8.4.2009 The SEC adopted Regulation S-AM, a new rule that addresses financial firms subject to the Regulation (Financial Firms) marketing the Financial Services’ products and services to the consumers (Clients) of affiliates of the Financial Firms (Affiliates). The compliance date for the new regulation is January 1, 2010.

Regulation S-AM prohibits a Financial Firm from using certain consumer “eligibility information” supplied by an Affiliate to market (i.e., to engage in “marketing solicitation”) the Financial Firm’s products or services to a Client unless the Client is first provided the ability to opt out of such marketing. The rule applies to the following types of Financial Firms: SEC-registered investment companies, investment advisers, transfer agents, broker-dealers, and municipal securities dealers. Thus, the Financial Firm may not use the Client’s “eligibility information” obtained from an Affiliate to engage in a “marketing solicitation” to the Client. “Eligibility information” is defined in § 248.120(j) of the Fair Credit Reporting Act (FCRA) to include “transaction or experience information, such as information about a consumer’s account history with [the Financial Firm], and ‘other’ information [under the FCRA] such as information from consumer reports or applications.” “Marketing solicitation” is defined to mean the marketing of a product or service to a particular Client that is based on eligibility information provided by an SEC registrant to the Affiliate and intended to encourage the Client to purchase or obtain the Affiliate’s product or service.

In the adopting release, the SEC notes that a Financial Firm may receive eligibility information from an Affiliate in a variety of ways. For example, a Financial Firm may place Client information into a common database. If an Affiliate were to access such data to make a marketing solicitation, this activity would be covered by the rule.  

Regulation S-AM prohibits a Financial Firm to use eligibility information obtained from an Affiliate to make a marketing solicitation to a Client unless the following opt-out conditions are met:

  • The potential marketing use of the information has been “clearly, conspicuously, and concisely” disclosed in writing to the Client or if the Client agrees electronically that the Financial Firm may use eligibility information about the Client received from an Affiliate to make marketing solicitations to the Client;
  • The Client has been provided a “reasonable opportunity and simple method to opt out of receiving the marketing solicitation” or the Client prohibits the firm from using eligibility information to make marketing solicitations to the Client; and
  • The Client has not opted out.

The SEC gave the following example of a prohibited arrangement under Regulation S-AM:

A consumer has a brokerage account with a broker-dealer. The broker-dealer furnishes eligibility information about the consumer to its affiliated investment adviser. Based on that eligibility information, the investment adviser wants to make a marketing solicitation to the consumer about its discretionary advisory accounts. The investment adviser does not have a pre-existing business relationship with the consumer and none of the other exceptions apply. The investment adviser is prohibited from using eligibility information received from its broker-dealer affiliate to make marketing solicitations to the consumer about its discretionary advisory accounts unless the consumer is given a notice and opportunity to opt out and the consumer does not opt out.  

Besides the opt-out exception, Regulation S-AM does not apply in the following situations:

  1. Pre-existing business relationships
  2. Employee benefit plans
  3. Service providers
  4. Consumer-initiated inquiries
  5. Consumer authorization or request
  6. Compliance with applicable law

Click http://www.sec.gov/rules/final/2009/34-60423.pdf to access the adopting release.