SEC’s Marketing Exams Reveal Compliance Shortcomings

On April 17, 2024, the SEC’s Division of Examinations issued a Risk Alert (the “Alert”) on its findings from adviser examinations conducted since the revised Rule 206(4)-1 (the “Marketing Rule”) compliance date. Firms were required to be in compliance as of November 4, 2022, and the SEC has actively been examining advisers for compliance since then. Several targeted exams or “sweeps” were conducted covering topics such as the substantiation of material facts in advertisements, use of testimonials and endorsements, and use of third-party ratings.

This Alert provides the results of the Division’s exams in broad terms. Examination data included in the Alert offers insight on how the industry is complying with the new Marketing Rule from a policy, disclosure, recordkeeping, and general prohibitions perspective. The exams found weaknesses across the board at firms in these areas, such as:

Marketing Policies – written policies that were too general and not customized to actual marketing activities by firms, as well as firms not implementing newly revised policies

Books and Records – lack of documentation regarding the use of questionnaires from third-party ratings, not maintaining copies of social media postings and lack of performance data support

Disclosures – Form ADV Part 1A, Item 5L filings were either incomplete or incorrect in relation to actual firm marketing practices; Form ADV Part 2A Item 14 on use of promoters containing outdated language referencing rescinded Rule 206(4)-3 for solicitors

General Prohibitions – marketing materials containing unsubstantiated claims, untrue statements, omission of material facts, lack of fair and balanced presentations, and use of inconsistent or outdated time periods for performance in materials

Most sections of the Marketing Rule fall under the General Prohibitions as stated under the Rule. Areas in need of improvement for many of the advisers examined, included:

  • Presentation of performance data and its disclosures
  • Use of specific recommendations and selection criteria
  • Claims made by advisers following specific investment mandates (ESG)
  • Marketing of awards received
  • Use of promoters and conflicts of interest
  • Misleading representations of third-party ratings

In addition, the examinations found materials where the presentation of disclosures was deemed materially misleading due to the use of a small font size on disclosures within websites and videos.

This Alert comes on the heels of five separate SEC enforcement actions released recently that involved the use of hypothetical performance by advisers on websites without adequate disclosures or means of ensuring that the materials were only reaching the intended audience. Under the Marketing Rule, hypothetical performance can only be used when the financial condition/status of the audience is known.

Investment advisers should review their current written marketing policies as well as marketing materials in use to determine if updates are needed based upon the information shared by the SEC in this Alert.

View Risk Alert, “Initial Observations Regarding Advisers Act Marketing Rule Compliance,” April 17, 2024