Key Observations From SEC on Marketing Rule Compliance
One of the more complicated issues with compliance recently has been the (relatively) new SEC Rule 206(4)-1, commonly known as the “Marketing Rule”. Since its adoption in 2020, firms have struggled to comply with the due diligence, performance and recordkeeping requirements imposed by the rule.
On April 17, 2024, the SEC's Division of Examinations issued a Risk Alert highlighting their most recent findings from examinations of investment advisers’ Marketing Rule compliance programs. Below is a summary of the key observations and areas where deficiencies were noted:
Policies and Procedures: Most advisers updated their policies to align with the Marketing Rule, including processes for reviewing advertisements. However, the SEC observed gaps where policies were not detailed enough to meet compliance rule standards or tailored to the specific marketing channels used by advisers, such as websites and social media. Some advisers relied on informal or incomplete policies.
Training: While many advisers provided training on the Marketing Rule, the SEC identified some instances where training was either inadequate or not provided to all relevant staff.
Books and Records Rule: Though advisers generally updated their record-keeping practices to meet the requirements of the Marketing Rule, deficiencies were noted, including: a) failure to maintain copies of questionnaires used in third-party ratings, social media posts, and b) documentation supporting performance claims in advertisements. These lapses could result in non-compliance with the Books and Records Rule, which mandates the preservation of such records.
Form ADV: Advisers updated their Form ADVs to reflect their marketing practices, but the SEC staff identified inaccuracies in these updates. Some advisers failed to disclose the use of third-party ratings, performance results, or hypothetical performance in their advertisements. Additionally, outdated language referencing prior rules, like the Cash Solicitation Rule, was still being used, leading to further compliance issues.
Compliance with General Prohibitions: The SEC staff also noted compliance deficiencies with respect to the Marketing Rule’s General Prohibitions, which are designed to prevent misleading or deceptive practices in advertising.
Several deficiencies were observed:
Untrue or Unsubstantiated Statements: The SEC identified cases of advertisements with untrue statements or claims that could not be substantiated. Examples included claims of being "conflict-free" when actual conflicts existed, and misrepresentations about the advisers’ services, personnel qualifications, and investment processes.
Omission of Material Facts: Instances of advertisements omitting critical information necessary to make the content not misleading. For example, some advisers claimed to act in the "best interest of clients" without disclosing that this is a fiduciary duty required of all advisers.
Misuse of SEC Registration: The SEC observed that some advisers improperly used their SEC registration status in advertisements to imply a level of endorsement or skill that does not exist. In some cases, advisers included the SEC logo on their websites suggesting that the SEC had approved or endorsed their business practices without actually obtaining approval from the SEC.
The SEC's observations underscore the importance of robust compliance programs tailored to the specific practices of each adviser. Investment advisers are encouraged to review their policies, procedures, and advertisements to ensure they fully comply with the Marketing Rule and related regulations.
If you wish to learn more about the Marketing Rule or the SEC’s findings from this or other Risk Alerts, view the Resources tab on our website.
