Compliance
SEC Issues Risk Alert on Investment Advisers’ Compliance With Marketing Rule
The agency’s notice focused on issues concerning the provisions related to testimonials, endorsements and third-party ratings.
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The alert is intended to inform advisers, investors and market participants about common deficiencies, and to encourage stronger adherence to regulatory requirements, according to the agency.
The marketing rule regulates how investment advisers can advertise their services to clients and prospects. The SEC amended the rule in December 2020 with changes that went into effect in 2022.
The SEC alert detailed observations about how investment advisers are complying with two specific provisions of the marketing rule: the use of testimonials and endorsements in advertising, and the inclusion of third-party ratings.
According to the SEC alert, many advisers failed to make proper disclosures when using client testimonials or endorsements, especially regarding promoter compensation and conflicts of interest. Disclosures were often hidden in hyperlinks or small print, making them hard to find, according to the agency. Advisers also omitted key details about compensation arrangements with promoters such as social media influencers or lead generation firms.
The SEC’s review also revealed that some advisers had not updated or implemented compliance policies and procedures to address the marketing rule’s requirements. Others lacked written agreements with paid promoters or failed to document the scope and terms of these arrangements. In some cases, advisers incorrectly classified compensation as “de minimis” (less than $1,000), even when payments exceeded that threshold over a 12-month period.
Regarding third-party ratings, the SEC observed that some advisers did not conduct adequate due diligence to ensure that the ratings were based on fair and unbiased methodologies. Additionally, disclosures related to third-party ratings were often missing or not sufficiently prominent, and some advisers failed to indicate when compensation was provided in connection with obtaining or using these ratings.
The SEC stated that the observations shared in the risk alert are intended to help investment advisers evaluate and strengthen their own practices, particularly in areas of training, supervision and compliance.