On September 19, 2022, the SEC’s Division of Examinations (Division) issued a risk alert outlining areas of focus for upcoming examinations of registered investment advisers (Advisers) concerning the SEC’s new marketing rule under the Investment Advisers Act (Marketing Rule), which is set to take effect on November 4, 2022 (Compliance Date).
In response to the Marketing Rule’s new requirements, 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. Additionally, under the Marketing Rule, Advisers will be required to make and keep certain records, such as records of all advertisements they disseminate, certain internal working papers, performance related information, and documentation for oral advertisements, testimonials and endorsements.
Areas of Focus
The Division plans to conduct “a number of specific national initiatives, as well as a broad review through the examination process, for compliance with the Marketing Rule,” focusing on the following areas:
- Marketing Rule Policies and Procedures: The staff will examine whether Advisers have adopted policies and procedures reasonably designed to prevent violations of the Investment Advisers Act (including the Marketing Rule). Citing the Marketing Rule’s adopting release, the Commission reemphasized its belief that effective policies and procedures should include “objective and testable means reasonably designed to prevent violations of the [Marketing Rule] in the advertisements the adviser disseminates.” Examples of objective and testable means could include, but are not limited to, conducting an internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk or pre-approving templates.
- Substantiation Requirement: The staff will review whether Advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements. The risk alert echoed previous SEC comments that Advisers “would be able to demonstrate this reasonable belief in a number of ways…[h]owever, if an Adviser is unable to substantiate the material claims of fact made in an advertisement when the Commission demands it, [the Commission] will presume that the Adviser did not have a reasonable basis for its belief.”
- Performance Advertising Requirements: The staff will also review whether Advisers are in compliance with the Marketing Rule’s performance advertising requirements, including prohibitions on showing:
- Gross performance unless net performance is also shown;
- Performance results from a subset of investments extracted from a portfolio unless an Adviser provides, or offers to promptly provide, performance results for the total portfolio;
- Hypothetical performance unless applicable requirements are met; and
- Predecessor performance unless applicable requirements are met.
- Books and Records: In connection with the Marketing Rule, the SEC adopted amendments to (i) Form ADV to require Advisers to provide additional information regarding their marketing practices and (ii) the Books and Records Rule. The SEC will review for compliance with these requirements.
In response to this risk alert, Advisers should reflect upon their own practices, policies and procedures and implement any necessary modifications to ensure compliance with the Marketing Rule by the Compliance Date.