A recent Risk Alert (the “Alert”) issued by the Division of Examinations (“EXAMS”) demonstrates a new tactic for the SEC. In its first ever Alert on the newly to be enforced Marketing Rule, the SEC is warning firms to be ready for an examination. Typically, EXAMS issues a Risk Alert after it has conducted enough exams to see patterns of non-compliance. However, in this case, they are taking a proactive approach and warning firms ahead of time as to what they will be looking for during exams. The expectation is that firms should be more prepared.
The compliance date of November 4, 2022 for the new Marketing Rule is fast approaching. According to the Alert, Marketing Rule focused targeted exams or “sweeps” will be conducted by EXAMS to review firms for compliance with the Rule. Marketing information will be part of EXAMS’ routine document requests for the near future. The Alert outlines specific focus areas of the review to be conducted by examiners, including:
- Written policies and procedures – In order for written policies to be deemed “testable,” the Staff is looking for firms to implement a robust review and approval process for marketing materials or pre-approving templated materials.
- Substantiation of material facts in advertisements – Information presented in marketing and advertising must be substantiated via support data that proves the information shown is factual. Records should be maintained as support.
- Performance advertising – Staff will be looking at all performance data shown in marketing and advertising materials and evaluating the performance advertising against the following criteria:
- Gross performance can only be shown as compared to net performance;
- Specific 1, 5, 10 years, and since inception time periods of performance must be shown (except for private funds);
- Materials cannot state review or approval by the SEC;
- Correct use of specific recommendations whether current or past holdings shown;
- Extracted performance if used can only be shown with proper disclosures;
- Hypothetical performance if used must be well disclosed, covered appropriately in written policies and procedures, and must be suitable to the audience of the material; and
- Predecessor performance utilized must be relevant to the current portfolio shown, managed in the same manner, and by the same individuals with all required disclosures.
- Books and records – Staff will review the maintenance of factual data (including internal working papers) that supports all data shown in marketing materials, oral advertisements, testimonials, and endorsements.
Form ADV will also be on the examination checklist. Firms will need to have any Form ADV disclosures regarding marketing or solicitation practices reviewed and updated prior to the November 4, 2022 compliance date. This is especially important to firms that use promoters and disclose that activity in the Form ADV Part 2A brochure. The March 2023 annual amendments will be reviewed in relation to the new marketing questions in Form ADV Part 1A.
The time is NOW to make sure your firm is ready to comply with this significant new marketing and solicitation rule.
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