With 45 days to go before the 4 November 2022 compliance date, the Division of Examinations on 19 September published a Risk Alert reminding investment advisers of their obligation to comply with the amendments to Advisers Act Rule 206(4)-1 (“Marketing Rule”) as of the compliance date, and identifying review areas for SEC examinations.

According to the Risk Alert, the SEC staff plan to conduct a number of specific national initiatives (presumably, targeted sweep examinations) and broader reviews for compliance with the Marketing Rule as part of routine examinations. These reviews will include the following areas:

  • Marketing rule policies and procedures — The SEC staff will evaluate whether investment advisers have adopted and implemented written policies and procedures relating to compliance with the Marketing Rule. The focus here seems to be on the review of advertisements. Specifically, the SEC is looking for “objective and testable” controls such as prior approval, risk-based sampling of advertisements, and preapproval of templates. Although the Marketing Rule does not require prior approval of advertisements before dissemination, this was an area of dispute among the commissioners at the time the final rule was adopted. Accordingly, advisers should be able to clearly articulate their review process. 
  • Substantiation requirement — Advisers are required under the Marketing Rule to have a reasonable basis for believing that they will be able to substantiate material statements of fact upon demand by the SEC. According to the Risk Alert, if an adviser is unable to substantiate these statements, the SEC staff will “presume that the adviser did not have a reasonable basis for its belief.” Advisers should retain records to substantiate statements of material fact or, alternatively, should position such statements as opinion or be prepared to explain why they are not actually material.
  • Performance advertising requirements — Of course, one of the key areas of review will be the performance advertising requirements under the Marketing Rule, including showing gross and net performance, the periods selected for showing performance, the use of related, extracted and predecessor performance, and the use of hypothetical performance. Performance advertising is by far one of the most difficult areas of the Marketing Rule for investment advisers to address given the various permeations and lack of clear guidance in this area. In the absence of clear guidance, investment advisers that are taking reasoned positions should be prepared to articulate those positions to the SEC staff.
  • Books and records — The SEC staff will also be reviewing for compliance with the additional books and records requirements added under the Marketing Rule. 

Although the Risk Alert does not specifically mention compliance with the testimonial and endorsement provisions of the Marketing Rule, advisers should still be prepared to evidence compliance with those provisions — particularly in the case of testimonials and endorsements that are subject to additional requirements because they are provided in return for cash or noncash compensation. 

Please reach out if you have questions about compliance with the Marketing Rule.

Author

Jennifer serves as the Co-chair of Baker McKenzie's Financial Regulation and Enforcement Practice in North America. Jen is an experienced investment management lawyer with particular focus on investment adviser regulation and the convergence of investment advisory and brokerage services. She regularly represents clients before the US Securities and Exchange Commission (SEC), both in seeking interpretative guidance and in managing examination and enforcement matters. Jen is a leading practitioner in digital investment advice and the use of FinTech in the asset management industry.