On April 17, 2024, the SEC’s Division of Examinations issued its latest risk alert regarding Rule 206(4)-1 of the Investment Advisers Act of 1940, known as the Marketing Rule. Following the examinations staff’s June 2023 and September 2022 risk alerts regarding areas of emphasis in examinations focused on compliance with the Marketing Rule, the latest risk alert highlighted initial observations from examinations of investment advisers’ compliance with the Marketing Rule and related rules under the Advisers Act. The risk alert focused on compliance with the Marketing Rule’s general prohibitions, Rule 206(4)-7 (the Compliance Rule), Rule 204-2 (the Books and Records Rule), and Form ADV disclosure requirements.
General Prohibitions. Observations related to the Marketing Rule’s general prohibitions included advertisements containing untrue and unsubstantiated statements of material fact; omissions of material facts or misleading inferences; and statements about the potential benefits connected with the advisers’ services or methods of operation, specific investment advice, and performance results or performance time periods that were not presented in a fair and balanced manner. Examples noted by the staff included advertisements publicizing the receipt of certain awards or accolades that were not received, advertisements recommending certain investments without disclosing the adviser’s conflicts of interest, and advertisements including misleading testimonials.
Compliance Rule. The examinations staff observed instances where advisers’ policies and procedures were not reasonably designed or implemented to address compliance with the Marketing Rule, in violation of the Compliance Rule. Examples noted by the staff included policies and procedures that were informal, rather than in writing; consisted only of general descriptions and expectations related to the Marketing Rule; were incomplete, not updated, or only partially updated for certain applicable marketing topics; and were not tailored to address advisers’ specific advertisements.
Books and Records Rule. The examinations staff observed instances where advisers were deficient with respect to Marketing Rule-related books and records maintenance and preservation requirements. Examples noted by the staff included advisers not maintaining copies of information posted to social media and not maintaining documentation to support performance claims included in advertisements.
Form ADV. The examinations staff observed Marketing Rule-related deficiencies on advisers’ Form ADV, such as inaccurately reporting on Form ADV, Part 1A, that their advertisements did not include third-party ratings, performance results, or hypothetical performance when such information was in fact included in the advisers’ advertisements.
In sharing its observations, the SEC staff encouraged investment 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 risk alert is available here.
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