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(Article from Registered Funds Regulatory Update, July 2024)

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The Staff of the SEC’s Division of Examinations published a new Risk Alert on the Marketing Rule, which had some important takeaways (framed as “preliminary observations”). The Alert is the Staff’s most comprehensive written statement to-date on its observations on Marketing Rule compliance since the Marketing Rule was adopted (it has published two prior risk alerts on its Marketing Rule examination program). The Alert underscores that the Staff expects to continue its focus on Marketing Rule compliance in exams, which is evident from marketing being in the SEC’s 2024 Exam priorities, the SEC’s continued settlements of enforcement actions involving Marketing Rule violations and the recent SEC FAQ on fund performance and use of leverage.

The following are some key practical takeaways for firms from the Alert:

• Now that firms have been operating with the “new” Marketing Rule for some time, the Alert provides a reminder to firms to review policies and procedures, and assess whether they are being followed (or adjust as appropriate), and determine whether policies are tailored to the firm’s business and actual advertising practices.
  • This includes policies and/or procedures addressing all channels the firm uses to advertise (e.g., social media, websites, podcasts) and ensuring review and record retention processes for content disseminated if using those platforms to “advertise.”
  • Typically, Marketing Rule compliance is a function of a firm’s compliance testing and monitoring, including testing that required records are being preserved.
    • While not a focus of the Alert, firms could also consider testing on other components of the Marketing Rule, including required oversight of placement agents.
  • Firms might consider refreshing training of relevant personnel, including in light of new developments and SEC guidance on the Marketing Rule’s application.
    • Firms may want to consider how to make training specific and instructive, including providing firm personnel with examples or clear instructions on how to prepare materials that accord with the Marketing Rule and the firm’s policies and procedures. 
  • Substantiation will remain a key focus and firms should retain required substantiation.
    • The Alert focuses on a few key areas, including:  performance calculations, third-party ratings (e.g., copies of any questionnaires or surveys used in the preparation of such third-party rating) and support for other material statements of fact.
    • Consistent with market expectations, the Alert suggests that the Staff will view statements where firms cannot provide supporting records as “likely [to be] untrue” and therefore in violation of the general prohibition.
    • ESG (which is specifically mentioned) and other “hot button” SEC topics, such as AI, are likely to be key focus areas for substantiation.
  • Firms also should continue to review marketing materials for perennial areas of SEC focus, including:
    • avoiding overstatement and puffery;
    • bringing forward information (one of the examples included in the Alert for substantiation was erroneous biographical information);
    • providing enough context in advertisements to avoid being seen as omitting material information (for example, around the basis of or criteria for awards or rankings), and especially in the context of presenting performance information; and
    • focusing on fair and balanced presentation of information, including performance information, and of risks.
  • While firms with fiscal year-ends in December recently updated their Form ADVs, firms might consider tracking changes in their marketing practices as part of their regular compliance oversight to ensure they are capturing necessary updates for Form ADV (updates to information in Form ADV Part 1, Item 5, which contains the Marketing Rule questions, generally does not require an other-than-annual amendment, even if it becomes inaccurate).

Initial Observations Regarding Advisers Act Marketing Rule Compliance (Apr. 17, 2024), available at: https://www.sec.gov/files/exams-risk-alert-marketing-observation-2024.pdf.