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Melanie Waddell

Regulation and Compliance > Federal Regulation > SEC

SEC Marketing Rule Enforcement Actions Could Be on Their Way

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What You Need to Know

  • Recent SEC exams have found major marketing rule-related deficiencies, IAA's associate general counsel says.

Securities and Exchange Commission exams of compliance with the agency’s new marketing rule are in full swing, and enforcement actions related to firms’ lax compliance could be in the pipeline.

The SEC’s 2023 exam priorities reflect “a huge focus” on compliance with the marketing rule, notes Sanjay Lamba, associate general counsel for the Investment Adviser Association in Washington.

The good news is that results of initial SEC exams conducted during the first four months of the rule’s Nov. 4 compliance date “apparently revealed that the majority of advisors have fully updated their policies and procedures to reflect the new rule,” Lamba said.

The bad news, however, is that IAA has “very recently learned that the [SEC] exam staff has found serious [marketing rule-related] deficiencies on a large number of exams — with some being referred to the SEC enforcement staff,” Lamba said.

“It would be very unfair if these deficiencies and referrals” relate to the agency’s updated FAQ guidance issued in January, Lamba said.

IAA hopes that the SEC exam staff “is not referring cases where advisors in general have made good faith efforts to implement” the new rule.

While the SEC has begun issuing deficiency letters to firms that relate to the updated FAQ, IAA said that it does not know “the subject of any deficiency that’s been referred” to the agency’s enforcement division.

On a recent webcast held by the National Society of Compliance Professionals, Amy Lynch, president and founder of FrontLine Compliance, stated that firms that have “done nothing” to comply with the new marketing rule are at risk of facing an enforcement action.

These include firms that have no updated policy, firms that have “not touched” their marketing materials, and firms that are “out there doing testimonials and endorsements without the proper disclosures,” Lynch said. “That’s the kind of firm or activity that’s going to be a ‘gotcha,’ and the SEC will be likely taking enforcement against that type of an entity.”

Right now, Lynch said, the SEC expects firms to have updated written policies and procedures and to also “have conducted [an] analysis of their current marketing materials to see what need[s] to be changed/updated to be in compliance with the new rule.”

Because the new rule is in it’s early days, the SEC “just wants to see that firms are making a best effort approach and they’ve got those policies in place, they are updating those [marketing] materials and are going through the process of being in full compliance,” Lynch continued.

“As long as that best effort can be proven, in the early stages of a new rule typically the SEC is not going to go out and do a ‘gotcha’ enforcement action against a firm,” Lynch said.

‘Little Patience’

The SEC has signaled a likely heavy hand on marketing rule compliance.

In statements last November, William Birdthistle, director of the SEC’s Office of Investment Management, called the new marketing rule one of the agency’s more “ambitious” rulemakings, and stated: “I would very much encourage a rigorous compliance with the rule.”

While the compliance date was Nov. 4, the SEC’s advertising and marketing rule has been in effect since May 2021.

Kurt Gottschall and Kit Addleman, partners at Haynes Boone, told me in an email that given the “relatively long time” advisors have had to comply with the marketing rule, they expected the SEC to have “little patience with firms that had not undertaken a robust review and revision” of their policies and procedures.

As with enforcement matters following the adoption of Regulation Best Interest and Form CRS, Gottschall and Addleman say they expect the SEC exam division “will make enforcement referrals whenever they encounter firms that do not appear to have made a good faith effort to consider all new aspects” of the marketing rule.

In 2023, examiners are reviewing marketing materials “provided to highly sophisticated private fund investors and separately managed accounts for institutions,” the attorneys state. 

Gottschall, former director of the SEC’s Denver office, and Addleman, former director of the SEC’s Atlanta office, added that they’ve been “struck by the breadth” of marketing rule requests by examiners.

“Every SEC examination is supposed to be risk-based, so the staff always face tradeoffs as to the number of issues they review versus the depth,” the attorneys said. “In FY 2023 exams, the staff seems to be devoting significant time to Marketing Rule compliance in initial request lists, interviews with firm personnel, and then follow-up document requests.”

SEC examiners are “asking certain investment advisors to produce documents relating to their hypothetical performance advertising and to preserve additional documents reflecting all of their policies, procedures and ads” following the mandatory Nov. 4 compliance date, the attorneys said.

The SEC has also focused its attention on firm “websites and other broadly disseminated advertisements that include various forms of hypothetical performance, including:  (1) model portfolios; (2) backtested application of strategies; and (3) the projected performance of portfolios or strategies,” Gottschall and Addleman said.

Exam Focus

The Risk Alert the SEC exam staff released last September sets out specific areas the agency will be looking at during initial exams, Lamba explains. One focus area is on making sure advisors “can substantiate material statements of fact in their marketing materials.”

The SEC exam sweep also zeroes in on written policies and procedures, performance advertising and books and records.

Maureen Kiefer-Goldenberg, senior vice president of compliance at Mariner Wealth Advisors, said on the webcast with Lynch that “there’s not a lot of meat” to the SEC’s updated FAQ released in January.

State-registered firms, Kiefer-Goldenberg said, may also be having a tough time complying with the new marketing rule, as only Arkansas, Massachusetts, Rhode Island and Wyoming have issued harmonized rules.

Lamba of IAA agrees that the SEC’s updated FAQ distributed in January to clarify an issue involving gross/net performance “has thrown a monkey wrench into the compliance programs” of many advisors.

Many advisors “devoted significant resources and effort, including obtaining advice from outside counsel, to try and address an issue that was unclear and known to the staff prior to the compliance date,” Lamba said.

The updated FAQ, however, came out “with a different position than advisers had taken in good faith,” he continued. “Exam staff then tell them — through a formal written deficiency — that despite making good-faith determinations on how to comply, they got it wrong.”

Firms “are now having to spend more time and money to change their compliance programs to reflect the staff’s view in the FAQ,” Lamba said.

The FAQ, Lamba said, “raised additional uncertainties.”

Senior SEC officials were able to provide some additional clarity during a recent IAA event, according to Lamba.

For example, Lamba said, according to SEC staff, “a table showing the gross performance of all individual holdings in a portfolio must include the net performance of each of the individual holdings.”


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