The SEC’s Division of Examinations has published a Risk Alert sharing preliminary observations from examinations of investment advisers’ compliance with the Marketing Rule (Rule 206(4)-1 under the Investment Advisers Act of 1940).
The securities regulator, and particularly its exams staff, continues to focus on compliance with the Marketing Rule. In addition to conducting a couple of enforcement sweeps of firms violating the rule, the Examinations division explained that it is increasing its focus on Marketing Rule–related infractions in its examination priorities report, issued in late 2023 with a look toward 2024.
Deficiencies noted
With respect to the Marketing Rule’s General Prohibitions, the Risk Alert provides observations of deficiencies related to:
- untrue statements of material fact and unsubstantiated statements of material fact;
- an omission of material facts or misleading inference;
- the fair and balanced treatment of material risks or limitations;
- references to specific investment advice that were not presented in a fair and balanced manner; and
- inclusion or exclusion of performance results or time period in matters that were not fair and balanced.
Policies and procedure issues
Some of the examples the SEC provided in terms of policies and procedures not being adequate to address compliance with the Marketing Rule were:
- They did not address applicable marketing channels utilized by the advisers, such as websites and social media. And some advisers failed to maintain copies of the information they posted to social media.
- They were informal (rather than in writing) or were incomplete or not recently updated.
- They were updated to reflect the Marketing Rule but not implemented. For example, the staff observed advisers’ policies that required net of fees performance to be included with any performance advertisement; however, the staff observed those same advisers including only gross performance in advertisements.
- They were not tailored to address advisers’ specific advertisements (for example, ones including testimonials or other endorsements).
- They did not adequately address the preservation and maintenance of advertisements and related documents, such as copies of any surveys used in the preparation of a third-party rating (in the event the adviser has received such documents) included or appearing in any advertisement.
Form ADV issues
The staff also found some Form ADV-related issues, such that the requisite SEC-registration form did not include some important details required in it and related to its advertisements, as required by the Marketing Rule. For example, some firms in their Form ADV said their advertisement did not include performance results, when performance results were included in their marketing materials.
Fair and balanced – and unreadable font
Other deficiencies fell in the area of infractions of the rule’s general prohibitions, such as an adviser referencing specific investment advice provided by it a manner that was not fair and balanced or presenting performance time periods in a manner that was not fair and balanced.
The risk alert reminds advisers that website-based or video-based advertisements can appear to be materially misleading when the disclosures presented in them are featured in an unreadable font.
Marketing rule enforcement sweep
Earlier this month, the SEC announced settled charges against five registered investment advisers for violations of the agency’s Marketing Rule, specifically targeting the firms’ advertisements of hypothetical performance to the general public; all five firms agreed to settle the SEC’s charges and will pay $200,000 in combined penalties.
Last September, the SEC charged and settled proceedings with nine registered investment advisers for misrepresenting hypothetical performance of advisory products in connection, citing the Marketing Rule.
The SEC’s orders, which the firms settled without admitting or denying the findings, found that each of the nine firms advertised hypothetical performance to mass audiences on their websites without the required policies and procedures and that two of the firms failed to maintain required copies of their advertisements. They agreed to pay civil penalties ranging from $50,000 to $175,000.
