Donna DiMaria, director, Vigilant warns that US registered investment adviser firms need to be, excuse the pun, vigilant, as the SEC ramps up compliance with The Marketing Rule which became effective on 4th November last year.
“The SEC made the effective date of the rule two-year years from the time of its approval,” DiMaria says. “The industry had a huge ramp-up period to get ready for it and a surprising number of firms weren’t ready and scrambled at the last minute.”
“When that happened the rule, which is a risk-based rule, left open a lot for interpretation on how to handle certain situations.”
DiMaria says that the idea behind this was that the rule could apply to small to large firms.
The other intent was to codify rule-making. “Much of the oversight previously was done through risk alerts or no action letters you had to go back and search the archives to understand the rules.”
The 4th of November onwards meant that the industry was saying: ‘Did we do this right?’ Di Maria, says. “Now the SEC is diving more into all the details behind it and to accompany that, they are holding regional round tables across the country trying to get the information out and explain what their initial review and findings were and where they are seeing deficiencies in the rule.”
DiMaria observes that the industry has changed. “This is one of the first big changes for the SEC in terms of rules – going from prescriptive to risk based.”
In the old rules, most enforcement action were violations of the anti-fraud provisions. “It made it hard to follow up when they found violations as people didn’t understand what they were doing wrong.”
This new rule gives the SEC more areas where they can bring in violations and allows firms to understand what parts of the rule they have violated.”
The roundtables provide lots of routine information, but DiMaria notes that the SEC is proving particularly insistent on the new substantiation requirement.
“The SEC wants firms to be able to substantiate on demand that they have reviewed any claims they have made and they can show the SEC why these claims are not misleading or inaccurate,” she says.
The on demand upon request by the SEC is new and firms are not certain what that means now as in the old days you had time to provide it.
As an attendee of the SEC roundtables, DiMaria quotes a roundtable in Philadelphia which discussed having conducted their initial set of reviews for 400 firms and finding a large number of deficiencies.
The new rule also harmonises more with the rules with FINRA. “This is important because FINRA had one set of rules and the SEC another but now they are actually back in the same fold,” DiMaria says. “For people managing and distributing ETFs, this kind of harmonises the rules that they had to follow all along, as in the US, you have to be registered with FINRA when distributing an ETF. This is actually helpful in that it has helped bring the two standards much closer together.”
DiMaria warns that some individuals were relaxed and thinking that they had time to implement the new rule. “But there is no doubt about it that this is a serious part of the SEC exams and something the SEC is taking very seriously, not only in the context of the marketing rule, but the SEC has also been active in rule making this year with approximately 56 new rules in the pipeline. The marketing rule is leading the way as to what is to come,” DiMaria warns.
“This has been out there now for more than two years and some firms are still deficient in the areas of not having the appropriate policies and procedures, which is compliance 101.”
