RIA Compliance Blog
While it comes with little surprise, on Monday the SEC’s Division of Examinations officially announced the areas of focus regarding compliance with the New Marketing Rule. The recently released Risk Alert was expected as the compliance date for the New Marketing Rule is quickly approaching.
Initially introduced in December 22, 2020 the modernized Marketing Rule allowed for an 18-month transition period ending with a compliance date of November 4, 2022. Since adoption, we have previously written about the passage of the New Marketing Rule and some of the significant areas impacted by the new rule. The newest announcement shows that the SEC is going to initially focus on some of the top-level issues under the New Marketing Rule: policies and procedures, substantiation, and performance advertising.
When reviewing policies and procedures, the SEC will look that the investment adviser has adopted and implemented a compliance program that is reasonably designed to prevent violations of the New Marketing Rule by the firm and its supervised persons. The Risk Alert mirrors sections of the Adopting Release and states that the SEC expects a thorough New Marketing Rule compliance program should include objective and testable means to prevent violations. Testing includes some documentable review process for advertisements for compliance with the policies and procedures.
The New Marketing Rule prohibits a statement of material fact that an investment adviser does not have a reasonable basis for believing that it could substantiate upon request by the SEC. The SEC has said that it will focus on what record investment advisers are creating to demonstrate substantiation. Investment advisers should place an emphasis on creating policies and procedures that generate a contemporaneous substantiation record. Failure to provide information substantiating a material statement will lead to a presumption that the investment adviser did not have a reasonable basis for its belief and underlying statement.
Additionally, the SEC will focus on the use of performance advertising under the New Marketing Rule. While not expressly prohibited by the New Marketing Rule, displaying performance results in advertisements requires additional policies and procedures to ensure that the use of the performance figures complies with the New Marketing Rule. This heightened requirement is due to the increased potential for performance marketing to mislead retail investors, a major concern of the SEC over the past few years.
Once the SEC has conducted examinations under the New Marketing Rule, it will typically release another Risk Alert regarding the observations from the exam program. These observations serve as supplemental guidance and highlight the good and bad practices witnessed in the industry and are usually offered along with other forms of guidance such as Staff Interpretations.
From the state regulation standpoint, we expect examinations to focus on the use of testimonials and solicitors and whether individuals acting as solicitors are properly registered if necessary. The North American Securities Administrators Association (NASAA) has announced that it is working on model rules for states to incorporate the SEC’s New Marketing Rule. We imagine that states will put a greater emphasis on whether the actions of a promoter within their jurisdiction necessitates registration of the promoter as an investment adviser representative.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.