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Print articleSEC Risk Alert Addresses Upcoming Examinations Relating to the “Marketing Rule”
November, 2022 - Kevin S. Woodard
The Risk Alert describes what staffers will be looking for when it comes to compliance with the Marketing Rule. The reviews will include the following areas:
- Marketing Rule Policies and Procedures
- The Division of Examinations will review whether advisers have adopted and implemented written policies and procedures addressing the Marketing Rule. Policies and procedures should include objective and testable means reasonably designed to prevent violations of the Marketing Rule. The Division of Examinations provides that objective and testable means could include “conducting an internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.”
- The Division of Examinations will review whether advisers have adopted and implemented written policies and procedures addressing the Marketing Rule. Policies and procedures should include objective and testable means reasonably designed to prevent violations of the Marketing Rule. The Division of Examinations provides that objective and testable means could include “conducting an internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.”
- Substantiation Requirement
- The Marketing Rule prohibits advertisements that include material statements of fact that the investment adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC. Advisers may address this requirement through policies and procedures, including the maintenance of contemporaneous records demonstrating the reasonable basis for their belief. The Division of Examinations provides that if an adviser is unable to substantiate the material claims of fact in an advertisement when the SEC demands it, the SEC will presume that the adviser did not have a reasonable basis for its belief.
- The Marketing Rule prohibits advertisements that include material statements of fact that the investment adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the SEC. Advisers may address this requirement through policies and procedures, including the maintenance of contemporaneous records demonstrating the reasonable basis for their belief. The Division of Examinations provides that if an adviser is unable to substantiate the material claims of fact in an advertisement when the SEC demands it, the SEC will presume that the adviser did not have a reasonable basis for its belief.
- Performance Advertising Requirements
- The Division of Examinations notes the following Marketing Rule performance advertising requirements subject to review as part of the initiative:
–- Use of gross performance data;
- Required time periods;
- Statements of SEC approval or review;
- Related portfolio inclusion;
- Extracted performance;
- Hypothetical performance; and
- Predecessor performance.
- The Division of Examinations notes the following Marketing Rule performance advertising requirements subject to review as part of the initiative:
- Books and Records
- Compliance with the amendments to Advisers Act Rule 204-2, books and records.
The Division of Examinations also notes the amendments to Form ADV Part 1A, Item 5. As a reminder, advisers will first be required to answer the marketing related questions included in Form ADV Part 1A, Item 5 in their next annual updating amendment after the compliance date. Form ADV does not require advisers to update responses to Item 5 “promptly” by filing an other-than-annual amendment. Even an adviser that submits an other-than-annual amendment is not required to update its response to Item 5 even if the response to Item 5 has become inaccurate.
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