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Written by Mark Buckley-Jones

The SEC’s Division of Examinations (the “Division”) recently issued a Risk Alert to provide investment advisers, investors, and other market participants with information regarding investment advisers’ compliance with amended Rule 206(4)-1 (the “Marketing Rule”).

Compliance Rule

Division staff noted that advisers’ compliance policies and procedures typically included processes to comply with the Marketing Rule, including staff training, marketing review and approval processes, but the Division’s staff observed failures in policies and procedures and the implementation thereof, including:

  • Use of only general descriptions and expectations related to the Marketing Rule;
  • Failure to address applicable marketing channels utilized by the advisers, such as websites and social media;
  • Use of informal policies which were not always in writing;
  • Use of the policies not tailored to an adviser’s specific advertisements;
  • Failure to address the preservation and maintenance of advertisements and related documents, such as copies of any questionnaires or surveys used in the preparation of a third-party rating; and
  • Failure to implement written policies.

Books and Records Rule

Advisers typically maintained updated policies and procedures to reflect Marketing Rule-related books and records preservation requirements, but Division staff nonetheless observed deficiencies, including:

  • Completion of questionnaires or surveys used in the preparation of a third-party rating but failing to maintain a copy of such questionnaires;
  • Failure to maintain copies of information posted to social media; and
  • Failure to maintain documentation to support performance claims included in advertisements.

Form ADV

Division staff observed that many advisers had updated their Form ADVs, including Part 1A, Item 5.L and Part 2A, Item 14 disclosures related to advertising. However, there remained multiple instances where:

  • Form ADV said no third-party ratings, when firm websites and social media posts included third-party ratings;
  • Form ADV said no performance advertising, when firm’s performance results were included in advertisements;
  • ADV said no hypothetical performance, when hypothetical performance was included in advertisements; and
  • Outdated language from the prior Cash Solicitation Rule was used in the ADV Part 2A Brochure.

General Prohibitions

Division staff observed the following deficiencies related to the Marketing Rule’s General Prohibitions:

  1. Untrue statements of material fact and unsubstantiated statements of material fact
    Division staff observed advertisements that included statements of material fact that appeared to be untrue. In such instances, the advisers typically ceased disseminating the advertisements or removed the untrue statements. In some cases, the advisers acknowledged that the statements of material fact were likely untrue after being unable to substantiate the statements.
  2. Omission of material facts or misleading inferences
    Division staff observed advertisements that appeared to omit material facts necessary to make the statements made not misleading. The staff also observed advertisements including information that could reasonably have caused untrue or misleading inferences to be drawn concerning material facts.
  3. Fair and balanced treatment of material risks or limitations
    Division staff observed advertisements that included statements about the potential benefits connected with the advisers’ services that failed to provide fair and balanced treatment of material risks or limitations associated with the potential benefits.
  4. References to specific investment advice that were not presented in a fair and balanced manner
    Division staff observed advertisements that included only the most profitable investments or specifically excluded certain investments without providing sufficient information and context to evaluate the rationale, such as investments that were written off as a loss or were lower performing investments.
  5. Inclusion or exclusion of performance results or time periods in manners that were not fair and balanced
    Division staff observed advertisements that included or excluded certain performance results or presented performance time periods in manners that were not fair and balanced.
  6. Advertisements that were otherwise materially misleading
    Division staff observed advertisements that appeared to otherwise be materially misleading, such as presenting disclosures in an unreadable font on websites or in videos.

The Risk Alert concludes by encouraging advisers to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.

About the Author

Mark Buckley-Jones is a Director in the New York office with a focus on the private fund industry. Prior to joining RQC Group in 2019, Mark spent 11 years in in-house CFO and CCO roles with three separate investment advisers.


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