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SEC issues risk alert to firms regarding compliance with marketing rule

On Behalf of | Apr 29, 2024 | Securities and Compliance

The Securities and Exchange Commission has issued a risk alert to provide information to advisers and firms about issues it found in complying with its marketing rule, reports InvestmentNews.

The SEC’s advisory detailed its findings from a staff review of whether investment advisers had adopted and implemented policies and procedures designed to prevent violations of the Investment Advisers Act of 1940, including the marketing rule.  The alert included problems that were revealed in firms’ compliance procedures, advertising practices, and Form ADV disclosures.

With regards to compliance policies, the staff observed that the policies typically included processes to comply with the marketing rule and training for relevant staff on the rule’s requirements.

But the SEC did find instances where advisers’ policies and procedures were not reasonably designed or implemented to address compliance with the marketing rule.

These included policies and procedures that:

– Consisted only of general descriptions and expectations related to the marketing rule.
– Did not address applicable marketing channels utilized by the advisers, such as websites and social media.
– Were informal rather than in writing.
– Were incomplete, not updated, or partially updated for certain applicable marketing topics.
– Were not tailored to address advisers’ specific advertisements (e.g., policies and procedures to address the General Prohibitions, and advertising requirements for testimonials, endorsements, and third-party ratings utilized by advisers in advertisements).
– Did not adequately address the preservation and maintenance of advertisements and related documents, such as copies of any questionnaires or surveys used in the preparation of a third-party rating included or appearing in any advertisement.

Other deficiencies found by the SEC staff included advisers who used broad descriptions rather than specific guidelines, a lack of coverage for all marketing channels, and policies that the regulator said were overly informal or outdated. In addition, some advisers did not maintain copies of information posted to social media and did not maintain documentation to support performance claims included in advertisements.

The alert expressed concerns over untrue statements and misleading information, including advisers who claimed to be free of all conflicts when in fact there were conflicts, and misrepresentations about the advisors’ qualifications and services.

Furthermore, the SEC found that some advisers inaccurately reported on Form ADV, Part 1A, that their advertisements did not include:

– Third-party ratings, when their websites included third-party ratings or social media posts that touted the firms as being ranked in certain third-party ratings.
– Performance results, when performance results were included in their marketing materials.
– Hypothetical performance, when hypothetical performance was included in advertisements.

In cautioning advisers against misleading marketing practices, the SEC said in conclusion, “The [Division of Examinations] encourages advisers to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.”

Last week the commission announced that it had fined and censured five registered investment advisers for violations of its marketing rule.

The attorneys at Lewitas Hyman regularly monitor SEC, FINRA and other self-regulatory organizations’ rule-making activities to help ensure that our clients are aware of any new policies, while assisting them in implementing any recommended changes. Our clients include broker-dealers, RIAs, banks, investment companies and hedge funds, along with registered representatives and other individuals participating in the securities industry.  Should you be in need of experienced counsel regarding a matter involving a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.