Compliance, Regulatory, Standard of Care

Marketing Rule and “Promoter” Agreements — What Advisers Should Consider

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Advisers paying third parties for client referrals (“promoters”) must determine whether they will need agreements with such promoters in order to comply with the new Marketing Rule and to ensure that any such agreements allow them to ensure compliance with the Marketing Rule’s disclosure, oversight and disqualification provisions pertaining to the use of paid testimonials and endorsements.

Among other things, advisers will want to consider the following with respect to agreements with promoters:

  • Restrictions on the materials the promoter may use to promote the adviser’s services
  • Processes for pre-approval of any materials to be used by the promote to promote the adviser’s services
  • The Imposition of disclosure requirements for any marketing materials to be used by the promoter to ensure compliance with the Marketing Rule
  • The right of the adviser to conduct ongoing due diligence on the promoter’s compliance with the Marketing Rule including the right to inspect books and records
  • Inclusion of representations and warranties to be made by the promoter to ensure that it and its personnel are not disqualified from referring clients to the adviser
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Marketing Rule Compliance: “To Do’s” by November 4th

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Here is a checklist of certain “to do” items for SEC-registered advisers to consider to come into compliance with the Marketing Rule on November 4, 2022:

  • Review any existing marketing materials (including any websites and social media posts) to be used in the future (including those for any private funds) to determine whether they comply with the requirements under the new Marketing Rule
  • Determine if there are factual statements in any marketing materials that have not been substantiated by references or backup documentation
  • Determine if all performance results include results presented “net of fees” and determine if net performance results are calculated properly

The complete list of recommended “To Do’s” can be found here.

Compliance, Standard of Care

Fiduciary Obligations for Legacies

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Many advisers incorrectly believe they automatically have no fiduciary obligations with respect to legacy investments that clients bring into the advisory relationship.

However, in the absence of an explicit understanding to the contrary, this is not true. By default, advisers still owe a fiduciary duty of care with respect to such investments (i.e., to conduct a reasonable investigation into such investments and to determine if they are suitable for the client) as they do for other investments they proactively recommend.

Advisers that do not wish to undertake the responsibility of conducting due diligence on and to make suitability determinations with respect to such legacy investments must take steps to clarify these points in their advisory agreements with clients.

Read more here.

Compliance, Enforcement, Standard of Care

Enforcement appears as messages disappear part II: Steep penalties imposed in personal messaging cases

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Sixteen firms settled with the Securities and Exchange Commission and Commodity Futures Trading Commission for failing to maintain and preserve business-related communications.

  • Total civil penalties for these settlements and similar actions brought in December 2021 exceed $2 billion.
  • The settlements stem from a risk-based investigation into whether broker-dealers, swap dealers, and other registrants are retaining business-related communications made on personal devices.
  • Companies can take certain proactive measures now to ensure their record retention policies and controls sufficiently mitigate risk stemming from employee use of text messaging applications, including third-party platforms such as WhatsApp, on their personal devices.

Read more here.

Compliance, Standard of Care

Successfully Navigating Client Complaints

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With any significant downturn in the markets, client complaints invariably increase.

The difference between successfully navigating a client complaint (and avoiding litigation) often turns on whether an adviser has an effective gameplan for handling complaints and how that gameplan is executed.

An effective gameplan should address the following:

  • How the adviser initially responds to the complaint;
  • When and how the adviser communicates with the client;
  • How the adviser approaches investigating the complaint; and
  • How the adviser resolves the complaint.

Read more here.