SEC Releases Risk Alert on Marketing Rule Exam Priorities

The Securities and Exchange Commission Monday released a Risk Alert highlighting the upcoming Nov. 4 compliance date for its new Marketing Rule and outlining areas of focus for examiners.

As of Nov. 4, the SEC warns, advisors may no longer choose to comply with the previous advertising and cash solicitation rules.

Further, the SEC is withdrawing certain staff statements relating to those rules.

Advisors should consider whether they need to update or revise their written policies and procedures, as required by Advisers Act Rule 206(4)-7, “to ensure they are reasonably designed to prevent violations by the advisers and their supervised persons of the Marketing Rule,” the SEC states.

The agency also warns that Advisers Act Rule 204-2 (the Books and Records Rule), as amended, “will require investment 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.”

Ken Joseph, managing director and head of the Financial Services Compliance and Regulation practice for the Americas at Kroll, predicted in a previous interview with ThinkAdvisor that SEC examiners will include compliance with the Marketing Rule as a focus area for 2023.

Sanjay Lamba, associate general counsel for the Investment Adviser Association in Washington, told ThinkAdvisor Monday in an email that the risk alert signifies the agency’s “intent to conduct examination very soon after — if not starting on — Nov. 4.”

In its alert, “SEC staff has highlighted a few specific areas of focus in their initial examinations that include having updated policies and procedures in place, making sure you can back up what you say in advertisements, keeping newly required books and records, and — not surprisingly — making sure you comply with all the requirements of the new Rule relating to performance advertising,” Lamba said.

Exam Focus Areas

The alert states that SEC staff “will conduct a number of specific national initiatives, as well as a broad review through the examination process” for compliance with the Marketing Rule that will include, but will not be limited to, the following areas:

Marketing Rule Policies and Procedures: The review will focus on whether investment 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: This review will determine whether investment advisors have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.

Performance Advertising Requirements: The Marketing Rule prohibits several kinds of performance statements in advertisements. These include:

• Gross performance in absence of net performance
• Performance results given without specifying the time period
• Hypothetical performance, without meeting other requirements
• Predecessor performance, without meeting other requirements.

Books and Records: In connection with the Marketing Rule, the SEC adopted amendments to the Books and Records Rule. The SEC will review for compliance with these requirements. Also, the Commission amended Form ADV to require advisors to provide additional information regarding their marketing practices.

(Photo: Diego M. Radzinschi/ALM)