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SEC issues Marketing Rule Risk Alert

20 May 2024

By Jennifer Dickinson, Senior Managing Director, U.S.

On April 17, the U.S Securities Exchange Commission (SEC) issued its first Risk Alert on the modernized Marketing Rule for registered investment advisers (Advisers), which had a compliance date of November 4, 2022.   Although most Advisers did seem to adopt and implement policies to comply with the updated rule, the SEC’s Division of Examinations (EXAMS) staff observed a number of non-compliant practices, the most salient of which are summarized below.

Failure to update policies

EXAMS teams found that some Advisers’ policies:

  • Did not address applicable marketing channels that they used, specifically websites and social media
  • Were incomplete, outdated, or only partly updated for the marketing topics applicable to the Adviser
  • Were not tailored to address Advisers’ advertisements, such as the requirements for testimonials, endorsements, and third-party ratings
  • Were updated but not being followed, e.g., policies required presenting performance net of fees but Advisers continued to present only gross performance

Inadequate recordkeeping

EXAMS teams found a number of recordkeeping issues, including:

  • Failing to retain completed questionnaires or surveys used to prepare third-party ratings
  • Not keeping copies of social media content
  • Insufficient documentation to support performance claims

Form ADV

Form ADV Part 1, Item 5.L requires Advisers to answer yes/no questions about their marketing materials. EXAMS teams found that some Advisers were answering “no” when their materials, websites or social media included that content.  The Risk Alert noted this issue regarding third-party ratings, performance results and hypothetical performance.  EXAMS teams also noted that some Advisers used outdated rule references in Form ADV, Part 2A, Item 14.

General prohibitions

The Marketing Rule’s “General Prohibitions” identify several ways in which an Adviser’s materials could be considered false or misleading as well as a catch-all for content that “is otherwise materially misleading.”

1. Untrue statements of material fact and unsubstantiated statements of material fact

  • Statements that a network of personnel perform advisory services when it was just one person
  • Erroneous statements regarding employees’ qualifications, including education, experience, and professional designations
  • Referencing investment mandates that were not being used (e.g., ESG)
  • Claiming that investment processes were validated by professional institutions when they were not
  • Stating that the Adviser considered certain risk tolerances when recommending investment strategies when it did not
  • Describing formal securities screening processes that did not exist

2. Omission of material facts or misleading inference

  • Recommending investments without disclosing that the Advisers were compensated for those recommendations
  • Presenting performance information that did not adequately disclose the share classes included in the returns
  • Using lower fees to calculate net returns than were available and omitting material information regarding fees and expenses used in calculating returns
  • Implying the Advisers were the sole top recipients of certain awards when the awards went to multiple recipients or the advisers were not the top recipients
  • Statements that the Advisers were highly rated without disclosing that the ratings were based on factors unrelated to investment advice (e.g., assets under management, number of clients) or that Adviser personnel nominated fellow employees for these awards
  • Benchmark index comparisons that did not define the index or provide sufficient context to understand the basis for the comparison or disclose that the benchmark performance did not include reinvestment of dividends
  • Performance presentations that contained outdated market data (e.g., more than five years prior); or investment products that were no longer available and included lower investment costs than were available
  • Advisers’ track record included securities that were not purchased in a similar manner as was used for clients’ accounts
  • Investment recommendations containing performance information that did not provide context, e.g., performance was for a time period when most investors would have experienced similar returns because of general market performance

3. References to specific investment advice that were not presented in a fair and balanced manner

  • Including only the most profitable investments or specifically excluding certain investments without providing context (e.g., investments that were written off as a loss or were lower-performing)
  • EXAMS teams observed that some Advisers had not established criteria to ensure that references to specific investment advice were provided in a fair and balanced manner

4. Inclusion or exclusion of performance results or time periods in manners that were not fair and balanced

  • Not disclosing the time period or whether the returns were calculated for the same time period as other performance information included in the same advertisement
  • Including the performance of only realized investment information in the total net return figure and excluding unrealized investments

5. Advertisements that were otherwise materially misleading

  • These findings included Advisers that presented disclosures in an unreadable font on websites or in videos

At IQ-EQ, our compliance consultants have the experience to handle all U.S. regulatory requirements of the SEC, CFTC and more, and will work with you to adapt your compliance program to suit your business, the SEC’s priorities and other regulatory developments. Find out more about our regulatory compliance consulting services.

Working with IQ-EQ has been seamless – you and your team understand our business, advise us appropriately, and handle your side of our collective partnership so that we can focus on making good investment decisions. Evan Gibson SVP, Merchants Capital

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