SEC Risk Alert: Examinations focused on additional areas of the new Marketing Rule for investment advisers

On June 8, 2023, the Securities and Exchange Commission (SEC) issued a Risk Alert highlighting additional areas of emphasis during examinations, which will focus on the amended Rule 206(4)-1 (the New Marketing Rule) under the Investment Advisers Act of 1940. The alert provide additional guidance to investment advisers on complying with the new Marketing Rule, building on the previous Risk Alert (published on September 19, 2022) which described the initial areas of review related to the Marketing Rule.

Why was this additional SEC risk alert published?

The Division of Examinations is publishing this Risk Alert to inform investment advisers, which are registered or required to be registered with the SEC, about the additional areas of emphasis during examinations focused on the Marketing Rule.

The previous Risk Alert published on September 19, 2022, described the initial areas of review related to the Marketing Rule, which included:

1. Policies and procedures: Examine whether advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations.
2. Substantiation requirement: Assess whether advisers have a reasonable basis for substantiating material statements of fact in advertisements.
3. Performance advertising requirements: Review compliance with the performance advertising requirements outlined in the Marketing Rule.
4. Books and records: Evaluate whether advisers comply with Advisers Act Rule 204-2, specifically regarding the records of all advertisements they disseminate.

What additional areas of the new Marketing Rule for investment advisers will the recent SEC Risk Alert cover?

The additional Marketing Rule areas of emphasis that the staff is examining, per the most recent SEC Risk Alert, include:

1. Testimonials and endorsements: Review compliance with requirements for the use of testimonials and endorsements in advertisements, focusing on:
   • Disclosures including compensation for testimonials and existing relationships or conflicts of interest.
   • Oversight conditions including a reasonable basis for believing the endorsements comply with the Marketing Rule.
   • Written agreements are disclosed unless of de minimis value.
   •  Ensuring there has been no compensation of ineligible persons for promotion.
2. Third-party ratings: Evaluate compliance with requirements related to the use of third-party ratings in advertisements including:
   • Emphasizing clear and prominent disclosures including dates of ratings, review periods examined, identity of the rating agency and any compensation.
   • Appropriate use of questionnaires or surveys designed for impartiality.
3. Form ADV: Highlight the amendments to Form ADV, and mention that the staff will review whether advisers accurately completed questions regarding their marketing practices in their annual Form ADV amendments.

As part of the examination of marketing practices, the SEC staff will focus on whether advisers have disseminated advertisements that violate general prohibitions, including:

1. Use of untrue or misleading statements: Assess whether advertisements include untrue statements of material facts or omit necessary material facts.
2. Including material facts without reasonable basis for substantiation.
3. Including information that would reasonably be likely to cause an untrue or misleading implication or inference.
4. Discussions of potential benefits to clients or investors without fair and balanced treatment of associated material risks or limitations.
5. Referencing specific investment advice provided by advisers not presented in a fair and balanced manner.
6. Use of performance results as well as performance time periods not presented in a fair and balanced manner.
7. Materially misleading information.

Visit the SEC’s websites for any new updates, risk alerts or key regulatory information.