As the SEC ramps up its enforcement of the Marketing Rule’s stricter requirements, a newly released risk alert warns advisers that they are still coming up short in several areas.
Published by the SEC’s Division of Examinations, the alert shares preliminary observations concerning compliance with Advisers Act Rule 206(4)-7 (the “Compliance Rule”), Advisers Act Rule 204-2 (the “Books and Records Rule”), and the Marketing Rule’s “General Prohibitions.”
Included among the general deficiencies observed by the SEC staff were untrue or unsubstantiated statements of material facts, as well as references to specific investment advice that were not presented in a “fair and balanced manner.”
In reviewing whether investment advisers had adopted and implemented written marketing-related policies and procedures designed to prevent violations, the SEC notes, for example, that advisers who updated their policies and procedures typically established a process for reviewing advertisements.
“The staff, however, observed instances where advisers’ policies and procedures were not reasonably designed or implemented to address compliance with the Marketing Rule, which resulted in gaps for preventing violations of the Marketing Rule, Books and Records Rule, or both,” the alert explains.
For example, the staff observed advisers’ policies that required net-of-fees performance to be included with any performance advertisement; those same advisers, however, included only gross performance in advertisements.
Books and Records Rule
The staff also observed that advisers typically had updated their policies and procedures to reflect the books and records maintenance and preservation requirements, but nevertheless still observed deficiencies. Among the examples provided were that advisers:
- completed questionnaires or surveys used in the preparation of a third-party rating but did not maintain a copy of such questionnaires;
- did not maintain copies of information posted to social media; and
- did not maintain documentation to support performance claims included in advertisements.
Also observed were deficiencies on Form ADV, such as advisers who inaccurately reported that their advertisements did not include:
- Third-party ratings, when their websites included third-party ratings or social media posts that touted the firms as being ranked in certain third-party ratings.
- Performance results when they were included in their marketing materials.
- Hypothetical performance when such claims were included in advertisements.
Advisers apparently have also been using outdated language in their Forms ADV referencing provisions of the prior Cash Solicitation Rule, indicating inaccurately that no referral arrangements existed, and omitting material terms and compensation of referral arrangements on Form ADV.
General Prohibitions
As alluded to earlier, the staff observed advertisements that included statements of material fact that appeared to be untrue. In such instances, the advisers typically ceased disseminating the advertisements or removed the untrue statements, the SEC notes.
“In some cases, the advisers acknowledged that the statements of material fact were likely untrue after being unable to substantiate the statements upon demand by the staff during examinations, which also constituted a violation of Rule 206(4)-1(a)(2) of the Marketing Rule,” the risk alert explained.
The staff also observed advertisements that included information that “could have reasonably caused untrue or misleading implications or inferences to be drawn concerning material facts relating to the advisers,” the SEC further noted.
For example, some advertisements contained statements that advisers were different from other advisers because they acted in the “best interest of clients,” without disclosing that all investment advisers have a fiduciary duty to act in their clients’ best interests.
In addition, some advertisements recommended certain investments (e.g., on podcasts or websites) without disclosing the conflicts of interest attributed to the compensation received by the advisers for such recommendations.
As to references not being presented in a fair and balanced manner, the SEC staff observed advertisements that included only the most profitable investments or specifically excluded certain investments without providing sufficient information and context to evaluate the rationale.
The SEC’s risk alert comes just days after the Commission announced a second set of cases it brought as part of an ongoing sweep concerning marketing rule violations. In those cases, the SEC found that each of the charged firms advertised hypothetical performance to mass audiences on their websites without having the required policies and procedures.
The SEC in December 2020 voted to modernize rules governing investment adviser advertisements and solicitor compensation under the Investment Advisers Act. To give advisers a transition period, advisory firms had until November 2022 to come into full compliance with the rule.
The SEC’s risk alert can be viewed here.
