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New SEC risk alert modernizes investment adviser marketing rules

The SEC issued a risk alert relating to the amended Advisers Act Rule 206(4)-1 (“Marketing Rule”) on September 19, 2022. The rule was adopted in December 2020, became effective on May 4, 2021, and included an 18-month transition period requiring compliance by November 4, 2022. This rule modernized rules that govern investment adviser advertisements and payments to solicitors and allows for marketing via new channels that previously had not been included. Previously, rules had been patchworked since the initial adoption in 1961 through an assortment of cases, no-action letters and SEC staff guidance.

In particular, this Marketing Rule replaces the previous four specific prohibitions with seven new general prohibitions. Advisers may not disseminate any advertisement that:

  1. Includes untrue statements and omissions
  2. Includes unsubstantiated material statements of facts
  3. Includes untrue or misleading implications or inferences
  4. Fails to provide fair and balances treatment of material risks or material limitations
  5. Fails to present specific investment advice in a fair and balances manner
  6. Cherry-picks performance results or otherwise presents performance in a manner that is not fair and balanced, and
  7. Is materially misleading. The result of these being less specific and more general places a higher burden of proof on advisers, requiring them to maintain evidence of any claims made within advertisements.

With the Marketing Rule coming into effect, the SEC states that advisers should update or revise their written policies and procedures, as required by Advisers Act Rule 206(4)-7, to ensure they are appropriately designed to prevent violations by advisers and supervised persons. This has been highlighted in an attempt to decrease any potential findings when examinations are conducted in subsequent periods.

The risk alert points out certain areas in which the SEC staff will focus on compliance. These will not be the only areas under focus but they are expected to be the key focus through their examination period.

  • Marketing rule policies and procedures – SEC staff will ensure adoption and implementation of written policies. The goal is to prevent violations by advisers and supervised persons of the rule. The Commission stated “…for these compliance policies and procedures to be effective, they should include objective and testable means reasonably designed to prevent violations of the final rule in the advertisements the adviser disseminates.” The focus will be on how the policies and procedures are designed to ensure compliance with the higher burden of proof placed on advisers.
  • Substantiation requirement – SEC staff will review advertisements to determine if investment advisers have a reasonable basis for believing that they will be able to substantiate material statements of fact in advertisements. The Marketing Rule makes it clear that advertisements can not include items that an adviser does not have a reasonable basis for believing. This should be documented and maintained by each adviser for their advertisements. In the event the SEC makes inquires and the adviser is unable to support their policy/assessment, it will be assumed that the adviser did not have a reasonable basis for its belief. Documentation and support prior to these advertisements being used will be expected to be maintained.
  • Performance advertising requirements – SEC staff will ensure compliance for advertisements to not include prohibited items such as gross performance, performance results, statements that the Commission had approved a calculation or performance results, hypothetical performance, or predecessor performance, to name a few. This is important to ensure that advisers are not misleading potential investors based on false or misleading statements included within their advertisements.
  • Books and records – SEC staff will ensure that the new requirements are being met by requiring that proper records are kept for sufficient periods of time. Form ADV has been updated to require additional information relating to the advisers’ marketing practices. The SEC wants to ensure that the Form ADV is appropriately updated for each adviser to comply with the new guidelines.

The purpose of this risk alert was to notify advisers that these are the areas that will be focused on during examination reviews and to allow for advisers to review their current practice, policies and procedures and ensure they are sufficient. If, after internal reflection, it is determined that they should be revised, changes should be made to their programs to ensure that they will sufficiently meet the requirements of the Marketing Rule. The SEC hopes that this risk alert will promote another deep assessment by advisers and lead to less comments during future SEC examinations.

Information included above was sourced from the SEC website.

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