SEC Risk Alert Addresses Marketing Rule Compliance Examinations

On Monday, the Securities and Exchange Commission released a risk alert that provides the latest information about “upcoming review areas during examinations” related to its new marketing rule.

As of the November 4 compliance date, the alert says, investment advisers may no longer choose to comply with the previous advertising and cash solicitation rules, and any advertisements on or after that date will be subject to the marketing rule. Additionally, it notes that the SEC Division of Examinations is withdrawing certain staff statements related to the previous rules.

Advisers should consider whether they need to update or revise their written policies and procedures “to ensure they are reasonably designed to prevent violations by the advisers and their supervised persons of the Marketing Rule,” the alert states. Investment advisers will also be required “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.”

The risk alert, which is noted to represent the views of the staff of the Division of Examinations, says 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.” This will include, but will not be limited to, the following areas:

Marketing Rule Policies and Procedures

The alert says staff will review 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

The staff will review whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements, the risk alert states. The marketing rule prohibits advertisements that “[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission.”

Performance Advertising Requirements

The alert states staff will also review whether investment advisers are following performance advertising requirements in the marketing rule, including the prohibitions on including the following in an advertisement:

• Gross performance, unless net performance is also provided;
• Any performance results, unless they are provided for specific time periods;
• Performance results of a subset of investments extracted from a portfolio, unless the performance results of the total portfolio are provided;
• Hypothetical performance; or
• Predecessor performance, unless other disclosures are made.

Books and Records

The alert states that the SEC has adopted amendments to the books and records rule and will review these requirements for compliance. Additionally, the agency has amended Form ADV to require advisers to provide additional information regarding their marketing practice and “reminds advisers of their obligations to accurately complete these questions in their next annual Form ADV amendment.”