SEC Issues Risk Alert on Additional Areas of Focus for Examining Marketing Rule Compliance

On June 8, 2023, the Division of Examinations (EXAMS) of the Securities and Exchange Commission (SEC) published a Risk Alert (the Risk Alert) setting forth additional areas of review that EXAMS will focus on in connection with amended Rule 206(4)-1 (Marketing Rule) of the Investment Advisers Act of 1940 (Advisers Act) during upcoming examinations of SEC-registered investment advisers (RIAs). These areas of review come in addition to the initial Marketing Rule focus areas that were published by EXAMS on Sept. 19, 2022.

The Risk Alert encourages RIAs to reflect on their practices, policies and procedures and to implement any appropriate modifications to their training, supervisory, oversight and compliance programs to ensure compliance with the Marketing Rule. This article summarizes the areas emphasized by EXAMS in the Risk Alert.

INITIAL AREAS OF REVIEW

On Sept. 19, 2022, EXAMS identified four initial areas of focus for examinations in connection with the Marketing Rule, which we have covered in detail in a prior article. To briefly summarize, those initial focus areas were as follows:

• Whether RIAs have adopted and implemented written policies and procedures that are reasonably designed to prevent violations of the Marketing Rule by the RIAs and their supervised persons.
• Whether RIAs have a reasonable basis for believing they can substantiate material statements of fact in their advertisements.
• Whether RIAs are complying with the Marketing Rule’s performance advertising requirements.
• Whether RIAs are complying with the amendments to the recordkeeping requirements of the Advisers Act that were adopted in connection with the Marketing Rule.

GENERAL PROHIBITIONS

The Risk Alert indicates that the EXAMS staff has examined and will continue to examine whether RIAs have disseminated advertisements that violate certain general prohibitions, such as (i) including an untrue statement of material fact, or omitting a material fact such that the statement made becomes misleading, (ii) discussing potential benefits to investors in connection with the RIA’s services without providing fair and balanced treatment of any associated material risks or limitations and (iii) referencing specific investment advice by the RIA, or including or excluding performance results, in each case, in a manner that is not fair and balanced.

ADDITIONAL AREAS OF REVIEW

Testimonials and Endorsements

The EXAMS staff will examine whether RIAs are complying with the requirements of the Marketing Rule with respect to the use of testimonials and endorsements, including:

• Whether prominent disclosure is provided as to whether (i) the person giving the testimonial or endorsement (promoter) is a client or investor, (ii) the promoter is being compensated and (iii) there exist any material conflicts of interest.
• Whether the RIA has a reasonable basis for believing the testimonials and endorsements it disseminated comply with the Marketing Rule.
• Whether written agreements, such as written agreements with promoters, were entered into when required under the Marketing Rule.
• Whether ineligible persons have been compensated for providing testimonials or endorsements and whether the RIA knew or reasonably should have known the person was ineligible.

Third-Party Ratings

EXAMS staff will examine whether an RIA’s use of third-party ratings in advertisements is in compliance with the Marketing Rule, including:

• Whether the RIA provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure (i) of the date the rating was given and the time period on which the rating was based, (ii) of the identity of the third party that created and tabulated the rating and (iii) to the extent applicable, that compensation was provided by the RIA in connection with obtaining or using the third-party rating.
• Whether certain conditions have been met in connection with questionnaires or surveys used in preparation of a third-party rating, such as whether the RIA has a reasonable basis for believing that any such questionnaire or survey is structured in a way that allows participants to provide favorable or unfavorable responses with equal ease, and that it is not designed or prepared to produce any predetermined result.

Form ADV

Finally, EXAMS will be reviewing whether RIAs have accurately completed the questions of Form ADV that relate to their marketing practices. As a reminder, Item 5 of Form ADV Part 1A was recently amended by the SEC to require additional disclosures regarding marketing practices.

In light of these additional areas of review, RIAs should reevaluate their compliance programs, practices, policies and procedures to ensure they are prepared for any upcoming examinations. As always, Kramer Levin is available to provide guidance on these focus areas and to counsel managers in their compliance efforts.

The Risk Alert can be found here.