ANALYSIS: SEC Marketing Rule Compliance Begins; Exams to Follow

Effective Nov. 4, SEC-registered investment advisers will need to comply with the SEC’s new Marketing Rule, which consolidated the prior Advertising and Cash Solicitation Rules.

Under the new rule, SEC-registered investment advisers may no longer choose to comply with the previous Advertising and Cash Solicitation Rules, and ads must instead conform to the Marketing Rule’s requirements. The rule will be a focus of upcoming reviews, the SEC’s Division of Examinations said in a September risk alert.

Reforms to the rules that regulate investment adviser advertisements and payments to solicitors were adopted by the Commission in Dec. 2020. Although those rules became effective May 4, 2021, investment advisers were given 18 months to prepare themselves for compliance.

Initial Exam Initiatives and Areas of Review

Some of the areas the SEC has flagged for compliance initiatives include:

Policies and Procedures. What written policies and procedures has the investment adviser implemented to comply with the Marketing Rule?

Advertisement Substantiation. Did the adviser have a reasonable basis for believing that it would be able to substantiate material statements of fact contained in its advertisements?

Performance Advertising Requirements. The Marketing Rule prohibits ads that include:

• gross performance (unless the advertisement also presents net performance);
• performance results (unless provided for specific time periods; doesn’t include private funds);
• a statement that the Commission has approved or reviewed any calculation or presentation of performance results;
• certain ways of comparing the performance of portfolios;
• certain performance results of a subset of investments extracted from a portfolio;
• certain hypothetical performance; and
• certain predecessor performance. (In addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.)

Books and Records. The SEC has also amended Form ADV, and agency staff will review for compliance. The revised form requires additional information from advisers regarding their marketing practices.

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