SEC Issues Risk Alert Regarding Compliance with Rule 206(4)-1, the Marketing Rule

On April 17, 2024, the Securities and Exchange Commission’s (SEC) Division of Examination (Division) issued a Risk Alert to provide information about investment advisers’ compliance with amended Rule 206(4)-1 (Marketing Rule) under the Investment Advisers Act of 1940 (Advisers Act). The SEC examined whether investment advisers had implemented written policies and procedures designed to prevent them and their supervised persons from violating the Advisers Act and its rules, including the Marketing Rule.

The Division found most advisers had the necessary policies and procedures in place to comply with the Marketing Rule and provided training for their staff on the rule. Advisers also generally updated their written marketing policies and procedures to establish a process for the preapproval and review of advertisements. However, the SEC also found instances where the established policies and procedures were insufficient in design or implementation to address compliance with the Marketing Rule. They observed that some policies:

• Contained only general descriptions and expectations related to the Marketing Rule
• Failed to address applicable marketing channels used by the advisers, such as social media and websites
• Were informal as opposed to in writing
• Were incomplete, not up to date or only partially updated for certain applicable marketing topics
• Were not tailored to address the specific advertisements of the advisers
• Failed to adequately address the preservation and maintenance of advertisements and related documents, including copies of questionnaires or surveys used in the preparation of third-party ratings

The Division also found deficiencies in the maintenance and preservation of books and records under the Marketing Rule. Advisers often failed to maintain copies of questionnaires or surveys used for preparing third-party ratings. Advisers also did not maintain copies of information posted on social media and failed to maintain documentation to support performance claims made in advertisements.

Additionally, the Division observed certain deficiencies on the Form ADV of some advisers, with such advisers inaccurately reporting that their advertisements did not include third-party ratings, performance results or hypothetical performance. Furthermore, the Division observed advisers that used outdated language in their Form ADVs, indicated inaccurately that no referral arrangements existed and omitted material terms and compensation of referral arrangements.

Regarding compliance with the Marketing Rule’s General Prohibitions, the Division also observed a number of deficiencies. These observations included:

• Untrue and unsubstantiated statements of material fact: These included claims that advisers were “free of all conflicts” despite conflicts existing. There were also instances where advertisements made inaccurate statements regarding advisers’ businesses, such as the number of personnel performing advisory services for clients and their qualifications. Certain advertisements contained facts about advisory services or products that were inaccurate, such as referring to environmental, social and governance mandates that were not actually in place. Some advertisements also publicized the receipt of awards or accolades that had not been received.
• Omission of material facts: Some advertisements contained information that could result in untrue or misleading implications, such as (i) recommendations for certain investments without disclosing associated conflicts, (ii) untrue or misleading performance claims and (iii) misleading testimonials.
• Fair and balanced treatment of material risks: Certain advertisements included statements about the potential benefits of advisers’ services or methods that did not provide a fair and balanced treatment of the potential material risks or limitations associated with those benefits.
• Specific investment advice that was not presented in a fair and balanced manner: Some advertisements only included the most profitable investments or specifically omitted certain other investments without sufficient context to evaluate the rationale behind their exclusion. Some advisers also failed to establish criteria in their policies and procedures to ensure the fair and balanced presentation of references to specific investment advice in their advertisements.
• Inclusion/exclusion of performance results or time periods that were not fair and balanced: Some advertisements did not disclose the time period for which the presented returns were calculated or whether returns were calculated for the same time period as additional performance information included in the same advertisement. Some advertisements also excluded unrealized investments in the total net return figure and only included the performance of realized investments.
• Otherwise materially misleading advertisements: This included presenting disclosures in an unreadable font on websites or in videos.

The Division urges advisers to consider their own practices, policies and procedures and implement the needed modifications to their training, supervisory, oversight and compliance programs based on these observations.