Yes, You Can Still Market Effectively Within the New SEC Rules
Shahyan Aly – 09/30/2021
Growing up in Karachi, my father owned a marketing and advertising company, and I spent summers in his factory pretending to help. One day when I was six or seven years old, I sat at his desk and used his manual typewriter to write an essay on why I wanted to work in advertising when I grew up. My father was quite moved.
Fast-forward 25 years, and I find myself working to help others succeed at advertising and marketing. When the Investment Advisor Marketing rules went into effect in May, I took a personal interest in learning about them and how they affected Black Diamond clients. Having picked up a Juris doctorate and a couple of bar licenses, I feel I’m in a unique position to address some of the angst I see in the blogosphere.
A common sentiment is the SEC is making it difficult for firms to communicate their value propositions in a way that is both in compliance and effective. The rules make it harder for firms to discuss performance in their marketing materials and the books and records requirements add to an existing compliance burden.
I believe this framing of the issue is misleading. As defined in the Adviser Act of 1940, the SEC’s purpose in regulating financial advisors is as wholesome as the golden rule. The ‘40 Act regulations exist to protect investors from unscrupulous actors. Unfortunately, the internet makes it much easier to deceive people at scale and an unscrupulous actor can harness the power of mass advertising to dupe unsuspecting investors into making uninformed decisions.
These individuals aren’t the only ones with access to the power of technology, however. Tools like the Black Diamond Wealth Platform allows advisors to market at scale while providing investors information to make well-informed decisions. And, by codifying marketing conduct, the SEC has greater statutory ability to target unscrupulous actors with punitive measures.
Under the new rules, advertisements cannot include:
- “Any untrue statements of material fact or omit to state a material fact…”17 CFR 275.206(4)-1(a)(1)
- Claims that the advisor cannot have “reasonable basis for believing it will be able to substantiate upon demand by the Commission… ” [17 CFR 275.206(4)-1(a)(2)]
- Claims that would reasonably be likely to lead the investor into believing directly, by implication or inference, something that is untrue or misleading regarding a material fact about the investment adviser. [17 CFR 275.206(4)-1(a)(3)]
- Essentially, when discussing past performance, investment advice, or pretty much anything, the adviser must be fair and balanced. [17 CFR 275.206(4)-1(a)(4)-(7)]
In plain English, the SEC is codifying the underpinning of the RIA’s fiduciary relationship:
- Don’t lie to the prospects and investors.
- Provide data to back up anything you say that can lead to an investor taking action.
- Present information in a way that is objectively accurate and not misleading.
The “what” seems straightforward. The “how” and “where” leads to the question, “Where can I get information that is acceptable for sharing?” If your tech stack includes Black Diamond, you are well on your way to advertise and market your business both ethically and in a complainant manner. Black Diamond exists so that you can succeed at growing your business and empowering you to market your firm is central to what we do. Marketing isn’t just white-labeled applications, beautiful reports, and client communication tools. It also includes the ability to gather the data you need to grow your business. Business Intelligence, Data Mining, Advisor Reports – these are all arrows in your quiver to help you succeed by disseminating data that is true and presented in a way that is fair and balanced.
SEC rule 17 CFR 275.206(4)-1(d) requires presenting “any presentation of gross performance, unless the advertisement also presents net performance:
- With at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance; and
- Calculated over the same time period, and using the same type of return and methodology, as the gross performance.”
While Black Diamond is a comprehensive wealth platform, its robust performance reporting is still the lynchpin. With features that allow one to calculate net and gross performance, compare performance with industry benchmarks, filter out supervised and unsupervised assets, and select proper date ranges, Black Diamond is key to exceeding SEC requirements for performance reporting.
Backing Up Reasonable Basis with Data
The Final Rule release mentions “reasonable basis” 45 times – it is not simply a gut feeling, but instead, rooted in fact. Testimonials, for example, are acceptable in advertisements so long as they include disclosures regarding any conflicts of interest or compensation agreements. However, the advisor is still required to ensure a reasonable basis for believing that the endorsement complies with the SEC requirements.
Black Diamond’s Data Mining warehouse, Business Intelligence, Monitor Dashboard, and Client View are essential to forming your reasonable basis. For example, if you want to review a list of your high net worth clients, it is as simple as a single query. Want to retrieve data for tax-deferred accounts? It is a one-click filter. Want to check your firm’s year-over-year AUM growth? Business Intelligence can report that within seconds.
With Black Diamond, you can be confident that your reasonable basis is rooted in data and demonstrable.
Books and Records
The SEC has renewed its focus on books and records. The final rule will “require advisers to maintain accounts, books, internal working papers, and other documents necessary to form the basis for or demonstrate the calculation of the performance or rate of return of any portfolios.” (Final Rule: Investment Adviser Marketing (sec.gov) – 246).
Black Diamond enables one to capture and retain all reports generated by the advisors at your firm. These reports can be packaged into a single zip file nightly, along with a metadata file detailing the included accounts and whether any manual or alternative investments were a part of the report. For easier advisor oversight and compliance, this information can then be stored in your compliance platform. Black Diamond’s robust API suite also allows users to pull additional data, both point-in-time and for previous business days, to ensure capture of all the necessary information for compliance.
While the SEC rules may appear complex, each point is intended to “simplify the rule’s compliance for all advisers, while preserving and promoting protection for all investors.” Black Diamond can help in all the ways mentioned. Helping to market in a way that is both ethical and compliant remains our priority. While my father may disagree that what I do for a living is marketing in its traditional sense, I can point to the SEC Rules and say, “Look, Dad! The law says I help people market their services.”
To learn more about joining the Black Diamond community, request a personalized demo today.