SEC Risk Alert on the New Marketing: Additional Areas of Focus for Examinations
June 12, 2023
The Division of Examinations (“EXAMS”) published a risk alert on June 9, 2023, to inform investment advisers, including advisers to private funds, about areas of emphasis for examinations focused on Rule 206(4)-1 of the Investment Advisers Act of 1940 (the “new Marketing Rule”). This risk alert repeats the initial areas of focus of the September 19, 2022, risk alert and adds additional areas of emphasis. See here for our previous coverage of the September risk alert and the January update to the commission’s FAQ. While the initial focus areas are unchanged, EXAMS is increasing its focus on additional areas related to the new Marketing Rule.
Initial Marketing Rule Exam Areas
EXAMS staff has been reviewing the following and will continue to do so.
- Policies and procedures – a common question we’ve seen in current examinations is whether firms have adopted new polices for the rule and requests to share written policies before and after updates for the new Marketing Rule.
- Substantiation requirement – advisers must have a reasonable basis for being able to substantiate any material statement of fact in advertisements.
- Performance Advertising requirements – net performance, prescribed time-periods and other requirements for presenting performance in advertising will be reviewed.
- Books and records – firms are accustomed to maintaining records of all disseminated ads, look out for additional recordkeeping requirements around internal working papers to substantiate factual statements, data back-up for performance information, and documentation of disclosures and written agreements connected to oral advertisements, testimonials and endorsements.
If you have not done so, now is the time to update policies if you have not done so and to review your website and disseminated ads for these focus areas.
Complying with the General Prohibitions of the new Marketing Rule
Exams has, and will continue, to review firm advertising for violations of the general prohibitions. If you have not updated your marketing review practice for these changes, now is the time. Changes include monitoring for any untrue or materially misleading statements, substantiation of material facts, and fair and balanced references to specific investment advice, potential benefits to clients or investors, and performance results.
Additional Marketing Rule Areas of Emphasis
EXAMS will continue to conduct both focused examinations of marketing and broad reviews that include compliance with the new Marketing Rule. The risk alert named three additional areas of emphasis:
- Testimonials and Endorsements
- Providing Disclosures – clear and prominent disclosures of client or investor status, whether the promoter is compensated, and any material conflicts of interest must be given at the time the presentation is made. For oral advertisements, promoters would need to read a disclosure at the start of a telephone conference or audio presentation to comply.
- Oversight – advisers must have a reasonable basis for believing promoters comply with the new Marketing Rule when giving testimonials or endorsements.
- Written Agreements – firms must have written agreements with promoters giving testimonials or endorsements if those promoters are compensated over $1,000 in cash or non-cash equivalents in total during a calendar year.
- Ineligible persons – advisers my not compensate a person giving testimonials or endorsements if the adviser knows or should have known such person is disqualified for being a “bad actor” or otherwise disqualified under the new Marketing Rule.
- Third-Party Ratings
- Clear and Prominent Disclosure – Ratings must clearly and prominently disclose (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. The clear and prominent standard means these disclosures must appear alongside the rating and not hidden in endnotes or behind a link.
- Conditions for Questionnaires or Surveys for third-party ratings – advisers must have 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
- New Form ADV requirements – Advisers are required to provide additional information on marketing practices in their ADV filings. EXAMS will review whether advisers accurately completed these questions in their annual Form ADV amendments.
What does this mean for me?
While the risk alert contained no new guidance, it is clear that the new Marketing Rule will be a priority in examinations. EXAMS stated that these additional examination review areas were shared to encourage advisers “to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.” Updates to written policies and procedures and Form ADV reporting on marketing activity should be in place. Now is the time to make sure your compliance program has fully implemented the changes required by the new Marketing Rule.
Fairview provides comprehensive and ongoing compliance services, including comprehensive marketing and advertising review and complete examination support. Contact us for additional information about maintaining your compliance program in an ever-changing regulatory environment.