SEC Issues Rare ‘Pre-Emptive’ Warning in Expanded Marketing Rule Risk Alert

The Securities and Exchange Commission published a second risk alert Thursday concerning its new marketing rule that breaks precedent by giving advice up front instead of responding to failed examinations, according to an industry expert.

The risk alerts, which build on guidance the SEC issued in September, are unusual in that they are framed in terms of what the SEC will be looking for in future examinations, according to Matthew Shepherd, a director at ACA Group, a governance and risk advisory. Normally, risk alerts reflect on common failures from previous exams as a warning to other advisers and can often include recommended fixes.

The new risk alert highlights the importance of being able to substantiate statements of fact, eliminating misleading statements and maintaining proper policies and procedures.

Shepherd says the preemptive approach makes these risk alerts less useful than others. It may be harder for advisers to respond to them because they are not highlighting errors that have actually been made in the industry, he notes. 

Regardless of the regulator’s approach, Shepherd warns that, generally, the SEC is very consistent with the priorities laid out in their risk alerts. Advisers should be prepared to substantiate statements of fact so that they are not “scrambling” to find what evidence they relied on at the time an advertisement was published, he says.

One such area the alert lists is material omissions of fact that can make a statement misleading even if it contains no explicit falsehoods. Shepherd notes that it is possible to say something that is, in and of itself, true, but, “by leaving out context, you have made it a false statement.”

As an example of a misleading by omission, Shepherd says that if an adviser advertises their strategy as being superior by noting the performance of their portfolio without noting that the entire market was growing in the same time period, that could be a misleading statement in violation of the marketing rule.

Shepherd also explains that the sophistication of the audience “is not baked into the rule.” An adviser does not have to tell their audience “that the sky is blue,” but advisers should not lean too heavily on assumptions that certain investors may share with them. If they do, they may end up having to argue their case to the SEC in exams.

In approaching marketing materials, an adviser should make sure that their statements cannot reasonably be interpreted in multiple ways, and one certainly should not “hope” for a particular interpretation or seek “plausible deniability,” he says. Instead, in all marketing, advisers should ask: Is it possible “that someone can read this and think something else? And if yes, then re-write it.”