New SEC Risk Alert on the Marketing Rule

SEC Releases

Brief Introduction

In an increasingly aggressive regulatory environment, many compliance professionals are erring on the side of caution when interacting with the new Marketing Rule.

Although some guidance has been offered in the form of FAQs, the SEC has been cautious to produce actionable material for Firms committed to proactive compliance.

On June 8^th, the SEC released a Risk Alert related to the Marketing Rule. The Risk Alert substantiates the marketing review process that Vigilant is currently conducting.

We have broken down the Risk Alert for further understanding below.

Key SEC Focus Areas of Review During Exams

• The Implementation of Policies and Procedures
  • Firms should have made updates and changes since the implementation of the Marketing Rule.
  • Policies and procedures should reasonably prevent advisers and supervised persons from violating the Advisers Act and the subsequent Marketing Rule.
  • The Firm should have a process for evaluating marketing material that shows a commitment to compliance with the Marketing Rule.
• Substantiating Claims of Material Fact
  • Firms should have a reasonable belief that they can defend the claims made in their marketing materials.
  • When statements of fact are made about skills, expertise, superior analytics, etc., the Firm should reasonably believe it can provide evidence to support these claims.
• Requirements Related to Performance Advertising
  • Firms will need to demonstrate that they are following requirements related to performance advertising.
  • Advertised performance should provide net returns with equal prominence along with 1-, 5-, and 10-year results when indicated.
  • The SEC reminds advisers that extracted performance and hypothetical performance must be in compliance with the Marketing Rule.
• Recordkeeping
  • The Adviser Act Rule 204-2 has multiple recordkeeping requirements.
  • Firms will need to provide records of their advertising materials.
  • Additional materials are also required, including internal working papers, performance related discussions, documentation for oral advertisements, testimonials, and endorsements.
• Avoiding the General Prohibitions Listed Below
  • Untrue statements, misleading statements, and omitting important material facts.
  • Statements that may be true, but the adviser does not have a reasonable basis for believe it can be substantiated.
  • Information that may cause viewers to believe something that is untrue or misleading.
  • Discussion of benefits to clients or investors without providing a fair and balanced discussion of risks or limitations.
  • Referring to specific investment advice from an adviser that is not fair and balanced.
  • The use of performance results in a way that is not fair and balanced, including using time periods that are presented in a way that is not fair and balanced.
  • Anything that is materially misleading.

Additional Areas of Focus by the SEC

• Testimonials/Endorsements
  • Disclosures should make it clear and evident to the reader if a person giving a testimony is an investor, client, compensated person, or any other potential conflict of interest.
  • Advisers should properly supervise the claims made during testimonials and consider whether claims made can be substantiated in accordance with the Marketing Rule.
  • Written agreements are entered into where required, such as written agreements with promoters, unless the promoters are applicable affiliates of the advisers, and such affiliation is readily apparent or disclosed or the promoters receive de minimis compensation.
  • Persons that are considered ineligible, including “bad actors”, should not be used by an adviser for any testimonials or endorsements.
• Use of Third-Party Ratings
  • Advisers should provide or believe that the third-party rating provides:
    • The date of when the rating was given and the time period the rating is based off of.
    • What party or parties actually created, calculated, and provided the public rating.
    • If any compensation either directly or indirectly has been provided by the adviser in using or receiving the rating.
  • Questionnaires or surveys used in the creation of third-party ratings should:
    • Make it equally easy to provide unfavorable responses as favorable.
    • Be designed in such a way that results are not predetermined or likely to be determined.
• Form ADV Requirements
  • Advisers are required to provide additional information about marketing practices.
  • The SEC will review submitted forms, and review whether advisers have completed them accurately.

Vigilant’s Conclusion

Risk Alerts are generally helpful for the industry, as many compliance professionals rely on the SEC when determining how to properly design their compliance procedures. However, without details and specific facts and circumstances, it may be difficult to address the many concerns noted in the Risk Alert when complying with the Marketing Rule.

Vigilant brings to the table over 370+ years of combined experience in this industry. We have an established Marketing Review Process that uses a proactive regulatory mindset, allowing your marketing team to focus on their core competencies.

If you are concerned about avoiding regulatory headaches, especially in regards to the Marketing Rule, and being free to focus on your business goals, reach out to us today for assistance.

Contact Us Today