RIA Compliance and Practice Management Blog

SEC releases risk alert on investment adviser Marketing Rule

Posted by RIA in a Box

Sep 21, 2022 4:22:03 PM

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On Sept. 19, 2022, the Securities and Exchange (SEC) Division of Examinations released a risk alert notifying SEC registered investment advisers, including advisers to private funds, of "upcoming review areas during examinations" focused on the new Marketing Rule.

Advisers should consider these areas as they review and update their written policies and procedures, as required by the Advisers Act Rule 206(4)-7, to ensure they are in compliance with the new rule. In this blog post, we provide an overview of key takeaways in this risk alert.

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The SEC’s Marketing Rule will take effect on Nov. 4, 2022. Investment advisers will no longer adhere to the previous advertising and cash solicitation rules, which have both been replaced by the new rule. The division emphasizes that all advertisements circulated on or after the compliance date are subject to the Marketing Rule, as well as the Books and Records rule. We provided a rundown of key highlights of the 430-page Marketing Rule in a previous post, available here.

We recommend the chief compliance officer (CCO) of all registered investment adviser (RIA) firms review the risk alert, as advisers may face regulatory implications if they violate the new Marketing Rule. 

The division shares the specific areas on which they focus, as they conduct initiatives and reviews to ensure compliance with the Marketing Rule. 

Policies and procedures: Investment advisers will be evaluated for how they have updated and implemented their written policies and procedures to reflect the requirements of the new marketing rule and prevent violations. 

Substantiation requirement: The division staff will focus on whether an adviser can substantiate the material claims of fact made in advertisements. The adviser must prove they have a reasonable basis to believe they can substantiate the claim, on demand from the SEC. The division provides examples of how an adviser can prove this, one being to create a record at the same time of the advertisement, demonstrating the basis for the belief. 

Performance advertising requirements: Any forms of performance advertising will be evaluated to ensure it does not include prohibitions, such as statements of gross performance (unless also providing net performance), performance results which didn’t include specific time periods, performance results of investments extracted from a full portfolio without providing (or offering to provide) results from the total portfolio, and hypothetical performance (unless policies and procedures are designed to ensure the performance is relevant to the likely financial situation and investment objectives of the intended audience).

Books and Records: The division will look to ensure advisers are adhering to the amendments of the Books and Records Rule, which were made in conjunction with the Marketing Rule. Advisers must keep records of all advertisements they circulate, including certain internal papers, performance related documents, and documentation of oral advertisements, testimonials, and endorsements. The division also emphasizes the importance of accurately and completely addressing the required marketing questions in their next Form ADV amendment.

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RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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