The Securities and Exchange Commission (SEC) recently published a risk alert highlighting additional areas of focus in relation to the amended Marketing Rule. In 2020, Rule 206(4)-1 under the Investment Advisers Act of 1940 was amended to modernize rules that govern investment adviser advertisements and payments to solicitors. The first risk alert was published September of 2022 and detailed performance advertising, substantiation, policies and procedures, and books and records requirements. In addition to the initial Marketing Rule exam areas of review, the recent alert emphasizes three key areas of additional emphasis: testimonials and endorsements, third-party ratings, and Form ADV. The SEC continues to assess whether investment advisers are adhering to the requirements outlined in the Marketing Rule and is taking appropriate measures to ensure compliance, with increased focus on the above areas.
Testimonials and Endorsements
The SEC staff is scrutinizing whether advisers are complying with the Marketing Rule provisions pertaining to testimonials and endorsements in their advertisements. This includes assessing the following factors:
- Adequate disclosures: Advisers must provide clear and prominent disclosure of any material conflicts of interest associated with testimonials or endorsements.
- Oversight conditions: Advisers should have a reasonable basis to believe that the testimonials or endorsements disseminated align with the Marketing Rule requirements.
- Written agreements: Where necessary, advisers must enter into written agreements with promoters, unless the promoters are readily identifiable as applicable affiliates or receive minimal compensation (under $1,000 or equivalent non-cash compensation in the preceding twelve months).
- Compensation of ineligible persons: Advisers should not compensate individuals for testimonials or endorsements if they know or should have known that the person is ineligible, particularly “bad actors” who are prohibited from acting as promoters unless they meet specific exemption conditions.
The SEC is also examining whether advisers are complying with the Marketing Rule when utilizing third-party ratings in their advertisements. The key areas of focus include:
- Clear disclosure: Advisers must provide or reasonably believe that the third-party rating provides clear and prominent disclosure of the rating’s date, the period it was based on, the identity of the rating’s creator, and any compensation provided by the adviser.
- Questionnaire or survey conditions: Advisers must ensure that questionnaires or surveys used in preparing third-party ratings are designed to solicit both favorable and unfavorable responses equally. They should not be structured to produce predetermined results.
In response to the Marketing Rule, the SEC updated Form ADV to gather additional information on advisers’ marketing practices. The risk alert highlights the SEC’s intention to assess whether advisers have accurately completed the questions in their annual Form ADV amendments.
The SEC’s risk alert on the Marketing Rule serves as a reminder to investment advisers about their obligations when it comes to testimonials and endorsements, third-party ratings, and Form ADV. Adhering to these requirements is crucial for ensuring transparency and protecting investors’ interests. Advisers should review their marketing practices and take necessary steps to comply with the Marketing Rule guidelines. Failure to do so may result in regulatory action by the SEC. By maintaining a strong commitment to compliance, advisers can build trust with investors and contribute to a more robust and trustworthy investment industry.
How RegEd Can Help
RegEd’s Advertising Review Solution delivers capabilities that map directly to the areas of focus detailed in the SEC’s risk alert on the Marketing Rule:
- Disclosures: RegEd’s Advertising Solution includes SMART DisclosuresSM, which automatically scans content to identify if required performance and other disclosures are present as defined by the firm. This feature ensures that advertisements meet the necessary disclosure requirements, promoting transparency and compliance.
- Policies & Procedures: The solution offers a lexicon detection tool that allows firms to customize keywords and phrases specific to their policies and procedures (P&Ps). This customization enables the tool to highlight any content that may require additional scrutiny during internal reviews, ensuring consistent application of the firm’s P&Ps. Additionally, configurable internal review questions provide a checklist for reviewers, ensuring adherence to the firm’s established policies and procedures.
- Performance Advertising and Third-Party Ratings: RegEd’s Advertising Solution enables firms to create branching questions that gather all relevant information from submitters regarding advertised performance. This ensures that all necessary details related to performance advertising and third-party ratings are collected and reviewed. The lexicon detection tool can be configured to highlight any submitted content related to performance advertising and ratings as determined by your firm, allowing for comprehensive internal review.
- Endorsements and Testimonials: RegEd offers turnkey submission and internal review questions specifically designed to gather the required information for the use of endorsements and testimonials. This ensures that advisers have a structured approach to collecting and reviewing information related to endorsements and testimonials, enhancing the compliance review process. Additionally, RegEd’s Conflicts of Interest solution can be leveraged to determine whether the endorsement and/or testimonial presents any material conflicts per regulatory guidelines.
- Format-Specific Issues: Firms using RegEd’s Advertising Solution can set up specific submission questions and internal review checklists tailored to different types of advertising formats. This flexibility allows for efficient review processes for various advertising channels, such as websites, oral advertisements, and specific uses like endorsements and testimonials.
- Substantiation of Fact: The solution allows submitters to add multiple attachments of various file types to support documentation. This ensures that all necessary supporting evidence is provided, strengthening the substantiation of material facts. Additionally, submission questions can be configured to require explanations to substantiate material facts, promoting accurate and compliant advertising practices.
- Books & Records: RegEd’s Advertising Solution offers a secure repository that stores all advertisements, approvals, documentation, and attachments in compliance with SEC 17a-4(f). This ensures that firms maintain comprehensive and WORM-compliant books and records, facilitating regulatory audits and inquiries.
By leveraging RegEd’s Advertising Solution, investment advisers can effectively address the amended Marketing Rule. The solution’s robust features streamline compliance efforts, enhance internal review processes, and promote adherence to regulatory requirements.
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