On June 8, 2023, the SEC’s Division of Examinations (Division) issued a risk alert outlining its broadened areas of focus for examinations of registered investment advisers concerning amended Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940 (Advisers Act).
Specifically, the alert noted that the Division is conducting focused examinations, as well as broad reviews, for compliance with Marketing Rule requirements applicable to advisers’ (i) use of testimonials, endorsements and third-party ratings in advertisements and (ii) completion of Form ADV.
Testimonials and Endorsements
With respect to advisers’ inclusion of any testimonials or endorsements in advertisements, the Division is examining whether:
- advertisements clearly and prominently disclose (i) if the person giving a testimonial/endorsement (Promoter) is a client or investor, (ii) whether the Promoter is compensated, if applicable, and (iii) any material conflicts of interest;
- advisers have met all of the Marketing Rule’s oversight and compliance conditions (e.g., whether the adviser has a reasonable basis for believing all testimonials/endorsements comply with the Marketing Rule);
- advisers have entered into written agreements with Promoters, where required; and
- advisers have provided compensation to any “ineligible person” under the Marketing Rule for testimonials/endorsements, if the Adviser knew or reasonably should have known such person was ineligible.
With respect to an adviser’s use of third-party ratings in advertisements, the Division is examining whether the adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of:
- the identity of the third-party that created and tabulated the rating;
- the date of, and the applicable periods covered by, the rating; and
- whether any compensation was provided by the adviser in connection with the rating.
Examinations will also review whether advisers have a reasonable basis for believing that any questionnaires or surveys used to create third-party ratings are (i) designed to make it equally easy for a participant to provide favorable and unfavorable responses and (ii) not designed or prepared to produce a predetermined result.
Finally, examinations will review whether advisers have accurately completed their Forms ADV to provide required information regarding marketing practices.
In addition to these new areas of focus, the alert reiterated the Division’s continuing focus on certain Marketing Rule topics previously noted in a similar SEC risk alert issued on September 19, 2022, including advisers’(i) adoption of policies and procedures reasonably designed to prevent violations of the Marketing Rule and the Advisers Act, generally, (ii) substantiation of material statements of facts included in advertisements, (iii) compliance with the Marketing Rule’s performance advertising requirements (e.g., those pertaining to “hypothetical” and “extracted” performance), (iv) compliance with recordkeeping requirements under Advisers Act Rule 204-2, and (v) satisfaction of the Marketing Rule’s principles-based prohibitions for all advertisements.
In response to this risk alert, advisers should reflect upon their practices, policies and procedures and implement any necessary modifications to their training, supervisory, oversight and compliance programs.