SEC Releases Risk Alert on Areas of Focus in Marketing Rule Examinations

Earlier this month the SEC released a new risk alert highlighting new areas of focus in Marketing Rule examinations. When the SEC released one of their earlier risk alerts.related to the Marketing Rule in September of 2022, the staff stated they would be initially focusing on four core areas of review:

• Policies and Procedures – Whether advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations (i.e., the Marketing Rule).
• Substantiation Requirement – Whether advisers have a reasonable basis for believing they can substantiate material statements in advertisements.
• Performance Advertising Requirements – Whether advisers are compliant with Marketing Rule performance advertising requirements.
• Books and Records – Whether advisers are compliant with Advisers Act Rule 204-2 which requires advisers to make and keep certain records.

In this new risk alert, the staff mentions that they will continue to focus on these four core areas of compliance with Marketing Rule assessments but will be increasing their focus on other areas within the rule and will be taking more of a comprehensive approach with advisers and companies. According to Sanjay Lamba, associate general counsel for the Investment Adviser Association, this new comprehensive and in-depth assessment basis with the Marketing Rule stems from the fact that “the [SEC] staff has found serious [Marketing Rule-related] deficiencies on a large number of exams – with some being referred to the SEC enforcement staff.”

General Prohibitions

A focus in exams will be the seven general prohibitions.One of the main focuses of these prohibitions is to help ensure that advertisements are not misleading or otherwise contain information that is untrue.

New Marketing Rule Areas of Focus

In their new risk alert, the SEC staff stated that coupled with continued broad reviews, they will be “conducting focused examinations” focusing on three other key Marketing Rule areas:

1. Testimonials and Endorsements
2. Third-Party Ratings
3. Form ADV

Testimonials and Endorsements

The staff's new focus on testimonials and endorsements will bring a deeper examination into the specifics of any recommendations or client statements a firm may use in marketing materials. Within this, the staff will focus on items including whether:

• Disclosures are provided – This includes prominent disclosures of whether the provider of the testimonial is a client or investor, if the provider has been compensated, and of any material conflicts of interest.
• Oversight conditions are met – Whether advisers reasonably believe the mentioned testimonials or endorsements comply with the Marketing Rule.
• Written agreements are entered into – This could include written agreements with promoters.
• Ineligible persons have been compensated for testimonials or endorsements – This includes whether the adviser knew the individual was prohibited from acting as a promoter or was a “bad actor.”

Third-Party Ratings

The staff stated they will review whether advisers are compliant with the requirements, including:

• The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosures – These disclosures must include the date on which the rating was given and the period within which the rating was based, the identity of the third party that provided the rating, and, if necessary, compensation that was provided in connection with receiving the third-party rating.
• Questionnaires or surveys used in preparation of a third-party rating meet certain conditions – These conditions may include the adviser having a reasonable belief that the questionnaire was easily structured to have both positive and negative responses and is not biased one way or another.

Form ADV

Recently the SEC amended Form ADV, requiring advisers to provide additional and detailed information regarding their specific firm marketing practices. The staff mentions in this alert that they will look specifically at whether the advisers accurately provided the necessary information.

Continued Marketing Rule Compliance

As we know from previous statements, the SEC has reinstated in-person exams and is taking extra care to dig deeper into each examination. With that said, it is important for investment advisers to not overlook any piece of their Marketing Rule compliance procedures and ensure all elements within the Rule are accounted for. If you or your firm are unsure of your Marketing Rule compliance procedures, contact FinTech Law's team of compliance veterans to help.