SEC Risk Alerts help firms prepare | Saifr

The SEC’s marketing rule has far-reaching implications that require firms to review and, in many cases, revise their policies and procedures, substantiation, performance advertising, books and records, general marketing prohibitions, testimonials, third-party rankings, and Form ADV.

The SEC is currently in the field conducting examinations for compliance to the marketing rule and have issued one fine to date, as of this writing. I have heard from industry colleagues and clients that there is an urgent need for more guidance. Firms have analyzed the rule but still seek more details for applying the rule. The good news is that we now have two Risk Alerts that provide some guidance on the SEC’s focus areas. The Division of Examinations’ first Risk Alert was published in September 2022 and described their initial areas of review. In June of 2023, they issued another Risk Alert emphasizing additional areas of focus.

The alerts help reinforce the importance of the regulatory requirements and highlight areas that intertwine a firm’s marketing practices and scope. I believe the critical takeaway here is to pre-prepare for your examination by self-auditing for the areas below to see if you are in alignment.

• Policies and procedures: Are there written, adopted procedures designed to prevent violations of the Advisors Act and Marketing Rule by advisors and their supervised persons? Have they been updated to support the tenants of the rule?

• Substantiation: Do advisors have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements? Do they have backup and sourcing to support these statements?

• Performance advertising: Are advisors following performance advertising requirements laid out in the marketing rule? How are gross and net returns represented in advertising?

• Books and records: Are advisors making and keeping certain records, such as all advertisements they disseminate, certain internal working papers, performance-related information, and documentation for oral advertisements, testimonials, and endorsements?

• General marketing prohibitions: Do advisors’ advertisements violate any general prohibitions? Is their advertising fair and balanced and not omitting material facts or risks? Are disclosures clear?

• Testimonials and endorsements: Do advisors follow the marketing rule requirements regarding the use of testimonials and endorsements in advertisements, including whether disclosures include details such as if compensation, conflicts, client status, and oversight conditions are met?

• Third-party ratings: If advisors are using third-party ratings in advertisements, are they including date, time, identity of the third-party, and applicable direct or indirect compensation?

• Questionnaires: Are the questionnaires used unbiased? Do they allow the participant to provide favorable and unfavorable responses? Are they not designed or prepared to produce a predetermined result?
• Form ADV: Are advisors providing additional information regarding their marketing practices within Form ADV?

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With the guidance from the SEC via the two Risk Alerts, it would be wise to conduct a mock audit internally to help teams prepare for demonstrating compliance and assessing gaps before an actual audit or exam occurs. This exercise, while it might seem excessive at first, is a better learning opportunity than a formal examination. So, next steps are to engage with your compliance and legal teams to review your materials, processes, and documentation and discuss preparations for a potential exam.

Source: SEC Risk Alert: Examinations Focused on Additional Areas of the Adviser Marketing Rule (sec.gov)

The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates.

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