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by InnReg on December 29, 2019

Get Ready for Advertising Rule Changes


Folding marketing and communications compliance into an overall compliance program poses special challenges for financial innovators. In fact, the current state of regulations does not offer much assistance in addressing these challenges.


FTC Rules for Influencers

On November 5, 2019, the FTC updated its rules of the road for when and how influencers must disclose sponsorships to their followers. These rules apply to all businesses, including fintechs and other financial innovators. 

First, to define the scope of the term clearly, influencers are individuals who are able to affect purchase decisions of others because of their authority, knowledge, position or relationship with their audience. They typically wield that influence on social media.

Per the FTC, influencers must now make it obvious when they have a relationship (“material connection”) with the brand. A “material connection” to the brand includes a personal, family, or employment relationship or a financial relationship – such as the payments for endorsements or receiving free or discounted products or services. Influencers also must not misrepresent their experience with a product or make unsubstantiated claims about the product.

For the world of investment advice, the FTC guidelines are about to become very relevant. It is true that influencer marketing is currently prohibited by the SEC Advertising Rule (see below) in very explicit terms because it falls into the territory of testimonials and endorsements. However, proposed rule amendments are in the works, so firms should be prepared. If influencer marketing becomes part of a firm's overall marketing toolkit, any influencer communications would need to be reviewed per FTC guidelines as well as proposed changes to the Advertising Rule.


SEC Advertising Rule: Changes Ahead?

The SEC Advertising (Rule 206(4)-1) and Solicitation (Rule 206(4)-3) Rules were defined in the Investment Advisers Act of 1940. They establish firm guidelines, but at the same time, these rules have not been substantially updated in nearly 60 years! Given the age of the rules, they refer only to print, radio, and television advertising, and they remain silent on new forms of media and advertising. 

The safest bet for most companies has been simply to assume that the rules apply to any other form of advertising as well. However, the rules were designed for a mass-media world and do not neatly apply to our highly-targeted and social digital era. As currently written, these regulations create unworkable constraints in today's marketing climate. For example, the Advertising Rule considers a direct or indirect reference to any testimonial or endorsement of any kind as "a fraudulent, deceptive, or manipulative act, practice, or course of business." That’s where it collides with the concept of influencer marketing; it creates significant challenges of interpretation when it comes to social media likes and comments. Consider the case of an Illinois registered investment adviser that posted a video about its 50th anniversary on its website and YouTube. The video included customers talking about the firm, ultimately resulting in a $15,000 fine by the SEC

The SEC has recognized this gap. On November 4, 2019, it released proposed rule amendments that will help modernize the regulation of advertising. 

First, the definition of advertising under the amendments would be broadened to include "any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes investment advisory services or that seeks to obtain or retain advisory clients or investors in any pooled investment vehicle advised by the adviser." Digital platforms, social media, and future means will now be unambiguously covered by the terms of the Rule.

Second, the prohibition of anything that could be constituted as a testimonial or endorsement would be substantially relaxed. These forms of advertising would be permitted as long as the adviser discloses whether the person giving the testimonial or endorsement is a client and whether compensation has been provided by or on behalf of the adviser. Rather than a blanket limitation, this proposed amendment lays out a set of general principles ([See callout box below]) for prohibited advertising practices that could intentionally mislead or misrepresent.

These changes are generally anticipated by the industry. However, a principles-based approach does raise the prospect of questions for how a negligent violation of those principles is determined. The principles are qualitative and subjective.

The proposed amendments are currently open for public comment prior to any revision before final adoption. From a compliance perspective, firms must not make any changes to current compliance processes for marketing and advertising.

When it comes to marketing and advertising, a relaxation of regulation is likely welcome news. However, these changes in no way remove the onus of rigorous compliance reviews of communications. They would simply change the rules of the game. Before any amendments are finally adopted, it is a good time to take inventory of marketing compliance review processes now, and make sure they are both robust and adaptable. 

If you have questions about marketing compliance, please be in touch.

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