A new Risk Alert by the Securities and Exchange Commission’s Division of Examinations specifies the initial exam initiatives and areas of review that it will conduct as part of the new Marketing Rule.
Among the provisions of the new rule (Advisers Act Rule 206(4)-1) adopted in December 2020 is a substantiation requirement, whereby the SEC notes that the staff will review whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
In the rule’s adopting release, the Commission explained that advisers should be able to demonstrate this “reasonable belief” in a number of ways, including by making a record contemporaneous with the advertisement demonstrating the basis for their belief or by implementing policies and procedures to address how this requirement is met. “However, if an adviser is unable to substantiate the material claims of fact made in an advertisement when the Commission demands it, we will presume that the adviser did not have a reasonable basis for its belief,” the SEC states.
Policies and Procedures
With a Nov. 4, 2022, compliance date fast approaching, the SEC notes that, as of that date, investment advisers can no longer choose to comply with the previous advertising and cash solicitation rules. In addition, the staff is withdrawing certain staff statements relating to those rules. “Any advertisements disseminated on or after the Compliance Date by advisers registered or required to be registered with the Commission are subject to the Marketing Rule,” the Commission advises.
As such, advisers should consider whether they need to update or revise their written policies and procedures to ensure they are in compliance. “In sharing initial examination review areas for the Marketing Rule, the Division encourages advisers to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs,” the Alert states.
Meanwhile, as part of its adopting release, the SEC had stated its belief that for the compliance policies and procedures to be effective, they should include “objective and testable means.” Examples include—but are not limited to—conducting an internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates, the SEC notes.
Performance Advertising Requirements
Also under review will be whether advisers are complying with the performance advertising requirements, including the prohibitions on including the following in an advertisement:
- gross performance, unless the advertisement also presents net performance;
- any performance results, unless they are provided for specific time periods;
- to the extent an advertisement includes the performance of portfolios other than the portfolio being advertised, performance results from fewer than all portfolios with substantially similar investment objectives and strategies as the portfolio being offered in the advertisement, with limited exceptions;
- performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
- hypothetical performance, unless the adviser implements policies and procedures to ensure that the performance is relevant to the financial situation and investment objectives of the intended audience and the adviser provides certain additional information; and
- predecessor performance, unless the personnel responsible for achieving the prior performance manage accounts at the advertising adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser.
The advertising adviser must also include all relevant disclosures clearly and prominently in the advertisement, the SEC notes.
Books and Records
As to the amendments to the Books and Records Rule, the staff will review whether investment advisers are making and keeping certain records, such as records of all advertisements they disseminate, including certain internal working papers, performance related information, and documentation for oral advertisements, testimonials and endorsements.
In addition, the Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices. The Alert reminds advisers of their obligations to accurately complete these questions in their next annual Form ADV amendment.
