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SEC's Marketing Rule
Kwanti strives to help advisors implement and follow the guidelines of the SEC marketing rule’s Principles-Based General Standards. Kwanti reports offer customized reporting enabling advisors to tailor recommendations to a specific audience, stipulate performance periods and fee structures, include information underlying all material statements of fact to support a reasonable basis for recommendations and illustrate recommendation benefits along with detailed risk analysis.
While Kwanti has taken steps to help users comply with the SEC Marketing Rule, we would like to remind users that you are ultimately responsible for ensuring your actions are in compliance with the regulatory standards applicable to you and your firm.Below you will find some FAQ's as it relates to Kwanti and the new SEC's Marketing rule.
1. What should I know about these FAQs?
- These FAQs are designed to help investment advisors understand the SEC’s Marketing Rule pertaining to the presentation of performance. Although there are other topics discussed in the Marketing Rule, these FAQs pertain to performance and how Kwanti helps you with that.
- This guide can be useful when you are working with your Chief Compliance Officer or your firm’s compliance team.
- These FAQs were prepared with the assumption that, if the SEC allows something, your firm allows it. However, that may not necessarily be the case. Check with your internal compliance team, CCO, or whomever may review or approve materials at your firm.
- As you read through these FAQs, keep in mind there is a distinction between performance and hypothetical As you’ll see, this is a distinction with a difference.
2. Does the SEC’s Marketing Rule permit the presentation of performance?
- Yes, the Rule permits the presentation of performance as long as net performance numbers are shown (Gross performance is prohibited).
- Performance results must include one-, five- and ten-year time periods.
- One-on-one communications tailored to a single prospective investor are excluded from the requirements of the Marketing Rule, unless the communications include hypothetical performance.
3. So, then, what is “hypothetical performance”?
- Generally, it means performance results that were not actually achieved by the investment adviser.
- In order to show hypothetical performance, an advisor must:
- Adopt and implement policies and procedures reasonably designed to ensure that the hypothetical performance information is relevant to the likely financial situation and investment objectives of the advertisement’s intended audience. 
- Provide additional information about the hypothetical performance that is tailored to the audience receiving the advertisement, such that the intended audience has sufficient information to understand the criteria, assumptions, risks, and limitations. 
4. When is the presentation of hypothetical performance considered advertising?
- Relevant to you as a Kwanti user, according to the SEC’s definition, a communication containing hypothetical performance made by the investment adviser is advertising if:
- It offers investment advisory services with regard to securities to prospective clients OR offers new investment advisory services with regard to securities to current clients. For example, offering investment or portfolio management services to a financial planning only client would be considered a “new investment advisory service.”
- The exception to the above is when the communication is provided in response to an unsolicited request from a prospective or current client.
- Note that there are other definitions and types of advertising that have nothing to do with performance, hypothetical or otherwise, or the presentation of performance.
5. Are the reports generated from Kwanti considered advertising (SEC definition)?
- Yes, if the report includes hypothetical performance and you give or send the report to a person who did not request it (see question #3 above).
6. If I have a link or a page on my website where a visitor can request a sample report or other materials that may contain a Kwanti report, is that compliant?
- Under the Marketing Rule, the SEC would consider that a “solicited request.” A sample report that you create using our software, posted on your website, or included in any marketing materials, would be advertising even if it does not contain any hypothetical performance.
7. When I’m building a Kwanti report, what time periods should I display?
- If using hypothetical performance in your advertising, you should include 1-, 5-, and 10-year time periods, if available.
8. Bottom line, are Kwanti’s reports compliant with the SEC’s Marketing Rule?
- Yes, if they are used in accordance with the Marketing Rule. We have designed and implemented options so that you can create reports that are in alignment with the SEC’s Marketing Rule.
- Yes, if they are used in accordance with the Marketing Rule.
- We strive to help advisors implement and follow the guidelines of the Marketing Rule’s Principles-Based General Standards.
- One of our strongest value propositions is that Kwanti reports offer customized reporting enabling advisors to:
- tailor recommendations to a specific audience,
- stipulate performance periods and fee structures
- include information underlying all material statements of fact to support a reasonable basis for recommendations and
- illustrate the potential benefits of your individualized recommendations with detailed risk analysis. A comprehensive value proposition designed to give advisors the tools they require to ensure compliance.
9. What are some things to keep in mind as I build and use these reports?
- Keep things relevant to the intended audience
- Include assumptions or limitations that affect outcomes
- If using a benchmark for comparison, ensure that it’s a relevant benchmark
- Your firm may have other restrictions or requirements.
- In the end, we strive to keep the deliverables created through our platform compliant with applicable SEC and state regulations.
10. Do you have any recommended resources for understanding more about the SEC Marketing rule?
- A great overview of the main points of the rule are summarized here - https://www.klgates.com/The-SECs-Modernized-Marketing-Rule-for-Investment-Advisers-1-20-2021
- If your firm is GIPS compliant:
Reconciling GIPS standards and the SEC marketing rule