Financial Institutions

No later than November 4, 2022, investment advisers must have implemented measures necessary to comply with the amended Advisers Act Rule 206(4)-1(i.e., the “Marketing Rule”). Recently, the SEC’s Division of Examinations issued a Risk Alert to inform Registered Investment Advisers of upcoming examinations focused on compliance with aspects of the Marketing Rule. The Marketing Rule implicates numerous compliance considerations, which makes the Risk Alert notable in that Staff identified “initial examination review areas” to push “advisers to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.”   

Staff notified advisers that they should consider updating their written policies and procedures to ensure compliance with Advisers Act Rule 206(4)-7 (Compliance Procedures and Practices).  In doing so, Staff noted that Advisers Act Rule 204-2 (Books and Records Rule), as amended, will “require investment advisers to 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.”

In addition, Staff will be conducting “a number of specific national initiatives, as well as a broad review” for compliance with the Marketing Rule. The Risk Alert included four such initiatives but noted that examinations will not be limited. According to Staff, the initiatives will include:

Marketing Rule Policies and Procedures: Staff reminded advisers that they are required to adopt and implement written policies and procedures “reasonably designed to prevent violations [of the Marketing Rule] by the advisers and their supervised persons,” and that such policies and procedures “should include objective and testable means reasonably designed to prevent violations[.]” Provided examples of “objective and testable means” include, without limitation, “internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.”

Substantiation Requirement:  Advisers were also notified by Staff that the Marketing Rule prohibits advertisements which contain material statements of fact that advisers do not have a “reasonable basis for believing” they will be able to substantiate upon demand by the Commission. Staff noted reviews will focus upon such statements and advisers’ ability to substantiate them. Staff further warned that if an adviser is unable to substantiate the material statements of fact, the adviser will be presumed not to have a reasonable basis for believing such statements. However, Staff provided a limited number of examples outlining how advisers may address meeting the substantiation requirement, such as creation of a contemporaneous record or implementation of policies and procedures targeted at addressing this requirement. 

Performance Advertising Requirements:  Staff also advised that they will review advisers’ compliance with the performance and advertising requirements of the Marketing Rule.  In doing so, Staff specifically enumerated seven categories of information, with qualifications, that are prohibited from inclusion in advertisements under the Marketing Rule. 

Books and Records:  Finally, the Risk Alert highlighted that the Commission adopted corresponding amendments to the Books and Records Rule and Form ADV along with the amended Marketing Rule. Advisers were accordingly reminded of their obligations to accurately complete the amended Form ADV in their next annual amendment.

The SEC Risk Alert can be found here.

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