As part of its stated ongoing efforts to enhance transparency and aid compliance, the SEC recently issued a risk alert highlighting additional areas of focus during examinations related to its adviser marketing rule. The SEC states that this alert serves as an essential update for investment advisers who are registered or required to be registered with the SEC, including advisers to private funds, to help them navigate the evolving regulatory landscape and stay compliant with the marketing rule.
Initial Marketing Rule Exam Areas Of Review
The SEC staff has been conducting comprehensive reviews in several key areas to assess compliance with the adviser marketing rule.
These areas include:
- Policies & Procedures: The marketing rule expects advisers to adopt and implement written policies and procedures that are designed to prevent violations of the Advisers Act and its rules, including the marketing rule. This includes establishing robust internal controls and compliance mechanisms to adhere to regulatory requirements.
- Substantiation Requirement: Advisers must have a reasonable basis for believing that they can substantiate material statements of fact made in their advertisements. This requirement aims to ensure that marketing materials are accurate, reliable, and supported by evidence.
- Performance Advertising Requirements: Compliance with the performance advertising requirements outlined in the marketing rule is of utmost importance. Advisers must make sure that their performance claims are presented accurately and in a manner consistent with regulatory guidelines.
- Books & Records: The Advisers Act Rule 204-2 mandates that advisers maintain certain records related to their advertisements, including internal working papers, performance information, and documentation for oral advertisements, testimonials, and endorsements. Compliance with these recordkeeping requirements is crucial for examinations.
Continuing Review For Compliance With General Prohibitions
In addition to the initial review areas, the SEC staff places significant emphasis on the general prohibitions outlined in the marketing rule.
These prohibitions aim to prevent misleading or deceptive practices, and they include:
- Untrue Statements Or Omission Of Material Facts: Advisers’ advertisements must not include untrue statements or omit material facts that would make the statements misleading.
- Substantiation Of Material Statements Of Fact: Advertisements should be supported by a reasonable basis for any material statements of fact, which can be substantiated upon demand by the SEC.
- Avoidance Of Misleading Implications Or Inferences: Advertisements should not contain information that could reasonably be likely to cause an untrue or misleading implication or inference concerning a material fact relating to the adviser.
- Fair & Balanced Treatment Of Benefits & Risks: When discussing potential benefits with clients or investors, advisers must provide fair and balanced treatment by addressing any associated material risks or limitations.
- Fair & Balanced Referencing Of Investment Advice: Advisers must reference specific investment advice in a fair and balanced manner, ensuring that the information provided is accurate, reliable, and not misleading.
- Fair & Balanced Presentation Of Performance Results: Advisers should include or exclude performance results and present performance time periods in a fair and balanced manner, without misleading investors.
- Avoidance Of Materially Misleading Information: Advertisements should not include information that is otherwise materially misleading, which could mislead investors or distort the true nature of the investment opportunity.
Additional Marketing Rule Areas Of Emphasis
The SEC staff is conducting focused examinations and broad reviews to evaluate compliance with other aspects of the marketing rule.
These areas of emphasis include:
- Testimonials & Endorsements: The staff will assess compliance with the marketing rule requirements related to the use of testimonials and endorsements in advertisements. This includes proper disclosures, oversight conditions, written agreements with promoters, and compliance with compensation rules.
- Third-Party Ratings: Compliance with the marketing rule requirements regarding third-party ratings in advertisements will be closely examined. This includes clear and prominent disclosure of the rating details, the identity of the rating provider, and any compensation received by the adviser.
- Form ADV: Advisers are required to provide additional information regarding their marketing practices in the annual Form ADV amendments. The staff will review whether advisers accurately completed the marketing practice-related questions in this form.
Compliance Solutions For SEC’s Advertising Rule
Thankfully, AdvisorLaw is a leading compliance solutions provider. We provide tailored compliance solutions to assist RIAs in navigating and adhering to the SEC’s advertising requirements.
Here’s how AdvisorLaw can aid in RIA compliance efforts:
- Expert Guidance: Our team of experienced compliance professionals provides expert guidance on interpreting and understanding the SEC’s advertising rule. We help RIAs navigate the rule’s requirements and provide a clear understanding of the compliance obligations.
- Customized Compliance Policies: AdvisorLaw assists RIAs in developing comprehensive compliance policies and procedures tailored to each RIA’s specific business practices. These policies are designed to align with the advertising rule’s principles-based approach, offering a robust framework for compliance.
- Review & Monitoring Tools: AdvisorLaw offers advanced tools and systems that enable RIAs to efficiently review and monitor their advertising materials. These tools support compliance with the advertising rule by verifying accuracy, substantiating claims, and identifying potential areas of noncompliance.
- Regulatory Updates & Training: AdvisorLaw keeps RIAs informed about regulatory changes and updates related to the advertising rule. We provide regular updates, training sessions, and resources to help RIAs stay current with evolving compliance requirements.
The SEC’s risk alert serves as a valuable resource for investment advisers to enhance their marketing rule compliance efforts. Firms are strongly encouraged to reflect upon their practices, policies, and procedures and make any necessary modifications to their training, supervisory, oversight, and compliance programs.
Compliance with the SEC’s advertising rule is crucial for RIAs’ efforts to avoid regulatory penalties. AdvisorLaw’s comprehensive compliance solutions and expert guidance empower RIAs to navigate the complexities of the advertising rule effectively. By leveraging AdvisorLaw’s expertise, RIAs can develop robust compliance policies, monitor their advertising materials, and stay informed about regulatory changes.
With AdvisorLaw as your compliance partner, your RIA can focus on delivering quality services to your clients while confidently meeting your regulatory obligations.