The Securities and Exchange Commission has issued an updated risk alert for registered investment advisors regarding compliance with its marketing rule, Advisor Hub reported.
In 2020, the SEC amended its marketing rule, which is designed to comprehensively regulate investment advisers’ marketing communications. The revision permits testimonials, endorsements, third-party ratings, and performance reports in investment adviser marketing provided certain regulatory standards are met. Under the rule, RIAs are also permitted to compensate individuals for endorsements and use third-party rankings in advertising.
But the latest risk alert, issued by the SEC’s Division of Examinations and based on staff observations, notes some deficiencies in compliance with the marketing rule.
For example, the SEC observed advisers using testimonials and endorsements that did not appear to comply with all or some of the requirements for both compensated and uncompensated testimonials and endorsements, including not providing the required disclosures. “The most common observed reason that an endorsement or testimonial was observed to be non-compliant was that it did not provide the disclosures at the time the testimonial or endorsement was disseminated,” the alert states. “Such testimonials or endorsements were often presented on advisers’ websites, including websites using alternative business names of their supervised persons (“d/b/a” websites).”
The SEC found that for some testimonials and endorsements, advisors are relying on hyperlinks rather than including the required clear and prominent disclosures within the testimonial or endorsement.. Other advisors formatted them in an inconspicuous font or excluded them entirely.
In certain cases, advisory firms compensating individuals for reviews on third-party websites have failed to ensure those sites also included the necessary disclosures. In other instances, advisors paid social media “influencers,” lead generation firms, referral networks and clients in “refer-a-friend” programs without realizing those may qualify as endorsements or testimonials under the amended rule.
At other points, advisors did not include disclosures that verify whether the promoter, or the person providing the testimonial or endorsement, “was a current client or investor in a private fund advised by the investment adviser, and, if applicable, whether the promoter was paid cash or non-cash compensation and/or had a material conflict of interest.”
“In sharing these staff observations, the Division 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,” the SEC wrote in the alert.
The SEC exam staff also provided context on third-party ratings in advertisements, which are prohibited unless “an adviser has a reasonable basis for believing that any questionnaire or survey used in the preparation of the third-party ratings meet certain criteria and discloses certain information related to the ratings.”
The staff said it saw advisors utilizing these ratings without complying with all or some of the requirements needed. These ratings were often used on advisors’ websites, social media accounts, marketing brochures or pitchbooks, press releases, newsletters, and blogs, among others.
“While the staff observed that many advisers utilizing third-party ratings in advertisements updated their compliance policies and procedures to address this practice, others had not,” the SEC wrote. “Some of the advisers that did not update their policies, as well as advisers that had updated their policies and procedures but did not implement them, disseminated advertisements that did not appear to comply with the Marketing Rule.”
The attorneys at Hyman Cotter PC were formerly senior attorneys in the SEC’s Division of Enforcement. We have represented clients in regulatory matters while working at Morgan Stanley and in private practice at some of the world’s largest law firms. Therefore, we understand the complexities that come with being the subject of a regulatory inquiry, and we have the experience to guide and advise you through any type of regulatory investigation. If you are the subject of a regulatory proceeding, contact Hyman Cotter PC at 312-291-4600 or through our online contact form for a free consultation.
