SEC Examination Staff Warn Advisers to Comply with Marketing Rule
Commentary by Andrew Lom
In a Risk Alert, SEC Examination staff highlighted deficiencies in compliance with the Investment Adviser Marketing Rule ("IAA Rule 206(4)-1").
SEC Examination staff made the following observations:
- Compliance Rule. The staff observed Marketing Rule policies and procedures that were (i) incomplete, (ii) not implemented, (iii) not tailored, (iv) informal rather than in writing and (v) consisted only of general descriptions and expectations related to the Marketing Rule. Even to the extent that they were written, they were sometimes not implemented.
- Books and Records Rule. The staff observed that advisers failed to maintain (i) copies of completed questionnaires or surveys used in the preparation of a third-party ratings, (ii) copies of information posted to social media and (iii) documentation to support performance claims included in advertisements.
- Form ADV. The staff observed Marketing Rule-related deficiencies on Form ADV, as to advertisements that did not include: (i) third-party ratings, when firm websites included them or social media posts that touted the firms as being ranked in certain third-party ratings; (ii) performance results, when performance results were included in firm marketing materials; and (iii) hypothetical performance, when hypothetical performance was included in advertisements. The staff also observed advisers using outdated language on their Form ADVs.
The staff observed compliance deficiencies under the Marketing Rule, including advertisements that:
- false represented that the advisers were "free of all conflicts";
- publicized the receipt of awards that were not actually received;
- touted that the adviser was "seen on" national media, when, in fact, the only adviser’s only appearances were paid advertisements;
- represented performance of products that were no longer available;
- touted that clients were serviced by a team of professionals when only one person was responsible for servicing clients; and
- included disclosures in an unreadable font.
SEC Enforcement staff encouraged advisers to reflect upon their practices, policies and procedures and to implement appropriate modifications to their training, supervisory, oversight and compliance programs.
Commentary
It's not a coincidence that this came out the week after the SEC's wave of enforcements against five advisers for violations of the Marketing Rule. (See e.g., Investment Advisers Settle Charges for Marketing Violations and Investment Adviser Settles Charges for False Advertisements.) The SEC is very focused on enforcement with regard to adviser advertising. This Alert gives some reasonably concrete examples of, and guidance about, the particular behaviors that the SEC deems enforcement-worthy. Perhaps the most important is for advisers to have procedures for the review of advertising materials that are very detailed and that require demonstration that the procedures have been satisfied.