Compliance and Regulatory Alerts | 10-04-22
With Nov. 4 Deadline Approaching, SEC Announces New Marketing Rule Exam Initiatives and Areas of Review
In a new Risk Alert issued by the Division of Examinations, the SEC reminded investment advisers to review their written policies and procedures on the new marketing rule before the November 4, 2022 compliance deadline. This was not an idle suggestion. Staff stated that they will be conducting “a number of specific national initiatives” to ensure compliance with the new rule. They warned that after that deadline, advisers will not be able to rely on conformance with the old advertising and cash solicitation rules.
As discussed in Bates’ previous post on compliance preparation for the marketing rule, there’s a lot to review, because the new marketing rule consolidates previous SEC guidance, no-action letters and exam findings on questions concerning recommendations, testimonials, and the presentation of performance metrics. Here’s the latest on what the SEC wants you to know.
Key Areas for Review
The SEC stated that it will focus on four areas: (i) policies and procedures, (ii) the “substantiation requirement,” (iii) the “performance advertising” requirement and related prohibitions, and (iv) books and records requirements.
Policies and Procedures: Staff expects firms to have “objective and testable means, reasonably designed to prevent violations of the final rule in the advertisements the adviser disseminates.” They suggested policies and procedures for conducting an internal pre-review and approval of advertisements, reviewing samples of advertisements based on risk, and pre-approving advertising templates.
Substantiation Requirement: Staff expects advisers to “have a reasonable basis for believing they will be able to substantiate upon demand” – through a contemporaneous record demonstrating that basis – material statements of fact in advertisements. They also noted that failure to provide such substantiation would create the presumption that “the adviser did not have a reasonable basis for its belief.”
Performance advertising: Staff said they will review a firm’s representations and prohibitions communicating performance. They referenced prohibitions on (i) gross performance (in the absence of net performance); (ii) performance results that do not refer to specific time periods; (iii) statements suggesting the SEC “approved or reviewed any performance results”; (iv) performance results from a subset of portfolios within an advertised offering with substantially similar investment policies, objectives, and strategies; (v) performance results “of a subset of investments extracted from a portfolio,” under certain conditions; (vi) hypothetical performance; (vii) and predecessor performance, under most conditions.
Books and recordkeeping: Staff said they will review marketing rule and amended books and record requirements that advisers make and keep 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.” They will also review Form ADV submissions for the information on marketing practices now required under the rule.
Conclusion
This alert serves mainly to remind advisers of the upcoming compliance deadline and the broad oversight, recordkeeping, and disclosure requirements under the rule. The SEC stated that it “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.” Upon engaging in that reflection, let us know if we can help.
How Bates Helps:
Bates supports firms navigating and implementing the SEC’s New Marketing Rule. We work with your firm to address investment adviser concerns and to support efforts to conform to oversight, recordkeeping and disclosure requirements under the new rule. Our compliance team includes senior compliance staff and former regulators with expertise in the development of policies, procedures, supervisory and compliance processes, and best practices to enhance compliance and supervisory systems.