COMPLYing with the SEC Marketing Rule

Despite the fact that the compliance date for the new SEC Marketing Rule was over a year ago, Marketing Rule compliance (and acts of non-compliance) continue to make headlines.

From enforcement actions to Risk Alerts, the SEC has made it clear they are examining firms with a fine-toothed comb…and they expect compliance.

In this blog, we’ll break down some areas of focus noted in both of the SEC’s Risk Alert related to the Marketing Rule and highlight how COMPLY Managed Services: Advertising Review can help you COMPLY with confidence.

What Firms Can Learn from the SEC’s Marketing Rule Risk Alerts

The SEC released its first Marketing Rule Risk alert on September 19, 2022, highlighting:

Marketing Rule Policies and Procedures
Substantiation Requirements
Performance Advertising Requirements
Books and Records

While the initial Risk Alert was published prior to the November 4 compliance date, it provided firms with the opportunity to, “reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.”

The second Risk Alert, released on June 8, 2023, summarized the initial alert, while adding new areas of focus for the division. Three specific areas of note included:

Testimonials and Endorsements

“The staff is reviewing whether advisers are in compliance with the Marketing Rule requirements

regarding the use of testimonials and endorsements in an advertisement, including whether:

Disclosures are provided, including clear and prominent disclosure of whether the person giving the testimonial or endorsement (the “promoter”) is a client or investor, that the promoter is compensated, if applicable, and of material conflicts of interest.
Oversight conditions are met, such as whether advisers have a reasonable basis for believing that the testimonials or endorsements disseminated comply with the requirements of 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 (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
Ineligible persons have been compensated for testimonials or endorsements, if the adviser knew or reasonably should have known the person was ineligible, including certain “bad actors” that are prohibited from acting as promoters, unless such promoters meet the conditions for exemptions.”

Third-Party Reviews

“The staff will review whether advisers are in compliance with the Marketing Rule requirements regarding the use of third-party ratings in advertisements, including:

The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of: (i) the date on which the rating was given and the period of time upon which the rating was based; (ii) the identity of the third party that created and tabulated the rating; and (iii) if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.
Questionnaires or surveys used in preparation of a third-party rating meet certain conditions, such as that the adviser has a reasonable basis for believing that such questionnaire or survey is structured to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result.”

Form ADV

“The Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices. The staff will review whether advisers accurately completed these questions in their annual Form ADV amendments.