Last week, April 17, 2024, the SEC’s Division of Examinations (DOE) issued a RISK ALERT describing some issues detected in recent adviser examinations. The DOE noted problems you would expect -- insufficient, incomplete or outdated policies and procedures, a lack of books and records, and a lack of implementation of written policies.
However, the Risk Alert had more information about violations of compliance with the “General Prohibitions” of the Marketing Rule (Sections 206(4)-1(a)(1)-(7)1), which focus on statements of fact made by advisers.
While the “new” Marketing Rule opened the door for advisers to use third-party ratings and testimonials in advertising, as well as social media, its requirements with regard to “statements of fact” have an added level of complexity. The DOE used some qualitative judgments to decide whether the language in an advertisement is “fair and balanced” or “would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to an investment adviser…”
The Marketing Rule requires that advisers be able to substantiate statements of fact made in advertisements but understand that the DOE will examine advertisements and their underlying statements of fact for more than just substantiation. DOE comments indicate a more critical analysis of advertisements for untrue or misleading implications or inferences, considering not only what is included, but also what information (whether specific or contextual) is excluded.
A few examples of deficiencies observed and reported in the Risk Alert:
Statements that an adviser was different from other advisers because they acted in the “best interest of client” without disclosing that all investment advisers have a fiduciary duty to act in their clients’ best interest;
Advertisements that contained untrue or misleading claims such as “seen on” national media, without disclosing that the appearances were paid advertisements;
Statements that used SEC Registration to imply that SEC registration was representative of a particular level of skill or ability, or implying approval or endorsement by the SEC;
Advertisements attributing an IA’s performance to their track records without mentioning general market performance when most investors would have experienced similar returns.
In general, advisers should make themselves aware of the General Prohibitions and develop or enhance their internal reviews, to examine advertisements closely, and examine them again at a higher level, to determine if more information and context is needed, even when the Marketing Rule’s disclosure requirements appear to be met.
You can (and should) read the Risk Alert Here
Lauri London is in private law practice with Cohen & Buckmann P.C. and advises clients on investment adviser regulation and compliance, executive compensation, and employee benefits. For more information about Lauri and her practice, visit https://cohenbuckmann.com/lauri-b-london.
This article is for general informational purposes only and does not constitute legal advice. The information above is not a complete list of all regulatory and/or compliance requirements that apply to SEC- registered investment advisers. For legal advice specific to your firm’s compliance issues, consult with counsel. Lauri can be reached at lauri@cohenbuckmann.com.
1 (a) General prohibitions. An advertisement may not:
(1) Include any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading;
(2) Include 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 Commission;
(3) Include information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser;
(4) Discuss any potential benefits to clients or investors connected with or resulting from the investment adviser's services or methods of operation without providing fair and balanced treatment of any material risks or material limitations associated with the potential benefits;
(5) Include a reference to specific investment advice provided by the investment adviser where such investment advice is not presented in a manner that is fair and balanced;
(6) Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced; or (7) Otherwise be materially misleading.