Alert November 19, 2009

SEC Affiliate Marketing Rules for Broker Dealer Investment Advisers, Transfer Agents and Investment Companies – Compliance Required June 1, 2010

The SEC approved a final rule on affiliate marketing, implementing Section 214 of the Fair and Accurate Credit Transactions Act of 2003 (“FACTA”), which amends the Fair Credit Reporting Act. Section 214 of FACTA provides consumers with the right to restrict a person from using certain information obtained from an affiliate to make solicitations to that consumer.  The new rule, which applies to broker‑dealers (other than notice registered broker‑dealers), investment companies and SEC‑registered investment advisers and transfer agents, has a June 1, 2010 compliance date after a recent extension by the SEC.

FACTA required the federal banking regulatory agencies (the “Agencies”), the Federal Trade Commission (the “FTC”) and the SEC, in consultation and coordination with one another, to issue rules on affiliate marketing.  The FTC issued its final affiliate marketing rules on October 30, 2007 (the “FTC Rules”), and the Agencies released joint final rules on November 7, 2007 (the “Joint Rules”).  After submitting rules for comment on July 8, 2004, the SEC recently adopted a final set of rules (“Regulation S-AM”) governing affiliate marketing to be published at 17 CFR 248.101 et seq

Regulation S-AM mirrors the requirements that have been introduced by the FTC and the Agencies.  Generally, the rule will require that consumers be provided an opportunity to “opt‑out” before a person or company may use “eligibility information” provided by an affiliated company to market its products or services to the consumer.  Regulation S-AM defines “eligibility information,” by reference to the statute, as any: 

  1. report containing information solely as to transactions or experiences between the consumer and the person making the report with communication of that information among persons related by common ownership or affiliated by corporate control; or
  2. communication of other information among persons related by common ownership or affiliated by corporate control, if it is clearly and conspicuously disclosed to the consumer that the information may be communicated among such persons and the consumer is given the opportunity, before the time that the information is initially communicated, to direct that such information not be communicated among such persons.

Regulation S-AM does not cover aggregate or blind data that does not contain personal identifiers. 

Regulation S-AM places conditions on the use of certain information received from an affiliate to make a marketing solicitation to a consumer.  It is important to note that what constitutes a marketing solicitation for the purposes of Regulation S-AM is quite different from a solicitation under the securities laws.  Under the definition of “marketing solicitation” under Regulation S‑AM:

  • A marketing solicitation generally includes any communication that is based on eligibility information provided by an affiliate, and intended to encourage the consumer to purchase or obtain the product or service. 
  • General advertising directed at the general public, such as television, magazine or billboard advertising, is excluded from the definition of marketing solicitation for this purpose. 
  • However, other types of marketing, such as educational seminars, customer appreciation events, and similar forms of communication, may be marketing solicitations, and will be evaluated based on the specific facts and circumstances of each occurrence. 

It is important to note that Regulation S-AM does not bar information sharing between affiliates, nor does it bar an affiliate’s use of customer information that it has collected itself in the scope of its business relationship with the customer.  Regulation S-AM does limit the use of shared customer information for marketing purposes.  A covered institution makes a marketing solicitation if it:

  • accesses or receives information from an affiliate about a consumer;
  • uses that information to identify a target customer or type of consumer, establishes criteria used to select customers, or tailors products offered to a particular customer; and
  • provides a marketing solicitation to that identified customer. 

This general prohibition on marketing solicitations applies unless the following three conditions are met:

  • it must be clearly and conspicuously disclosed to the consumer in writing or, if the consumer agrees, electronically, in a concise notice that the person may use shared eligibility information to make solicitations to the consumer;
  • the consumer must be provided a reasonable opportunity and a reasonable and simple method to opt out of the use of that eligibility information to make solicitations to the consumer; and
  • the consumer must not have opted out.

The notice must be provided by an affiliate that has an existing business relationship with the customer, or as part of a joint notice from two or more members of an affiliated group of companies, provided that at least one of the affiliates on the joint notice has an existing business relationship with the consumer.  An appendix to the final rule contains model forms that companies may elect to use in order to facilitate compliance with the notice and opt-out requirements of the new rule. 

One notable exception to the general affiliate marketing requirement is the concept of “constructive sharing.”  The SEC noted in the preamble to the final rule that constructive sharing arrangements, where an entity with an established relationship with a consumer uses eligibility information to market products or services on behalf of an affiliated entity, are outside the scope of the affiliate marketing rule.  Under Regulation S-AM, if an entity accesses or receives information from an affiliate about a consumer, uses that information to identify a target customer, and provides a marketing solicitation to that identified customer, the entity would normally have to comply with the opt out rules discussed above.  However, in constructive sharing, the entity with which the consumer has an established relationship can make the solicitation on behalf of the affiliate, and need not provide opt-out notice.  In addition, that entity may direct a service provider to use the entity’s own eligibility information to market products on behalf of an affiliate as well.  The SEC provided the following example of constructive sharing in the release adopting Regulation S-AM: “a broker-dealer that sells investment company shares to a consumer has a preexisting business relationship with the consumer (as does the investment company if the consumer is the record owner of its shares). The broker-dealer may make a marketing solicitation for an investment in an affiliated investment company based on eligibility information the broker-dealer obtained in connection with its pre-existing business relationship with the consumer.”

The SEC rule largely mirrors the substantive provisions of both the FTC Rule and the Joint Rules.  In fact, most of the operating language in Regulation S-AM is the same as the language in the FTC Rule.  Although the FTC Rule has additional and/or different examples and explanations, the requirements are identical.

A minor difference between Regulation S-AM and the Joint Rules and the FTC Rule is that the Joint Rules and the FTC Rule provide that compliance with an example described in the rules constitutes compliance.  The SEC has stated that its examples do not provide the same safe harbor.  The SEC examples in Regulation S-AM are intended to describe the broad outlines of situations illustrating compliance with the applicable rule.  However, the SEC believes that the specific facts and circumstances relating to a particular situation will determine whether compliance with an example constitutes compliance with the rules.