compensation. “Testimonials” are statements by clients of the adviser that solicit others to become clients. “Endorsements” are the same types of statements but are made by non-clients. Promoters that provide testimonials or endorsements include:
- Subscription-based referral services – websites or other entities that pair potential investors with local advisors (such as SmartAsset, Ramsey Solutions, or WiserAdviser, for example) to which the advisor pays a fee for the service;
- Referral arrangements with other professionals – such as attorneys, CPAs, insurance agents, etc. – that involve cash or non-cash compensation;
- Traditional solicitation agreements with other professionals that actively solicit advisory business on your behalf; and
- Any other relationship or arrangement that results in the referral of potential investors for advisory-related services.
If you use promoters and enter into arrangements to generate referrals to you, you will need to comply with ESI’s new requirements, described below.
Contract Requirement (Promoter Agreement): EFA is required to have an agreement in place with all Promoters if the amount of compensation (whether cash or non-cash compensation) is more than $1,000. Because it will be unclear whether the value of non-cash arrangements exceed this amount, EFA will require that an agreement be in place for all arrangements using promoters.
Disclosure Requirement: This agreement will require the use of a disclosure form, which will meet the rule’s disclosure requirements. These disclosure requirements include, but are not limited to:
- Whether the Promoter is a current client of the adviser;
- Whether cash or non-cash compensation is provided for the testimonial, endorsement, or solicitation;
- A brief statement of any material conflicts of interest on the part of the Promoter that results from their relationship with the adviser; and
- The material terms of any compensation arrangement, including a description of the compensation provided or to be provided, directly or indirectly, to the person for the testimonial or endorsement.
For IARs with existing referral relationships, such as informal networking agreements and cross-referral agreements with other professionals, formal referral arrangements with media personalities, or traditional solicitor relationships, you will be required to execute the new Promoter Agreement. This includes relationships where no cash compensation exchanges hands, but each party agrees to refer clients to the other. Click here for a copy of the new Promoter Agreement.
Sometimes you will act as a solicitor, referring clients to other advisors. For example, when you refer a client to Maple Capital, Brinker or AssetMark, you are acting as a Promoter. In these instances, you will use the agreement and disclosure required by those advisors.
What’s Changing:
- Informal networking arrangements, and other formal arrangements where business was referred to you on an impersonal basis, will be subject to new compliance requirements and oversight; and
- Advertisements, including social media posts, will be allowed to use testimonials and endorsements, as long as they comply with certain rules. Advertisements on social media can only be provided via an approved business-related website and will be subject to review by the Advertising Guidance Team (“AGT”) prior to posting live on the website.
what’s next?
ESI is working on updating its policies and procedures, as well as various documents impacted by the changes, and anticipates adopting the new regime in conjunction with the November 4, 2022 compliance date. There will be additional communication, particularly regarding implementation of the new Promoter Agreement, as we approach the final compliance date.
QUESTIONS
If you have any questions regarding this notice, please feel free to contact ESI Compliance at 800-344-7437.
[1] See Rule 206(4)-1(a)(1).
[2] See Rule 206(4)-3.
[3] See Rule 206(4)-3(b).
[4] See Excellence in Advertising, Ltd., SEC No-Action Letter (December 15, 1986) (opining that it was not solicitation to advertise the financial planners generally, and then invite listeners to contact them for a referral to an investment adviser representative who had paid a fee, where the referrals were based on geography without considering a caller’s individualized needs); Int’l Ass’n for Financial Planning, SEC No-Action Letter (June 1, 1998) (same, but also opining that inquiring about general areas of interest pre-referral did not constitute a solicitation); Nat’l Football League Players Ass’n, SEC No-Action Letter (January 25, 2002)(same, even though referrals were not based on geography).
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