Commentary: Keeping your data compliant under the new SEC marketing rule

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?

Maintaining data integrity, and thus remaining compliant, begins with automation. Data is complicated. And messy. And every human interaction with data is an opportunity for that data to be compromised. When asset managers automate the importation of raw investment data from their custodian into a data warehouse designed for that express purpose, it enables efficient beginning-to-end management, marketing and distribution of that data across the entire library of collateral and marketing distribution points.

Efficient automated processes mean that managers can spend less time on base data administration, and more time on data reconciliation and substantiation (see below), as well as planning the strategic positioning of that data to attract attention from database subscribers and consultants.

Automated assembly and warehousing of investment data makes efficient data reconciliation possible. Understand that effective, timely verification is impossible using a bunch of Excel spreadsheets, opened on a computer or spread out on a desk, with multiple tabs spanning multiple years. It's too inefficient (not to mention confusing), and the longer the track record, the more difficult it gets.

Insofar as publishing the data to the databases, automation promotes efficiency and reliability. Too many investment management firms task their data marketing distribution to an internal data liaison (typically a marketing associate or administrative assistant) who spends hours upon hours cutting and pasting datasets from Excel spreadsheets into the databases. These manual, do-it-yourself processes leave precious little time to ensure that data is actually correct. Additionally, if a firm has one person working with the data, they'd better have two more checking and rechecking the work.

If this type of rigorous reconciliation is not something a firm is doing every quarter, errors will begin seeping into database profiles, be they a misplaced decimal point (a minor keystroke error that can have profound consequence — think 2.56% vs. 25.6%), repeatedly publishing outdated firm information, erroneous narratives, blank fields and the like.

Each of these constitute potential compliance violations, or at the very least, might trigger an audit.

Recall that the marketing rule is based on broad, principles-based guidelines that provide the SEC with flexibility now and in the future. But that flexibility isn't just with regard to an evolving industry and technological developments down the road. Today, these principles expand the agency's ability to initiate actions based on the "fraudulent, deceptive, ... manipulative and ... misleading" regulatory standard.

To avoid these pitfalls, which have long been a core concern of the SEC, asset managers need to ensure their data is substantiated.

By "substantiated" we mean, simply, that a firm's quantitative data supports its qualitative narratives, and vice versa. For example, let's say a firm claims to be an all-cap contrarian manager whose portfolio management process enables taking tactical advantage of temporary market dislocations.

But when a consultant looks at the portfolio characteristics and sees Apple Inc., Tesla Inc., Facebook Inc., Walmart Inc, and Microsoft Corp. as the top five holdings, with portfolio turnover of 25% and a beta of 1 against its S&P 500 benchmark, it suggests this manager is either painfully lacking in self-awareness, is unable to execute the investment strategy as it is described or is simply spouting jargon in an effort to attract (unwarranted) attention. Regardless of intent, when the qualitative and the quantitative data in a database profile are incongruent, it calls into question a host of possibilities, none of which benefit the manager from either a marketing or a compliance standpoint.

The marketing rule is a welcome update to what had become a regulatory framework increasingly ossified by the march of technology and the evolution of the investment management industry. No doubt, technology and the ever-more granular availability of investment data is here to stay.

Insofar as how it applies to current and future marketing and advertising strategies, the SEC's focus on broad principles, rather than strict prohibitions on specific practices, means that managers who want to leverage the power of their data need to put into place broad standards, policies, procedures and practices that ensure they remain SEC-compliant in spirit and practice. Automating data management and distribution is an important first step in executing a sales and marketing strategy that effectively promotes a firm's top-line goals and stays within the SEC's mandates.

Daniel Quinn is chief marketing officer at APX Stream, an investment data management, data marketing and data distribution firm, based in Boerne, Texas. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.