Article: The New SEC Guidance: What Does it Mean for Investment Data Compliance?


Executive Summary:

There has long been a disconnect between publishing data in the investment databases and compliance. With updated regulations proposed by the SEC likely coming this fall, data distribution and data marketing can no longer be considered apart from an investment manager’s broader marketing, advertising, and compliance functions.

In late 2019, the SEC released a long revision to its decades-old set of rules and regulations governing investment management advertising and marketing.

These revisions aren’t new regulations, per se; rather, they aim to “modernize” these rules by taking into consideration the significantly altered marketing and advertising landscape wrought by the internet, information technology, and time.

These enhancements were long overdue. While the essence of advertising and marketing remain constant, marketing and advertising strategies and the distribution platforms have obviously evolved since the 1960’s, when these rules were first put into place (and were revised in 1979).

While the final revisions won’t likely be released until sometime later this year, based on the SEC’s proposals we can certainly make some assumptions about what the final rules will actually look like and thus what it means for managers publishing their data in the investment databases, both public (i.e.: Morningstar, eVestment, Investment Metrics) and private (i.e.: Callan, Mercer, Wilshire).

In our view, these new proposed regulations will likely have a significant impact on how the SEC looks at investment data generally, and what is in the investment databases specifically.

Why Update the Investment Management Marketing and Advertising Rules?

Simply put, existing SEC rules were old and did not account for modern digital technology: websites, internet, social media, and of course the investment databases.

When the rules were drafted, television, radio, and print were the only meaningful means of distribution. With digital, advertising reach is compounded by the network effect, and the availability of investment data is virtually unlimited.

While the growth of technology created unforeseen opportunities for investment managers, they also often revealed potential conflicts where none existed before. With new ambiguities and new paradigms came the need for a new approach.

And the SEC has had its say.

What’s the New Guidance?

The proposed changes were voluminous (running 139 pages), but the changes are broadly related to one of these four umbrellas:

  • Expand the definition of “advertisement” to include communications “disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser's investment advisory services”;
  • Create different standards for advertisements targeting retail and non-retail investors;
  • Replace specific prohibitions with general principles designed to prevent fraudulent, deceptive, or manipulative acts;
  • nsuring clarity in reporting performance while accounting for the validity of novel ways of presenting performance data.

Law firm Morgan Lewis has a very good summary of the proposed rules.

Investment Data Marketing & Distribution, Defined

For the uninitiated, investment data marketing is the process by which a firm’s quantitative and qualitative data are used to promote a firm’s investment management services and attract clients.

In this framework, data marketing is simply an adjunct of a firm’s broader marketing strategy, with data published, or distributed, to various channels which include a firm’s website, fact sheets, pitch books, and into client communications.

But the most powerful place for this data to be published is in the investment databases.

The public databases, such as Morningstar, eVestment, Investment Metrics, and PSN, sell access to manager data alongside robust analytical tools that help their subscribers in their due diligence process. The private databases, such as Mercer and Callan, use the data and their analytical tools internally on behalf of their clients.

Think of the databases as a place where there are thousands of RFPs, updated regularly, which can be sorted and searched by hundreds of different datapoints in nearly limitless combinations.

The databases are THE essential due diligence tool for consultants, institutions, and high net worth individuals.

Watch Te Recording: Investment Data COmpliance: An Evolving Standard

Investment Data Compliance: Why Consistency Will Become King

We at APX Stream have long advocated for a more consistent approach to investment data marketing and distribution. While those arguments had more to do with positioning, branding, and maintaining a professional marketing effort, data profile consistency is now a compliance issue.

For example, let’s say a firm has a Large Cap Growth product:

  • If the profile for that product is 75% complete in Database A
  • Is 35% complete in Database B
  • It puts subscribers of Database A at a competitive advantage, relative to the subscribers in Database B.

And what if the data between the two profiles doesn’t match – what if one lists the 5 year return as 3.25%, while the other lists it as 32.5%, because reconciliation was not carefully initiated (or at all).

These are inarguably compliance issues. The delivery or publication of inconsistent or inaccurate marketing/performance data is very low-hanging fruit when it comes to regulatory scrutiny.

If the firm publishing the data cannot demonstrate the proper level of compliance review and due diligence over what is being published on the marketing databases, it may lead to enforcement actions against the firm.

Moreover, the SEC uses their Big Data resources to triangulate information across the e-world of information. Regulators, such as the SEC and FINRA, are able to sift through very large amounts of data in order to ensure there is consistency among the data contained in an investment management firm’s digital footprint.

As previously noted, the regulators may assume these errors were made intentionally and pursue enforcement actions to limit the future operations of the firm.

As such, investment managers must ensure their data is transparent and consistent, with adequate compliance controls over its dissemination.

Protecting Yourself

Manager may ask, “how can I protect my firm?” The answer is easy – establish policies and procedures which require compliance professionals to review all published data maintained on the investment databases.

The trained eye of a compliance professional will be able to identify and anticipate inconsistencies and make sure they are remedied before being presented to database subscribers.

Like any compliance program, investment data compliance must be an ever-evolving business practice. Investment data compliance must review all existing data, as well as carefully vet any future changes to a firm’s data strategy. A firm’s marketing compliance protocol must ensure that regulators are not the first to discover any inconsistencies.

In the end…

Publishing data in the investment databases has long been siloed from the larger investment management marketing effort. Too many managers did not look at their data in the databases as a legitimate component of their marketing strategy.

Whether firms like it or not, when the SEC says, communications “disseminated by any means, by or on behalf of an investment adviser, that offers or promotes the investment adviser's investment advisory services,” they are including investment data as well.

After all, why are you publishing your data? To attract potential clients and keep current clients informed. The SEC clearly believes that the data you are publishing is, in fact, marketing and advertising.

Like it or not, it’s time for all investment managers to step up their compliance game, vis-à-vis investment data.