State-Registered RIAs: Navigating NASAA’s Proposed Marketing Rule Changes

For years, state-registered investment advisers (RIAs) have faced a unique challenge: advertising rules that put them at a disadvantage in comparison to their SEC-registered peers. While the SEC modernized its marketing rule in 2020, many states have maintained more restrictive regulations, creating a complex and fragmented landscape for firms that operate in multiple jurisdictions. Now a significant proposal from the North American Securities Administrators Association (NASAA) aims to change that.

The Path to Uniformity: What’s on the Table for State-Registered RIAs?

NASAA, through its Investment Adviser Regulatory Section Policy & Review Project Group, issued a Notice of Public Comment on proposed amendments to its model rules for investment adviser advertising. The goal? To align them with the SEC's 2020 marketing rule (Rule 206(4)-1). This is a big deal, and if adopted by the states, it could fundamentally alter the marketing opportunities and compliance responsibilities for state-registered RIAs.

Currently, state-registered firms often operate with prohibitions on activities that are now routine for their federal counterparts. For example, many states explicitly prohibit the use of testimonials and endorsements in advertising.

The NASAA proposal is designed to level this playing field by allowing firms to:

• Use Testimonials & Endorsements: State-registered financial advisors could finally leverage client feedback and third-party endorsements, provided they adhere to strict disclosure and oversight requirements, including prominent disclosures about compensation and conflicts of interest.
• Showcase Third-Party Ratings: Firms could include ratings and rankings from third parties, provided they conduct proper due diligence on the methodology and disclose key information about the source and any compensation.
• Feature Robust Performance Advertising: The proposal would permit more robust performance advertising, including multi-period, net-and-gross disclosures, which could help firms better convey their track record. This would also open the door to using predecessor performance, within specific guardrails.

These changes are designed to level the playing field and eliminate the competitive disadvantage that state-registered RIAs have faced. However, this increased flexibility comes with an added layer of complexity.

While the new model rules aim to create regulatory uniformity, they do not simplify the work for Chief Compliance Officers (CCOs) and their teams. Adopting a single, more extensive rule—even if it's the same across all states—requires a significant overhaul in firm compliance and marketing practices.

For state-registered firms, the implications are substantial:

• Policy & Procedure Overhaul: Firms will need to revise their compliance policies and procedures to address the new rules, particularly regarding the use of testimonials, endorsements, and performance data. This includes new requirements for oversight and recordkeeping.
• Documentation & Recordkeeping Burdens: The proposed rules come with enhanced recordkeeping requirements. Firms will need to retain detailed records of all advertisements, including testimonials and endorsements, third-party rating questionnaires, and the data used for performance calculations.
• Navigating A Transitional Period: The model rules are not mandatory. States must choose to adopt them. This means that for a period of time, firms operating in multiple states will face an even more confusing regulatory environment as some states align with the new model while others stick with their old rules.