The U.S. Securities and Exchange Commission (SEC) Division of Examinations (EXAMS) has issued a risk alert (Risk Alert) flagging that EXAMS will begin examining investment advisers for compliance with the amended Advisers Act Rule 206(4)-1 (Marketing Rule) after November 4, 2022. The Risk Alert helpfully identified specific areas of examination focus, as outlined below.
As a reminder, all materials that meet the definition of “advertisement” disseminated by a registered investment adviser after November 4, 2022 (the Compliance Date), must comply with the requirements and prohibitions of the Marketing Rule. This also applies to materials created prior to the Compliance Date that an adviser continues to use as an “advertisement” after the Compliance Date.
This Sidley Update summarizes the Risk Alert and offers some resources for advisers as they review and update their marketing materials and policies and procedures in anticipation of the upcoming Compliance Date. The EXAMS staff included no additional guidance regarding interpretations and application of the requirements of the Marketing Rule in the Risk Alert. Advisers that have developed and have been executing implementation plans for the requirements of the Marketing Rule should continue to do so and will likely encounter few, if any, changes that they need to make based on the Risk Alert.
Exam Initiatives
The Risk Alert notes that after the Compliance Date, the EXAMS staff plan to conduct a series of national exam initiatives relating specifically to compliance with the Marketing Rule and plan a broader review through the regular adviser examination process. The Risk Alert is a clear sign that the division will be focusing significant time and attention on compliance with the Marketing Rule. Advisers should consider the Risk Alert notice from the EXAMS staff that their initiatives may begin shortly after the Compliance Date and that Marketing Rule compliance will be a focus area of any examination.
Focus Areas
The stated focus areas for the new national exam initiatives and other exams track the primary provisions of the Marketing Rule and, therefore, contain few surprises. The EXAMS staff noted that they plan to examine and review i) adoption and implementation of Marketing Rule policies and procedures, ii) substantiation requirements for statements of material facts, iii) new performance advertising requirements and prohibitions, and iv) new books and records requirements. We suggest that advisers pay particular attention to the following topics highlighted in the Risk Alert:
Marketing Rule Policies and Procedures – identifying and implementing objective and testable means to review advertisements that are reasonably designed to prevent violations of the final rule in the advertisements the adviser disseminates. For example, advisers may wish to consider conducting an internal prereview and approval, reviewing samples selected based on risk, and preapproving templates or form documents.
Substantiation Requirement – establishing a reasonable basis for believing they can substantiate material statements of facts in advertisements. If an investment adviser is unable to produce information to substantiate claims in an advertisement, the EXAMS staff note that there will be a presumption that the adviser did not have a reasonable basis for its belief.
Performance Advertising Requirements – reviewing for compliance with the new performance advertising requirements and restrictions under the Marketing Rule for
(i) practices that are generally prohibited from being used in adviser advertising;
(ii) presentation of gross performance, unless net performance is included; and
(iii) appropriate presentation of related, extracted hypothetical and predecessor performance.
Books and Records Requirements – amending policies and procedures related to recordkeeping and the implementation of new recordkeeping requirements under the Marketing Rule.
We view the Risk Alert as a reminder from the EXAMS staff of the obligations for registered investment advisers in conjunction with the upcoming Compliance Date for the Marketing Rule.
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