Trillium

On June 8, the SEC Division of Examinations (DOE) released a Risk Alert to inform investment advisers of additional areas of emphasis in examinations focused on the amended Marketing Rule (Rule 206(4)-1 of the Advisers Act).

My Take

The additional areas of focus represent a natural evolution of the DOE’s review of compliance with the Marketing Rule. Whenever new rules are adopted and implemented, the DOE focuses its initial attention on whether advisers have implemented policies and procedures and are keeping the required books and records. That’s the low hanging fruit. The additional areas of focus required time to show up in advisers’ compliance efforts (e.g. an ADV amendment) and therefore it makes sense for the DOE to add these areas to their examinations.

What’s New?

The DOE identified that following three areas, each with underlying points, as additional topics for both focused and broad reviews.

1. Testimonials and Endorsements
   • Disclosures requirement
   • Oversight of promoters
   • Written agreements requirement
   • The evaluation of promoters’ eligibility status
2. Third-Party Ratings
   • Disclosures requirement
   • Evaluation of bias or preference in ratings
3. Form ADV
   • Accuracy of disclosure

Initial Areas of Focus

As a reminder, before the Marketing Rule was even required to be implemented, the DOE published a Risk Alert (September 2022 Risk Alert) identifying areas the DOE staff would focus on with regard to the amended Marketing Rule. We know now not only was this Risk Alert published but DOE Staff was preemptively highlighting deficiencies during examinations essentially warning advisers they were out of compliance before compliance was even required. The initial areas of focus are:

1. Policies and Procedures – Whether advisers adopted and implemented written policies and procedures to comply with the amended Marketing Rule.
2. Substantiation Requirement – Whether advisers had a reasonable basis for the believing they could substantiate materials statements of fact in advertisements.
3. Performance Advertising Requirements – Whether advisers are complying with performance advertising requirements, including the FAQ guidance released by the SEC Division of Investment Management on net and gross performance.
4. Books and Records – Whether advisers were maintaining the required books and records under the amended Marketing Rule.

If you would like to discuss the new risk alert and how it impacts you, please contact Trillium.