The Securities Compliance Podcast Season 6 Episode 6: SEC Marketing Rule Risk Alert and FAQs—Oh My!

In Season 6 Episode 6 of The Securities Compliance Podcast: Compliance in Context, host and Calfee Partner Patrick D. Hayes dives deep into one of our favorite topics on this fine show, namely what's happening with the SEC Marketing Rule and some recent guidance that's come out from the Division of Examinations and the Division of Investment Management. To help guide us through the conversation, we are very pleased to welcome back to the show, Chris Mulligan and Jeff Blumberg. In our Headlines section, we pay tribute to the service of former Commissioner Caroline Crenshaw, and we will also review a recent FINRA proposal covering the financial exploitation of senior investors and a new rule addressing suspected fraud for all customers, and finally, we close up today with another installment of Outtakes, where we continue to see an increased focus from the SEC Division of Enforcement on insider trading and related fraud schemes.

Show

Headlines

• SEC Statement on Departure of Commissioner Caroline Crenshaw
• FINRA Proposes Increased Protections for Senior Investors and Other Vulnerable Customers

Interview with Chris Mulligan and Jeff Blumberg

• Overview of the new Marketing Rule FAQs

• What is the impact on Footnote 590?

• Discussion of the purpose and process behind SEC Risk Alerts

• What does the new Risk Alert tell us about the Marketing Rule?

• What is the impact on testimonials and endorsements?

• Reviewing the sufficiency of disclosure requirements, including links to websites and the "clear and prominent" standard

• What does the Risk Alert say about third-party ratings? What satisfies the "reasonable belief" standard regarding preparation of third-party ratings?

• What does the Risk Alert disclose regarding the SEC's stance regarding compensation structures?

• When does a statement from a third-party trigger the Marketing Rule?

• Reviewing the "adoption and entanglement" doctrine and related issues

Outtakes

• SEC Charges Six in $41M Insider Trading Scheme

Quotes

08:03- "I think this FAQ is going to be very welcome by the industry. And it really stems from the fact that the rule itself does not seem to require a model fee. Net returns are defined as gross returns minus the fees and expenses you pay the advisor. There's a pretty clear definition. And it provides guidance around how you can use a model fee. But it doesn't really require it in the rule itself. However, Footnote 590-and this is why it was so controversial-said that if the fee to be charged to the intended audience is anticipated to be higher than the actual fees charged, the advisor must use the model fee that reflects the anticipated fee to be charged in order not to violate the rule's general prohibitions." - Chris Mulligan

15:24 - "So risk alerts are a really important part of the Division of Examinations. And, you know, they really express what the Staff is seeing on examinations, right? So the priorities come out every year and receive a lot of attention. You know, the reality is the priorities are often very similar year to year. They sort of focused on the issues that, you know, everyone generally knows they're going to focus on. And it doesn't talk about the results. Like, what did you actually find on these exams. And that's where the risk alerts really come in and I think are really terrific documents that help tell industry, you know, in an anonymous way, hey, here's the issues that you're seeing and this can really help CCOs." - Chris Mulligan

18:26 - "Well, the one thing I think we need to make sure we add, and we talked about this briefly when we were prepping, Chris made a point of this, I think, is that once it's been published in a risk alert, it's far more likely to end up as a referral to enforcement if you get it wrong. It's very clear across the industry that this is the SEC's position now, so you need to pay attention to it. Because if you don't pay attention to it, you're far more likely to end up with enforcement breathing down your neck than just a deficiency in your exam." - Jeff Blumberg

About the Securities Compliance Podcast: Compliance in Context

Introducing the Securities Compliance Podcast: Compliance in Context presented by Calfee, Halter & Griswold, and the National Society of Compliance Professionals and hosted by Patrick D. Hayes, Partner and Chair of Calfee's Investment Management practice.

Designed as a personal master class for the securities legal and compliance professional, this podcast embodies Patrick's passion to help you put Compliance In Context™ by combining the technical expertise of industry thought leaders and innovators with the practical experience of doers and key decision makers.

Listeners will find the podcast on Apple Podcast and Spotify.

The opinions expressed by guest speakers and panelists during Securities Compliance Podcasts may not necessarily reflect the viewpoints of the attorneys and professionals of Calfee, Halter & Griswold LLP, or its subsidiaries or affiliates. Calfee's educational content is intended to inform and educate readers about legal developments and is not intended as legal advice for any specific individual or specific situation. Please consult with your attorney regarding any legal questions you may have. With regard to all content including case studies or descriptions, past outcomes do not predict future results.

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