The Securities and Exchange Commission (SEC) is expanding the areas it plans to focus on during examinations of advisor compliance with the recently finalized marketing rule.
More specifically, the agency plans to broaden its exam target areas to include testimonials and endorsements, third-party ratings and Form ADV compliance, according to a June 8 Risk Alert released by the SEC’s Division of Examinations.
The final rule was published in the Federal Register in March 2021 and took effect on May 4, 2021, but full compliance with the rule didn’t kick in until Nov. 4, 2022, in order to give advisers a transition period to comply with the amendments. That so-called honeymoon period appears to be coming to an end, however, with this latest risk alert.
Last September, the Division published a Risk Alert describing the initial areas of review, including whether advisers have implemented written policies and procedures; whether material statements in advertisements can be substantiated; and whether they are in compliance with performance advertising requirements, and the Books and Records rule.
In addition, the SEC announced in February that the marketing rule will now be a core examination review area for registered investment advisers (RIAs).
Testimonials and Endorsements
Regarding the use of testimonials and endorsements in advertisements, the staff is reviewing whether:
- “Clear and prominent” disclosures are provided addressing whether the person giving the testimonial or endorsement is a client or investor, if the promoter is compensated, and whether there are any material conflicts of interest.
- Oversight conditions are met, such as whether advisers have a reasonable basis for believing that the testimonials or endorsements comply with the marketing rule.
- Written agreements are entered into, such as 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.
- Ineligible persons have been compensated for testimonials or endorsements, if the adviser knew or should have known the person was ineligible, including certain “bad actors” who are prohibited from acting as promoters, unless such promoters meet the conditions for exemptions.
Third-Party Ratings
Concerning the use of third-party ratings in advertisements, the staff will review whether:
- The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of:
- the date on which the rating was given and the period the rating was based;
- the identity of the third party that created and tabulated the rating; and
- whether compensation has been provided directly or indirectly by the adviser in connection with the third-party rating.
- Questionnaires or surveys used in preparation of a third-party rating meet certain conditions, such as whether they are structured to make it equally easy for a participant to provide favorable and unfavorable responses and are not designed to produce any predetermined result.
Form ADV
Here, the staff will review whether advisers accurately completed the additional questions in their annual Form ADV amendments regarding their marketing practices.
