As the SEC ramps up enforcement of stricter requirements in its marketing rules, a newly released risk warning warns advisors that it still falls short in several areas.
This Alert issued by the SEC's Division of Examination provides preliminary findings regarding compliance with Advisers Act Rule 206(4)-7 (the “Compliance Rule''), Advisers Act Rule 204-2 (the “Books and Records Rule''). I'm sharing it. “General Prohibitions” of the Marketing Regulations.
Common deficiencies observed by the SEC staff include false or unfounded statements about material facts and references to specific investment advice that is not presented in a “fair and balanced manner.” I did.
When considering whether an investment adviser has adopted and implemented written marketing-related policies and procedures designed to prevent violations, the SEC will, for example, typically review advertising if an adviser has updated its policies and procedures. They point out that they have established a process to do so.
“However, staff has observed instances where advisors' policies and procedures have not been reasonably designed or implemented to address compliance with marketing rules, resulting in poor compliance with marketing rules, bookkeeping rules, or both. A gap has emerged to prevent violations of the law.” Alert explains.
For example, staff observed an advisor's policy requiring performance advertisements to include net-of-fees performance. However, the same advisor only included total advertising performance.
Rules for books and records
Staff also observed that although advisors generally update their policies and procedures to reflect requirements for maintaining and preserving books and records, deficiencies persist. Examples provided included advisors:
- Completed questionnaires or surveys used to prepare third-party ratings did not retain copies of such questionnaires.
- We did not keep copies of information posted on social media.and
- It did not maintain documentation to support the performance claims contained in its advertisements.
We also observed deficiencies in Form ADV, including advisors inaccurately reporting advertising content. I didn't include:
- Evaluation by third party. If your website contains third-party reviews or social media posts that advertise that your company ranks in a particular third-party review.
- Performance results when included in marketing materials.
- Hypothetical performance if such a claim were included in the ad.
Advisers apparently used outdated language on Form ADV that referred to provisions of the previous cash solicitation rules, inaccurately indicated that no referral arrangement existed, and misrepresented the material terms and compensation of the referral arrangement on Form ADV. seems to have been omitted.
General prohibitions
As alluded to earlier, staff observed advertisements that contained statements of material fact that appeared to be false. In such cases, the SEC noted, advisers typically stopped distributing the advertisements or removed the false statements.
“In some cases, advisers have acknowledged that a statement of material fact is likely to be false after failing to substantiate the statement at the request of staff during an examination, which is also subject to Rule 206(4). )-1(a)(2) of the Marketing Regulations,” the risk alert explained.
The SEC also said its staff also observed ads that contained information that “reasonably could give rise to false or misleading implications or inferences about material facts about the advisor.”
For example, some advertisements include advisors acting in the “best interests of their clients” without disclosing that all investment advisors have a fiduciary duty to act in their clients' best interests. It included a statement that he was different from other advisors for this reason.
Additionally, some ads recommended specific investments (such as podcasts or websites) without disclosing any conflicts of interest resulting from the compensation the advisor received for such recommendations.
Regarding references that are not presented in a fair and balanced manner, the SEC staff may list only the most profitable investments without providing sufficient information and context to evaluate the rationale. , we observed ads that specifically excluded certain investments.
The SEC's risk warning comes days after the commission announced the second set of cases brought by the commission as part of its ongoing investigation into marketing rule violations. In these cases, the SEC found that each of the companies indicted advertised hypothetical performance to large audiences on their websites without having the necessary policies and procedures in place.
In December 2020, the SEC voted to modernize the rules governing investment adviser advertising and attorney fees under the Investment Advisers Act. To give advisers a transition period, adviser firms had until November 2022 to fully comply with the rules.
The SEC's risk alert can be found here.
