SEC NEWS AND SPEECHES—SEC issues risk alert regarding Advisers Act Marketing Rule Compliance - 23 April 2024

Advisers are encouraged to look to the observations and make appropriate modifications to their training, supervisory, oversight, and compliance programs.

The SEC’s Division of Examinations has issued a Risk Alert for investment advisers, investors, and other market participants in which it shares its preliminary observations regarding investment advisers’ compliance with amended Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940 (Advisers Act).

The Division is sharing its preliminary observations to “encourage accurate completion of the Marketing Rule items contained in Form ADV and to promote compliance with Advisers Act Rule 206(4)-7 (Compliance Rule), Advisers Act Rule 204-2 (Books and Records Rule), and the Marketing Rule’s ‘General Prohibitions.’”

Observations. As it pertains to the Compliance Rule, the staff observed instances where advisers’ policies and procedures “were not reasonably designed or implemented to address compliance with the Marketing Rule.” This resulted in gaps in the advisers ability to prevent violations of the Marketing Rule, Books and Records Rule, or both.

The staff observed Marketing Rule-related books and records deficiencies, including, among others, that advisers failed to maintain copies of information posted to social media, and failed to maintain documentation to support performance claims included in advertisements.

The staff also observed Marketing Rule-related deficiencies on Form ADV, including inaccurate reporting on Form ADV, Part 1, that their advertisements did not include performance results when performance results were included in their marketing materials, and hypothetical performance, when hypothetical performance was included in advertisements.

The staff’s observations relating to the Marketing Rule’s General Prohibitions included: advertisements which included statements of material fact that appeared to be untrue; advertisements that appeared to omit material facts “necessary to make the statements made in light of the circumstances under which they were made, not misleading;” advertisements that lacked a fair and balanced treatment of material risks or limitations; advertisements where specific investment advise was not presented in a fair and balanced manner; advertisements which included or excluded performance results or time periods that were not fair and balanced; and advertisements that were otherwise materially misleading.

Conclusion. The Division is encouraging advisers to look to the observations, reflect upon their own practices, policies, and procedures, and make appropriate modifications to their training, supervisory, oversight, and compliance programs as necessary.

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