The Marketing Rule: CCG Insights from the SEC Risk Alert and our SEC Examination Experiences

 As the SEC continues to forge ahead with new regulation, they have been closely examining how Advisers are complying with the new Marketing Rule and have provided additional guidance in their latest Risk Alert. This Risk Alert builds upon the previous Risk Alert released in September of 2022, which outlined the initial areas of examination for compliance with the Marketing Rule.

The additional areas of review that the SEC will emphasize are:

• Testimonials and Endorsements

  • Disclosures must make it clear if the promoter is a client, investor, compensated person, or has any other conflict of interest.

  • The Adviser must have a reasonable basis for any of the claims made.

  • Where required, written agreements should be entered into with promoters, unless the promoters are affiliates of the advisers, and such affiliation is readily apparent, or the promoters receive de minimis ($1,000 or less) compensation.

  • Any “bad actors” or other ineligible persons should not be compensated for testimonials or endorsements.

• Third-Party Ratings

  • Advisers should ensure that the third-party rating provides:

  • Date of when rating was given and the period that the rating is based off of.

  • Identity of the third party that created, calculated, and provided the rating.

  • Whether any compensation has been provided by the adviser in obtaining or using the third-party rating.

  • Questionnaires or surveys used in developing third-party ratings must:

  • Provide an equal level of convenience for respondents to express favorable or unfavorable responses.

  • Be designed in a fair way that ensures the results do not have biased outcomes.

• New Form ADV Requirements

  • The SEC is reviewing these submissions and will examine whether advisers accurately responded to these questions.

    As with the initial areas of review, the SEC will continue to focus on:

• Policies and procedures. Ensuring Advisers have adopted and implemented written policies and procedures designed to prevent violations of the Advisers Act, including the Marketing Rule.

• Substantiation requirement. Verifying Advisers ability to substantiate material statements of fact in advertisements.

• Performance advertising requirements. Examining compliance with performance advertising requirements.

• Books and records. Assessing whether Advisers comply with Rule 204-2 of the Advisers Act, which mandates the creation and maintenance of certain records, including records of advertisements, performance-related information, and documentation for oral advertisements, testimonials, and endorsements.

CCG’s Insights & SEC Examination Experiences

Chenery Compliance Group’s recent and ongoing experiences with SEC examinations of the Marketing Rule strongly align with the points raised in the Risk Alert. These examinations have particularly emphasized the importance of:

• Performance advertising

• The ability to substantiate performance data, hypotheticals, and avoiding the use of ‘cherry-picked’ data.

The SEC's focus on these areas, as highlighted in both the Risk Alert and our examination experiences, underscores the difficulty of complying with the Marketing Rule. If you are an Adviser that utilizes performance advertising, it is essential that you conduct a thorough review of your marketing materials and practices to ensure compliance and avoidance of any deficiencies in your next SEC Exam.

If you need assistance in reviewing your marketing material and enhancing your compliance program, Chenery Compliance Group delivers bespoke CCO solutions to protect you from regulatory risk, so you can focus on growing your business. Please reach out to us if you need support.