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News July 12, 2004 Issue

SEC Proposes Limits on Affiliate Marketing

If you rely on your affiliates for marketing leads, or if you provide your affiliates with marketing leads, you’ll want to get to know proposed Reg. S-AM, which was quietly proposed last week by the SEC sans open meeting.

Warning: You’ve only got a few weeks to get up to speed. The comment period ends mid-August, and Congress expects the final rules to be adopted by early September.

Reg. S-AM would limit the ability of affiliates of SEC-registered advisers, funds, broker-dealers, and transfer agents to use consumer information obtained from those registrants to send marketing or solicitation information to consumers. An affiliate could not use information for marketing purposes unless the consumer had been given prior notice and an opportunity to opt out of having his information used for an affiliate’s marketing. Either the registrant or its affiliate could provide the notice. If an affiliate receives consumer information, but does not use it for marketing purposes, Reg. S-AM would not apply.

The good news is that the proposal contains a broad array of exemptions. For example, if the affiliate has a preexisting business relationship with the consumer, or the consumer has made an inquiry to the affiliate, the notice and opt-out opportunity need not be provided.

The rules are distinct from the Reg. S-P privacy rules. Under Reg. S-P, firms can freely share information between affiliates. However, some states have imposed stricter requirements on affiliate sharing. Most notably, California requires firms to allow consumers to opt-out of information sharing between affiliates.

Reg. S-AM is part of a broader initiative by the federal banking agencies to implement a provision of last year’s FACT Act, which amended the Fair Credit Reporting Act.