SEC Risk Alert highlights new areas of focus in Marketing Rule exams

SEC’s latest Risk Alert tells investment advisers about added areas of emphasis during Marketing Rule-focused exams.

The SEC’s Division of Examinations published a Risk Alert last Thursday to inform investment advisers, including private fund advisers, about additional areas of emphasis during examinations focused on the amended Marketing Rule, or Rule 206(4)-1 under the Investment Advisers Act of 1940.

The Risk Alert sets forth additional areas of exam focus areas, including (1) testimonials and endorsements; (2) third-party ratings; and (3) Form ADV.  

On December 22, 2020, the SEC adopted amendments to modernize rules that govern investment adviser advertisements and payments to solicitors. The amendments created a single rule that replaced the previous advertising and cash solicitation rules.

The Division of Examinations published a Risk Alert on September 19, 2022, to inform SEC-registered investment advisers about upcoming review areas during examinations focused on Marketing Rule compliance, and this June 2023 Risk Alert further builds on that version.

The compliance date for the new rule was November 4, 2022.

The standard review

The SEC’s staff has been reviewing the following in terms of Marketing Rule compliance at advisory firms, and these reviews will continue:

  • Policies and procedures, such as whether advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the Advisers Act and the rules thereunder, including the Marketing Rule.
  • Substantiation requirement, such as whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
  • Performance advertising requirements, including whether advisers are in compliance with performance advertising requirements in the Marketing Rule.
  • Books and records, such as whether advisers are in compliance with Advisers Act Rule 204-2, as amended, that requires advisers to make and keep certain records, such as records of all advertisements they disseminate, including certain internal working papers, performance-related information, and documentation for oral advertisements, testimonials, and endorsements

The Division encourages advisers to review their websites and other marketing materials for compliance, including ensuring that they have a reasonable basis for believing they will be able to substantiate material statements of fact and that their performance advertising, including extracted performance and hypothetical performance, complies with the Marketing Rule.

The SEC’s staff will continue to focus on whether advisers have disseminated advertisements that violate such general prohibitions as making an untrue statement of a material fact, omitting a material fact necessary to make the statement made not misleading, or including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced.

New areas of emphasis

The staff will now conduct focused examinations, as well as broad reviews, for compliance with other aspects of the Marketing Rule, which include, but are not limited to:

Testimonials and endorsements:

  • Disclosures should be provided, including clear and prominent disclosure of whether the person giving the testimonial or endorsement (the “promoter”) is a client or investor, that the promoter is compensated, if applicable, and of material conflicts of interest.
  • Oversight conditions are met, such as whether advisers have a reasonable basis for believing that the testimonials or endorsements disseminated comply with the requirements of the Marketing Rule.
  • Written agreements are entered into, where required, such as written agreements with promoters, unless the promoters are applicable affiliates of the advisers and such affiliation is readily apparent or disclosed or the promoters receive de minimis compensation (ie, $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
  • Ineligible persons have been compensated for testimonials or endorsements, if the adviser knew or reasonably should have known the person was ineligible, including certain “bad actors” that are prohibited from acting as promoters, unless such promoters meet the conditions for exemptions.

Third-party ratings

The staff will review whether advisers are in compliance with the Marketing Rule requirements regarding the use of third-party ratings in advertisements, including:

  • The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of: (i) the date on which the rating was given and the period of time upon which the rating was based; (ii) the identity of the third party that created and tabulated the rating; and (iii) if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.
  • Questionnaires or surveys used in preparation of a third-party rating meet certain conditions, such as that the adviser has a reasonable basis for believing that such questionnaire or survey is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result.

Form ADV

The SEC amended Form ADV on December 22, 2020, requiring advisers to provide additional information regarding their marketing practices. The staff remind advisers they will review whether they have accurately completed these questions in their annual Form ADV amendments.