In late 2019, the U.S. Securities and Exchange Commission released more than 100 pages of proposed changes to their decadesold advertising rule. After a year of comment, the revised guidance was issued in December 2020, with a final update on March 5.
Rather than offering solely a laundry list of specific prohibitions, this new marketing rule establishes a series of broad, principles-based regulations that retain long-held prohibitions against practices that are "fraudulent, deceptive, or manipulative and, accordingly ... misleading."
While many compliance departments are understandably focusing on the specific rules governing social media, testimonials and performance-based advertising, the most underappreciated area affected by these new regulations is data marketing and distribution.
Over the past two decades, investment databases such as Investment Metrics LLC, PSN, Morningstar Inc., Mercer LLC, Callan LLC, Bloomberg LP and eVestment have become the first step in the due diligence process for consultants, institutions, endowments, foundations, high-net-worth individuals, family offices and others seeking investment management services.
And while it is true that the marketing rule does not offer much in the way of specific guidance as it relates to the databases, there are a few important items to note.
The SEC does note an enforcement action against a manager who, "directly or indirectly distributed materially false and misleading advertisements, including by submitting performance information in questionnaires submitted to online databases."
This action, combined with the SEC's broad mandate against false, misleading and deceptive advertising, as well as a new definition that advertising includes both direct and indirect communications delivered by the firm or through a third party, strongly suggests that the data published in the investment databases is advertising.
Looking at database marketing within this context, it is clear why the new marketing rule must definitionally cover investment database marketing and distribution. In this light, what can asset managers do to ensure they remain compliant with the spirit and the letter of the new SEC marketing rule?