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SEC Issues New Risk Alert on Expanded Focus for Marketing Rule Examinations

Ross Marlin
Ross Marlin
Director, BD Compliance

On September 19, 2022, the Securities and Exchange Commission (SEC) Division of Examinations published a risk alert describing the initial areas of review related to examining advisers for compliance with the Marketing Rule, which included policies and procedures, substantiation requirements, performance advertising requirements, and books and records.  On June 8, 2023, the Division issued a new risk alert reiterating these initial review focus areas, while also noting three additional areas of exam focus: testimonials and endorsements, third-party ratings, and Form ADV.

Testimonials and Endorsements

With respect to advisers’ inclusion of any testimonials or endorsements in advertisements, the Division is examining 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 must 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.
  • Compensation of ineligible persons: Advisers may not compensate individuals for testimonials or endorsements if they know or should have known that the person is ineligible.

Third-Party Ratings

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.
  • Questionnaires/surveys: 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.

Form ADV

The SEC is examining whether advisers have accurately completed their Forms ADV to provide required information regarding marketing practices.

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