The Securities and Exchange Commission’s (SEC) new marketing rule for registered investment advisers (RIAs), including private funds, went into effect on Nov. 4, 2022. The new marketing rule, which is extensive and layered, will affect most communication between registered investment advisers and their investors. While the rule offers firms the opportunity to flex their marketing muscles and implement testimonials into their materials, it also presents a new set of extensive requirements for those who do so. What’s more – the SEC published a risk alert which announced the organization’s intentions to begin investigations and administer enforcement actions related to the new marketing rule immediately.
Some RIA firms are already in full compliance with the new marketing rule, some firms are in the initial stages of complying with the new marketing rule, and some firms may not be in compliance at all. If your firm falls into the latter two categories, the time to act is now! You must immediately ensure that you are fully compliant with SEC Marketing Rule 206(4)-1, or you put yourself at risk of a violation and a hefty enforcement action.
The Examination Focus Areas
The SEC has announced it will focus its investigations and examinations on the following areas related to the new marketing rule.
1.Marketing Rule policies and procedures
The SEC will review whether investment advisers have adopted and implemented written policies and procedures which are reasonably designed to prevent violations of the new marketing rule.
2. Substantiation requirements
Firms should have evidence “lockers” or files in place which contain backup for every material factual statement provided by an investment adviser to an investor/potential investor. The SEC views this practice as essential to being able to substantiate the “reasonable basis” for all material claims of fact made in advertisement on demand.
3. Performance advertising requirements
The examination might include a review of your firm’s marketing materials to ensure they do not include the following:
- A list of gross performance unless the advertisement also presents net performance with equal prevalence.
- A statement or suggestion that the SEC has reviewed or approved performance information.
- Use of past performance information.
- Use of hypothetical performance, unless the adviser adopts and implements compliance policies and procedures reasonably designed to ensure the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain additional information.
- Use of predecessor performance, unless the personnel primarily responsible for achieving the prior performance manages accounts at the advertising adviser and the accounts which were managed by personnel at the predecessor adviser are sufficiently similar to the accounts they manage at the advertising adviser.
4. Books and records
Advisers must maintain records of all advertisements they disseminate.
5. Form ADV
Investment advisers will have to complete the new section on advertising and marketing included in the Form ADV.
How can you ensure your RIA firm is compliant the new SEC marketing rule?
It’s becoming increasingly common for regulators to use technology to spot gaps and violations in firms’ compliance programs. Which means the onus is placed on firms to ensure they are thoroughly complying with regulatory requirements like the SEC’s new marketing rule.
Here’s what your firm can do to comply with the new marketing rule:
- Familiarize yourself with the new marketing rule and what is expected of your firm.
- Implement policies and procedures which thoroughly address the new marketing rule.
- Ensure your firm’s compliance program is backed by compliance controls with objective and testable means such as “internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.”
- Incorporate a documented process which verbalizes how your firm will maintain records of its advertising materials – and follow it!
- Familiarize yourself with the new advertising and marketing section of the Form ADV.
Wherever your RIA firm is in the process of complying with the SEC’s new marketing rule, we have you covered. At the National Regulatory Services (NRS®) company, we work directly with firms to master compliance with confidence, and we offer a range of solutions to meet your firm’s needs.
As an add-on or standalone module, our NRS ComplianceGuardian Marketing Review module can help your RIA firm meet the requirements of the SEC’s marketing rule. Specifically, this module guides you step-by-step through the marketing review process, offering guidance on required corrections and required books and records rules.
We also offer SEC Mock exams to test your firm’s preparedness for examination and investigation, offering customized guidance on how to build an effective and thorough compliance program.
Whether your firm needs a technology solution, education or consulting, we have the expertise to help you achieve and maintain regulatory compliance. Learn more about our solutions for investment advisers and firms.