Five Answers Marketing Needs from Compliance – NOW
Marketing/investor relations teams clearly play an important role in any firm. To find investors willing to make substantial allocations, they need messaging that is simple, fast and upbeat. Frequently, they need to differentiate their firm from the competition.
As complex as the role is, marketing efforts also are low hanging fruit for regulators. The regulators are focusing on the processes that are in place around marketing, not just policies. Marketing teams are the target of SEC examination reviews and enforcement proceedings and, only recently, the SEC raised the specter of broker-dealer registration. As an important function charged with building a firm’s investor base, it is critical for the marketing team to understand the “rules of the road” so as not to inadvertently jeopardize themselves, colleagues or the firm.
Here are some marketing efforts that ran afoul of regulatory requirements:
- The client made the investment but now wants its money back. It is asking for the full amount invested, even though the fund has lost money. See more here.
- Marketing staff and the firm have been fined and banned from the industry. This news in the press may require disclosure in regulatory filings for years to come. See here.
Moreover, failing to comply with the local laws of some jurisdictions may result in equally (or more) severe results. The EU has proposed data privacy and AML regulations which carry penalties of 2 and 10% of annual revenues, respectively. Hong Kong’s data protection laws provide penalties for violations that include both fines and imprisonment up to five years. Seeking investors in Europe may require a firm to defer compensation arrangements for the marketing staff and others at the firm.
In short, marketing initiatives cannot be separated from legal and regulatory considerations. However, marketing personnel do not need to become expert on all these areas, provided compliance expertise is part of the team. Marketing and compliance need to work together to create the most effective marketing approach, one that allows a firm’s energy to be focused on initiatives with a high chance of success.
With that in mind, every marketing professional needs to ask compliance to address five important areas in a way that makes them clear and understandable:
1. Soliciting investors in a new jurisdiction triggers many regulatory “hot” topics. Which ones apply to our firm? To us as marketing professionals?
Before entering a new market there are a vast array of legal, tax and regulatory issues that need to be understood. Otherwise the prospective allocation could violate laws triggering damages, or possibly after spending time and effort obtaining the allocation, the firm will not be able to accept the allocation at all.
2. What about targeting a new type of investor? Are there some investors that are off limits for our firm or, on a positive note, whose needs we can satisfy (and in the process give ourselves a marketing edge)?
It does not make sense to spend a lot of time targeting a new investor base without at least a high level understanding of the business, legal and regulatory requirements that apply (for both the firm and the new investor base). Only with this understanding can there be a level of comfort that the firm is prepared to meet those needs. Have these issues been clearly explained?
3. Are there any limits on the ability to sweeten the allocation with new terms or products?
Marketing teams are very creative and will find ways to set the firm apart. Each of these initiatives and ideas needs to be analyzed before a commitment is made.
4. Are there any limits on the ability to use a new marketing technique?
New marketing techniques, such as social media or general advertising under the JOBS Act, may be an attractive way to raise funds. However, the implications need to be considered before solicitations begin.
5. How are marketing materials prepared, reviewed, and distributed?
Because the content and phrasing of marketing materials can be very important, this is an area where the marketing team must create a process for working with others in the firm. The goal is to produce materials consistently, in compliance with requirements and without unexpected surprises. Marketing needs to understand what they are expected to do, with whom they need to communicate, and when.
Are you comfortable that you are up to date on these areas and how they apply to your firm? If not, it’s time to reach out, now. It’s easier to avoid a misstep than to correct one down the road.
RFG monitors developments that may affect alternative advisers and their funds, and has information to help navigate these issues. To learn more about our offerings in this area, including risk assessments, please feel free to contact us at Information@RegFG.com.