SEC Exams Division Highlights Common Failures in IA Marketing Rule Compliance
In a Risk Alert, the SEC Division of Examinations ("Division") found that many investment advisers are still struggling with the practical application of the "Marketing Rule" (IAA Rule 206(4)-1 "Investment Adviser Marketing"), particularly regarding testimonials, endorsements, and third-party ratings.
The Division observed failures to meet the "clear and prominent" disclosure standard required for testimonials and endorsements. The staff said that simply having the disclosure is not enough and that placement and format matter. Examiners also criticized advisers using hyperlinks to provide required disclosures, a practice the Division explicitly flagged as insufficient. Similarly, disclosures rendered in smaller or lighter text than the testimonial itself were deemed non-compliant. These issues were found not just on main firm websites, but also on "d/b/a" websites and social media platforms used by influencers and lead-generation firms.
The Division stated that generic disclosures regarding compensation were inadequate. Advisers frequently disclosed that a promoter was paid for a referral but omitted the material terms of that compensation arrangement. Further, the staff highlighted a lack of transparency regarding material conflicts of interest. For example, advisers failed to disclose when a promoter was also an investor in the fund or a principal of a firm with a sub-advisory relationship.
The Division also addressed the following compliance failures: (i) advisers provided "gift cards to clients [for writing] reviews on third-party" sites without verifying that the resulting testimonials contained the necessary disclosures; (ii) advisers failed to "maintain written agreements with paid promoters;" and (iii) advisers incorrectly claimed exemption for compensation under $1,000 by treating payments as separate events, even when the aggregate total to a single promoter exceeded the threshold over a 12-month period.
The Division asserted that many advisers were utilizing ratings without the required due diligence. They said that under the Marketing Rule, advisers must have a reasonable basis for believing that the questionnaire or survey used to generate a rating is not designed to produce a predetermined result. The staff observed advisers using ratings without reviewing the underlying methodology or obtaining the questionnaire.
The Division flagged undisclosed compensation related to the use of a rating provider's logo, priority placement or "enhanced exposure" in the provider's directory and as to referral fees generated via links on the rating provider's website.