IAA: SEC Marketing Rule Still Top Concern for Compliance Teams

The Securities and Exchange Commission’s marketing rule continues to dominate conversation among investment advisory firms, according to this year’s Investment Management Compliance Testing Survey conducted by the Investment Adviser Association.

This is the third year in a row that the rule regulating how advisers present clients with investment advice and offerings has ranked as the “hottest” area for compliance divisions, according to the IAA. The SEC started enforcing the new marketing rule in November 2022 and, as recently as June, issued a risk alert on how regulators will be reviewing compliance exams regarding the rule.

“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,” Carlo di Florio, global advisory leader at the ACA Group, which partners with IAA on the report, said in a statement.

The survey, which is in its 18th year, gathered responses from 581 adviser firm compliance divisions, more than half (58%) of which said they also work in other areas of the business.

The SEC marketing rule has been a focus area for advisories, because it seeks to ensure that any communication mentioning investment performance directed to one or more persons is an advertisement subject to the Investment Advisers Act of 1940. This increased scrutiny has meant more resources being put toward marketing materials and presentations, even spurring knock-on offerings from third parties. On Wednesday, financial technology firm CapIntel released a “proposal generation builder” that creates investment presentations that comply with the rule.

Besides the marketing rule, investment advisers listed cybersecurity as the second hottest topic at 52% of respondents, followed by electronic communications surveillance at 35%. Monitoring and storing electronic communications for a defined period is another key area for the SEC. Last year, the regulator charged 16 Wall Street firms with failing to preserve electronic communications for the designated time period.

“The close contenders, cybersecurity and electronic communications, demand proactive measures to safeguard client data and maintain regulatory compliance,” di Florio said. “Only through proactive efforts can advisers thrive amidst these pressing challenges.”

Respondents also noted that SEC exams directed at their firms have tended to focus on the highest three areas of concern. When asked about the top areas of increased SEC testing, advisers responded with: advertising (69%), cybersecurity (65%), electronic communications (57%), vendor due diligence (44%) and ESG (40%).

“These top areas are in line with SEC rulemaking and enforcement focus areas reflecting a proactive industry, a continuing trend over the last several years,” the IAA wrote in the report. “Also, the majority of respondents did not decrease testing in any area, other than decreased COVID-19-related testing.”

Other findings from the report included:

• 49% of advisers are working in an office at the same levels they were pre-COVID;
  
  
• 58% of respondents are either undergoing an SEC exam or have been examined in the past five years; and
  
  
• 64% of investment advisers have conducted or intend to conduct mock SEC exams, while 82% reported that mock exams have helped them prepare for an actual SEC exam.

The IAA partners with compliance consultants ACA Group and Yuter Compliance Consulting on the annual survey.