EXAMS Publishes Risk Alert Regarding Examinations Focused on the New Investment Adviser Marketing Rule

Authors: Jessica Forbes, Philip Heimowitz, and Joanna D. Rosenberg

On September 19, 2022, the Securities and Exchange Commission Division of Examinations (“EXAMS”) published a Risk Alert (the “Risk Alert”) to inform SEC-registered investment advisers, including advisers to private funds, about upcoming review areas during examinations focused on amended Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”).[1] The Risk Alert serves as a reminder that the compliance date for the Marketing Rule is November 4, 2022 (the “Compliance Date”), and that any advertisements disseminated on or after the Compliance Date by advisers registered or required to be registered with the Securities and Exchange Commission (“SEC”) are subject to the Marketing Rule. We provide below a brief summary of the Risk Alert.

Initial Marketing Rule Exam Initiatives and Areas of Review

EXAMS staff indicated that it would conduct a number of specific initiatives, as well as a broad review through the examination process, for compliance with the Marketing Rule, including, but not limited to, the following areas:

Marketing Rule Policies and Procedures

• The Risk Alert states that the staff will review whether investment advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers and their supervised persons of the Advisers Act and the rules thereunder, including the Marketing Rule. Citing the adopting release for the Marketing Rule, the Risk Alert states that compliance policies and procedures should be objective and testable, which could include conducting an internal pre-review and approval of advertisements, reviewing a sample of advertisements based on risk, or pre-approving templates.

Substantiation Requirement

• The Marketing Rule prohibits advertisements that “[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the [SEC].” The Risk Alert states that the staff will review whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.

Performance Advertising Requirements

• The Risk Alert states that the staff will review whether investment advisers are in compliance with performance advertising requirements in the Marketing Rule, including the prohibitions under the rule, such as (i) the presentation of gross performance, unless net performance is also presented; (ii) any performance results (other than private fund performance, to which this requirement is not applicable), unless they are provided for the requisite one-, five-, and ten-year periods; (iii) any statement that the SEC has approved or reviewed any calculation or presentation of performance results; (iv) to the extent an advertisement includes the performance of portfolios other than the portfolio being advertised, performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as the portfolio being offered in the advertisement, with limited exceptions; (v) performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio; (vi) hypothetical performance, unless the adviser adopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain additional information; and (vii) predecessor performance, unless the personnel primarily responsible for achieving the prior performance manage accounts at the advertising adviser and the accounts that were managed by those personnel at the predecessor adviser are sufficiently similar to the accounts that they manage at the advertising adviser.

Books and Records

• In connection with the Marketing Rule, the SEC adopted amendments to Advisers Act Rule 204-2 (the “Books and Records Rule”) that require advisers to make and keep certain records regarding all advertisements they disseminate, with certain accommodations for complying with this provision in the case of oral advertisements. The Risk Alert states that the staff will review for compliance with these requirements.

Form ADV

• In connection with the Marketing Rule, the SEC also amended Form ADV to require advisers to provide additional information regarding their marketing practices. The Risk Alert reminds advisers of their obligations to accurately complete these questions in their next annual Form ADV amendment.

Conclusion

In anticipation of the Compliance Date and the examination initiative, we encourage our clients to review their marketing materials and written policies and procedures to ensure compliance with the Marketing Rule and the amended Books and Records Rule.

[1]   Risk Alert, Examinations Focused on the New Investment Adviser Marketing Rule (Sept. 19, 2022).