SEC risk alert warns investment advisers of marketing rule missteps

In a risk alert issued Wednesday, the SEC’s Division of Examinations said it found some firms’ policies and procedures were “not reasonably designed or implemented to address compliance with the marketing rule,” resulting in gaps for preventing marketing rule and/or books and records rule violations.

Those gaps included policies and procedures that:

• Contained only general descriptions and expectations related to the marketing rule;
• Did not address channels used by advisers to place marketing materials, such as websites and social media;
• Were incomplete, not updated, or only updated for certain marketing topics;
• Were not tailored to address advisers’ specific advertisements regarding general prohibitions and rules for testimonials, endorsements, and third-party ratings;
• Did not adequately address the preservation and maintenance of advertisements and related documents, like survey documents used to create a third-party rating; and
• Did not implement updates to reflect the marketing rule.

Examiners also noticed deficiencies in submissions of Form ADV, particularly related to third-party ratings, performance results, and hypothetical performance. Some submissions contained outdated references to the SEC’s former cash solicitation rule.

SEC staff also noted instances where investment advisers used prohibited advertising material, such as containing an untrue statement of material fact, omitting a material fact necessary to make a statement, and making a material statement the adviser might not be able to substantiate under questioning by an examiner.

The SEC said it found advertisements that contained misleading information that would lead an investor to draw an erroneous conclusion, contained performance claims that were either misleading or erroneous, or did not include fair and balanced treatment of material risks and limitations.

Examples of unsubstantiated or misleading claims included advisers “‘seen on’ national media” without disclosing those appearances were paid advertisements, celebrity endorsements, and SEC endorsements or implied endorsements in which the agency’s logo was used in marketing materials.