Article: New SEC Guidance Means an Evolving Landscape for Investment Data Compliance


As we have explained in recent posts, the SEC has introduced new proposed guidelines for investment management advertising and marketing.

While the reasons for these proposed enhancements are numerous, the SEC has clearly stated the three main factors for their issuance:

  1. Technology,
  2. An evolved business environment, and
  3. Greater across-the-board sophistication by investors.

It is important to note that many of the proposed enhancements are not directly applicable to how managers handle their investment data in the databases. Instead, they tend to address “traditional” types of advertising one would expect to see on television and in print more directly.

However, based on a careful reading of the proposed changes, as well as anecdotal evidence, the SEC’s interest would certainly be piqued by investment data that’s “fraudulent, deceptive, or manipulative and, accordingly… misleading.”

Watch The Recording: Investment Data COmpliance: An Evoling Standard

What is “Advertising” Now?

One of the most important changes to how the SEC is planning to interpret its ongoing mandate is to adopt a principles-based approach, rather than restricting its purview through specific prohibitions.

For example, the new approach clearly follows the spirit of the existing prohibition on “untrue statement[s] of a material fact, or which is otherwise false or misleading.”

Perhaps the most important definition to change is that of an “advertisement.” The SEC is broadening the definition extensively:

Specifically, the SEC is establishing a new, broad definition of what constitutes “advertising”:

The proposed rule would define “advertisement” as

“…any communication, disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser's investment advisory services or that seeks to obtain or retain one or more investment advisory clients or investors in any pooled investment vehicle advised by the investment adviser...”

This would replace the current rule's requirement that it be a “written” communication or a notice or other announcement “by radio or television.” This proposed revision would change the scope of the rule to encompass all promotional communications regardless of how they are disseminated…

Communications may be disseminated through emails, text messages, instant messages, electronic presentations, videos, films, podcasts, digital audio or video files, blogs, billboards, and all manner of social media, as well as by paper, including in newspapers [etc.]”

Importantly, it does not include responses to unsolicited inquiries, live, un-broadcasted, oral communications, responses to regulatory/legal inquiries, or other communications subject to other regulations (i.e.: Securities Act of 1933 or Investment Company Act of 1940).

Investment Data IS Advertising

It is true the proposed enhancements are largely quiet on the subject of database distribution and data marketing. However, we can infer, both through a careful reading of the text, as well as relying on anecdotal evidence, that data is advertising, and any CCO ignoring their firm’s investment data is asking for trouble.

Where the SEC tips their hand is when they write,

We believe communications that investment advisers use to offer or promote their services have an equal potential to mislead—and should be subject to the proposed rule—regardless of whether the adviser disseminates such communications directly or through an intermediary. Including communications “on behalf of” an investment adviser also is intended to reflect the application of the current rule to communications provided by investment advisers through intermediaries.[47]

That [47] footnote is important, as it cites an SEC action against an adviser whose “false & misleading advertisements” extended to “submitting performance information in questionnaires submitted to online databases that were made available to subscribers.”

Investment data, thus, must be considered advertising.

CCOs Must Manage Investment Data Distribution

Importantly, all this talk about “investment data,” “dissemination by any means,” “third parties,” etc. all lead to one inexorable conclusion:

Investment data can no longer be the provenance of the operations staff, nor of the marketing team independent of compliance.

If potential clients are using the data and tools of investment databases to conduct due diligence, then the data published by investment managers is there to attract them. As such, it means that all data has to offer a picture of an investment management firm that’s accurate, current, and reflective of the firm’s competitive position.

APX has long argued that performance is but one dataset of many; and that qualitative data (i.e.: narratives, etc.) are datasets not to be ignored. If 20 firms all have similar performance and portfolio characteristics, what differentiates them?

Narratives. Qualitative data. A great firm story.

CCOs Must Adapt to Understand How Investors Consume Data to Make Their Investment Decisions

Compliance professionals have long argued that the risk assessment process must not only include firm management’s view of the business, but also to view the business from each stakeholders’ perspective.

If the potential investor or future stakeholder uses data published to the investment databases to help make their investment decisions, the compliance team must then consider the “risk” that this information is inaccurate or misleading.

Thanks to the increasing importance of investment data published to the databases, compliance professionals now must adapt their marketing review procedures to keep up with the demands of this new data environment.

We acknowledge that keeping updated and consistent data across multiple databases creates a compliance drag in the process: not only must the CCO approve the data each time it’s distributed, they will now need to ensure the data is entered accurately and timely in each of the databases.

To a marketing person, this potential time lag seems like an eternity.

The only solution to mitigate the regulatory risk and the effects of this potential time lag is to implement a technology that centralizes the compliance function in one place to ensure that all of the investment data distributed through databases is both accurate and consistent.

In other words, a centralized “vault” where investment data is deposited, reconciled, and from which investment data is published to the industry databases.

In sum…

In so many important ways, the “good old days” are gone forever. Three martini lunches after a round of golf, followed by a handshake agreement?

Long gone.

Today, the sales cycle has lengthened to 5-7 meetings, 12-18 months. Due diligence is perhaps the most important component of the search and assess process, and that starts with data.

The indisputable fact is that it’s no longer the personal relationship that drives potential clients to the data - data is what drives the relationship. With this increased importance on data, it thus follows that compliance teams must be much more active in the data distribution process.