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Compliance June 9, 2023
SEC Broadens Adviser Marketing Rule Compliance Exams
The regulator has added three new areas of review to the adviser marketing rule that has been in effect since late last year.
Reported by Alex Ortolani
The Securities and Exchange Commission on Thursday issued a risk alert to advisers broadening the SEC’s focus areas when reviewing firms’ compliance with the adviser marketing rule that went into effect in November 2022.
The SEC’s risk alert reiterates prior examination guidance issued on September 19, 2022, addressing Rule 206(4)-1, which is aimed at preventing investment advisers from misleading clients. Thursday’s alert adds three new areas of focus by staff examiners: testimonials and endorsements; third-party ratings; and amended Form ADV filings showing information about investment adviser and business operations. The SEC wrote that while prior guidance should continue to be followed, “staff is also increasing its focus on other Marketing Rule-related areas during examinations.”
The scope of the marketing rule and its enforcement have been the focus of adviser attention, as the rule seeks to ensure that any communication that discusses investment performance and is directed to one or more persons is an advertisement subject to the Investment Advisers Act of 1940.
In terms of third-party ratings, the SEC’s new risk alert announced that exams will focus on details of who is providing testimonials for marketing materials—including whether they are a client or investor, whether they are being compensated or if there is a material conflict of interest with the testimonial. The new alert also requires advisers to disclose when agreements have been signed if “promoters” of a product or service receive more than $1,000 or the equivalent value.
The SEC’s focus on third-party ratings in advertisements will focus on disclosures of the date on which a rating was given, the identity of the third party that created the rating and whether compensation was given by the adviser to obtain the rating, according to the alert. Examiners will also look at the questionnaires or surveys used to prepare the ratings to ensure they are not designed to produce favorable results for the firm’s cause.
Finally, the SEC noted that staff will review whether advisers accurately completed the newly amended Form ADV in annual filings.
“In sharing additional examination review areas for the marketing rule, the division encourages advisers to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs,” the SEC alert stated.
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