Advisors' Biggest Problem With the SEC's Marketing Rule

The biggest challenge for advisors in complying with the Securities and Exchange Commission's Marketing Rule continues to be determining which information is "performance" that must be presented on a net basis, according to a newly released survey by CFA Institute and the Investment Adviser Association on compliance practices associated with the rule.

When asked about their biggest challenges in implementing the rule, 36% of the 189 respondents selected determining performance that must be presented on a net basis.

Advisors are still grappling with the term "performance" because it's "not defined" in the Marketing Rule, Karyn Vincent, senior head of CFA Institute's Global Industry Standards, said in an email. "The key requirement is that performance must be presented on a net basis."

For example, "is yield considered to be performance?" Vincent said. "If a firm considered yield to be performance, then it must be presented on a net basis. This is not a calculation that most firms have done."

Julia Reyes, partner, performance services at ACA Group, agreed in another email that the survey findings "highlights the difficulty of implementing rules-based provisions to performance metrics where terms are not defined clearly. It's not a surprise that the biggest challenge in implementing the marketing rule is determining what is considered performance."

Because the Marketing Rule does not define performance, "this seems to come through in a number of the questions around how advisers treat contribution to return, attribution, and yield," Reyes said. "Without clear written guidance from the SEC, advisers are stuck in a gray area where they must make a decision and risk being out of step with SEC staff expectations."

Compliance with the Marketing Rule is one of the SEC's 2024 exam priorities.

Other challenges associated with compliance include calculating investment-level net returns, restricted use of hypothetical performance, determining what is considered "extracted performance" and determining which fees to use to calculate net returns.

Lack of SEC Guidance

The rule has been in effect since Nov. 4, 2022. The CFA Institute report allows firms to benchmark their practices for compliance with industry peers, Vincent relayed, which is "particularly important given the lack of interpretive guidance from the SEC."

In April, the SEC's Division of Examinations released a Risk Alert on Marketing Rule compliance, which included observations on Form ADV reporting and on advertisements. The alert pointed to five trouble spots firms are running into when it comes to compliance.

In 2022, the SEC added questions to its Form ADV on the newly allowed advertising practices under the Marketing Rule. An IAA analysis of recent Form ADV filings reveals that larger advisors were more likely to engage in those practices than smaller ones, the report notes.

For example, "89.4% of respondents with more than $100 billion in assets answered 'yes' on Form ADV to at least one question, whereas only 31.6% of advisers with less than $100 million in assets indicated that they engage in any of the specified marketing activities," according to the report.

Inclusion of performance results is the most common advertising practice of advisors (almost 41%), followed by the inclusion of hypothetical performance (almost 23%), the report states.