Executive Summary:
New SEC guidance coming later in the second half of 2020 clearly spells out that any data published to the investment industry databases should be considered as a form of advertising. In addition, despite the hundreds of datasets a database profile contains, the SEC remains focused on performance data above all else. It would be a mistake to ignore other datasets, however.
With the SEC proposing updates to its decades-old regulatory framework for investment management marketing and advertising, we at APX Stream and Cipperman thought it would be helpful to identify two of the key takeaways investment management firms should have from this new initiative, insofar as data distribution and data marketing are concerned.
Takeaway #1: Investment Data in the Databases IS Advertising
The proposed rule says (all emphasis ours):
“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.”
Read broadly, this certainly encompasses investment data in the databases, as the entire point of database distribution is to use your firm’s data to attract new potential clients and distinguish yourself from other investment managers. And as we will see, the SEC’s main point of emphasis was, and will always be, performance data.
It would be unwise to think the SEC would make a meaningful distinction here.
Also, the agency writes, … any communication disseminated by any means,” which seems pretty air tight – the databases fall within this context. But is raw investment data really a “communication?” To repeat, it would be unwise to think the SEC would make that distinction, but we have some anecdotal evidence that strongly suggests they already think database profiles are advertising.
Even the databases themselves admit as much. For example, Investment Metrics describes its value proposition, in part:
“… By leveraging our unique insights into global asset allocation trends, performance benchmarks, asset flows, plan sponsor and style universe performance, we power the global institutional investment community to make more informed, data-driven investment decisions.”
To be blunt, databases helps subscribers to make or support their purchase decisions. That’s marketing -no way around it. The highest regulatory scrutiny is always given to information provided by investment managers that influence a client’s decision-making process.
Please also remember that most, if not all, marketing databases provide a disclaimer to their users that they do not ensure the accuracy of the data provided by the investment manager firms on their platform. This further emphasizes your firm’s compliance responsibility when it comes to the accuracy and consistency of the data presented.
In an earlier post on the APX Stream blog, we highlighted across several anonymous threads from the Investment Advisors Forum in the National Society of Compliance Professionals website.
In response to a question posted about this “databases-as-advertising” issue, a responder noted,
“Not all databases are created equal, and there is no hard and fast rule as to whether a database for the institutional marketplace constitutes advertising without a fact-specific analysis.
However, during our SEC review, the examiners made it clear that consultant databases would generally be considered advertising, especially if this was an avenue through which you obtained new clients.”
Another poster concurred:
“During a recent SEC exam, the SEC staff asked about our advertising/marketing policies and procedures as it related to the consultant databases. Later they verbally commented that we should ensure that we are complying with these policies and that we should be monitoring the information that is view-able on these databases.
hey all but said that the databases should be considered advertising.”
While these are clearly anecdotes, with all the evidentiary limitations that go along with that, it is important to remember each of these responses was in response to an audit with SEC staffers - there’s no guessing or hypothesizing here. It’s the SEC clearly telling us what they care about now.
Unconvinced? Here’s an excerpt from the proposed rules:
We believe communications that investment advisers use to offer or promote their services have an equal potential to mislead… 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.
Diligent compliance would require investment managers to heed the potential implications.
Takeaway #2: Performance is the SEC’s main focus, as always
When reading through the new guidance, it is readily apparent that the SEC remains laser-focused on performance data.
Though APX Stream does our best to promote awareness that performance is but one among many co-equal datasets, the SEC’s proposed rules make clear they view performance as the area of greatest concern.
Thus, so should investment managers.
We share that concern – performance data can always be fudged, massaged, and made up to be something it’s not. This is why reconciliation is such an important, if not the defining, characteristic of investment data compliance.
Automating your data assembly and distribution while centralizing your data warehouse means investment managers will have the time & resources to reconcile data to ensure it is accurate and reflects a firm’s current position.
In sum…
These proposed regulatory changes encompass a much broader spectrum of investment management marketing/advertising than we examine here.
But investment data published to the public and private investment databases has for too long been divorced from firms’ larger marketing strategy, which means that compliance hasn’t been as involved in the management and marketing of investment data as is now required.
It’s time for that to change. Investment data compliance must now be a pressing concern for all investment managers.