On June 8, 2023, the U.S. Securities and Exchange Commission Division of Examinations released a second Risk Alert concerning amended Rule 206(4)-1 (the “Marketing Rule”).  The focal point of this second alert is additional areas of emphasis that examiners will focus on during examinations. Last September, the Division published its initial Risk Alert detailing the areas of review related to compliance with the Marketing Rule. Although the Division’s focus on the initial areas will continue, the Division expressed that they will also increase its focus on additional areas related to the Marketing Rule.

As we may all remember, the Division announced the following focus areas as part of its Initial Marketing Rule Exam Areas of Review:

• Policies and procedures – whether advisers have adopted and implemented policies and procedures that are reasonably designed to prevent violations of the Advisers Act specific to the Marketing Rule;
• Substantiation requirements – whether advisers are able to substantiate material statements of fact in advertisements;
• Performance advertising requirements – whether advisers are in compliance with performance advertising requirements;
• Books and records – whether advisers are in compliance with requirements to maintain records of all advertisements that they distribute, including internal working papers, performance-related information, and documentation for oral advertisements, testimonials, and endorsements.

The Division announced that they are conducting focused exams, as well as broad reviews, for compliance with additional areas of the Marketing Rule such as the use of the following:

• Testimonials and Endorsements
  • Whether disclosures are provided to make it clear and prominent if the person giving the testimonial or endorsement is a client or investor, is compensated, or has any other material conflicts of interest;
  • Whether oversight conditions are met, and advisers have a reasonable basis for believing that the testimonials and endorsements are in compliance and can be substantiated;
  • Whether written agreements are entered into with promoters, where required; and
  • Whether ineligible persons, including certain “bad actors” have been compensated by advisers for the testimonials or endorsements.
• Third Party Ratings
  • Whether the adviser provides or reasonably believes that the third-party rating provides the following:
    • the date on which the rating was given and the period of time the rating was based upon;
    • the identity of the third-party that created and calculated the rating; and
    • if applicable, whether compensation was either directly or indirectly provided by the adviser in receiving or using the rating.
  • Whether questionnaires or surveys used in creating the third-party rating meet certain criteria such as:
    • making it equally easy to provide favorable and unfavorable responses; and
    • not being designed to produce any predetermined results.
• Form ADV
  • Advisers should make sure that their responses to the additional information questions regarding marketing practices on the amended Form ADV (Item 5.L.) are provided and accurate.

The SEC continues to provide valuable insight into complying with the Marketing Rule. As a continuation of the Risk Alert from last fall, the SEC encourages advisers to properly assess their own policies and procedures and make any necessary updates in order to comply with the Marketing Rule.

SEC3 can assist with assessing your firm’s compliance program and policies and procedures around the Marketing Rule. SEC3 will work with you on updating existing policies and procedures that are tailored to your firm’s business and easy to manage, while also meeting the SEC’s regulatory requirements.

SEC3 leverages over 100 years of combined regulatory compliance experience to deliver compliance knowledge and insight that you can trust. SEC3 strives to develop effective partnerships, where our clients feel we are an extension of your firm rather than another service provider. We pride ourselves on our quality and service that is unmatched rather than adopting the typical client-consultant relationship.

For more information, please contact us at info@seccc.com, at (212) 706-4029 x 229, through LinkedIn or visit us on our website at www.seccc.com.

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