SEC Issues a New Marketing Rule Risk Alert

What Happened?

The SEC issued a new Risk Alert on the Marketing Rule, spotlighting deficiencies uncovered in recent exams. Let’s explore their latest findings:

Key Takeaways

1) Policies and Procedures

• Advisers failed to include all marketing channels that were being utilized (e.g., social media and websites);

• Policies did not include the advisers’ specific advertisements (e.g., testimonials, endorsements, third-party ratings);

• The policies were updated, but the procedures were not followed.

2) Books and Records Rule

• Advisers did not maintain:

  • Copies of questionnaires used for third-party ratings;

  • Copies of information posted to social media;

  • Documentation to support performance claims.

3) Form ADV

• Inaccurately reported on Form ADV the type of advertising activities they were conducting (e.g., third-party ratings, performance results, and hypothetical performance).

4) Marketing Rule General Prohibitions

• False or substantiated statements:

  • Claiming to be “free of all conflicts” when actual conflicts exist;

  • Misrepresenting personnel roles or qualifications;

  • Providing inaccurate information about advisory services and products;

  • Publicizing the receipt of awards that were not received.

• Omission of material facts or misleading inference:

  • Claiming to be unique by acting in the “best interest of clients” without disclosing that all advisers have a fiduciary duty to act in their clients’ best interests;

  • Not disclosing conflicts tied to recommended investments;

  • Presenting performance without disclosure of the share classes included;

  • Using lower fees in performance calculations than were offered to the intended audience;

  • Omitting fee details in return calculations;

  • Misusing SEC registration claims to imply a particular level of skill, or that the SEC had approved the advisers’ business practices;

  • Using third-party ratings that imply the adviser was the sole top recipient of an award when multiple recipients won;

  • Using third-party ratings without disclosing that the methodologies were based on factors not related to the quality of investment advice (e.g., AUM, number of clients, etc.)

  • Using misleading performance information, such as:

  • Undefined benchmark comparisons;

  • Outdated market data or unavailable products;

  • Using the advisers’ track record with securities that were not purchased by the adviser in a similar manner.

• Fair and balanced treatment of material risks or limitations:

  • Highlight performance without disclosing the material risks and limitations associated with the potential benefits.

• References to specific investment advice that were not presented in a fair and balanced manner:

  • Cherry-picking investment performance;

  • Some advisers also had not established criteria in their policies and procedures to ensure references to specific investment advice were provided in a fair and balanced manner.

• Inclusion or exclusion of performance results or time periods in manners that were not fair and balanced:

  • Advertisements did not disclose the time period which returns were calculated;

  • Advertisements that included/excluded certain performance.

CCG’s Guidance

• Advisers should ensure all marketing materials are reviewed by their Compliance department and have processes in place to only use approved materials for advertising.

• Advisers should review that their policies and procedures are tailored to their business.

• Conduct additional training with marketing personnel to ensure that all advertisements are SEC compliant.

In an ever-changing regulatory landscape, preparation is key. The SEC’s detailed focus on advertisement practices serves as a reminder of the volume, velocity, and complexity of the new enforcement focuses of the SEC.

If you're looking to enhance your compliance program, contact us to learn more about how we can help you!