September 21, 2022
SEC Risk Alert on the New Marketing Rule: Act Now to Prepare
The Division of Examinations (“EXAMS”) published a risk alert yesterday to inform investment advisers, including advisers to private funds, that examiners will conduct “a number of specific national initiatives” that focus on the new Marketing Rule. The November 4th compliance date is almost here. After that day, advisers can no longer choose to comply with the previous advertising and cash solicitation rules, nor will they be able to rely on no-action letters set to be withdrawn the same day.
The announced exam initiatives and areas of review are:
Marketing Rule Policies and Procedures – Examiners will review if advisers’ policies and procedures are reasonably designed to prevent violations by the advisers and their supervised persons of the Advisers Act and also the new Marketing rule.
Substantiation Requirement – The second general prohibition of the new Marketing Rule states that advisers may not “[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.” To meet this requirement the Commission suggests in the adopting release:
If an adviser is unable to substantiate a material claim of fact upon demand, then the Commission will presume the adviser did not have a reasonable basis for belief.
Performance Advertising Requirements
The new Marketing Rule’s requirements around presentations of performance include many prohibitions. The following were listed in the risk alert:
Books and Records, and Form ADV
The new Marketing Rule includes amendments to the Books and Records Rule, which will be reviewed for compliance by Examiners. Additionally, all advisers are now required to accurately report their marketing activities in Item 5.L of Form ADV in the next annual updating amendment. The Commission concluded with a reminder of this new reporting obligation.
What does this mean for me?
The new Marketing Rule will be examined and the subject of these national initiatives. This risk alert follows the SEC’s unprecedented mass email earlier this year and the notices sent earlier this month to advisers whose Form ADV Part 2A brochure Item 14 response referenced the soon to expire cash solicitation rule. Make no mistake, the SEC will aggressively pursue violations of the new Marketing Rule. Act now to comply.
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