Recent Take-Aways Involving the Marketing Rule Sweep and Enforcement Activity
On June 8, 2023, the Security and Exchange Commission’s (“SEC’s”) Division of Examinations (the “Division”) published a Risk Alert (the “Alert”)[1] announcing “additional areas of emphasis” during the next leg of sweep examinations (the “Sweep”) focused on investment advisers’ (“Advisers”) compliance with amended Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”)[2].
We have been made aware recently that the SEC’s Division of Enforcement is actively engaged in parallel investigations as part of the Sweep process resulting in settlement offers being sent to Advisers at a very early stage for certain purported violations of the Marketing Rule, including those related to the dissemination of hypothetical performance. More specifically, based on our discussions with industry participants, we understand that the SEC is aggressively offering Advisers the opportunity to participate in omnibus settlement orders instituting proceedings (i.e., to be named alongside other Advisers in a public settlement order that have similar alleged violations) in order to avoid the possibility of more significant enforcement measures and penalties. Such offers are often not made in writing and specific violations are not always discussed. In light of these types of investigations by the SEC, Advisers may want to consider proactively working with their legal and compliance teams to ensure compliance with the Marketing Rule and contemplate how best to respond to any and all inquiries from the SEC related to the Sweep.
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By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton
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[1] On September 19, 2022, the Division published a risk alert (hereinafter referred to as the “2022 Risk Alert”) that outlined areas of the Marketing Rule that the Division would focus on during the initial Sweep. See SEC, Risk Alert, Examinations Focused on the New Investment Adviser Marketing Rule (Sept. 19, 2023), https://www.sec.gov/files/exams-risk-alert-marketing-rule.pdf.
[2] The Alert notes that the SEC is expanding its focus on compliance with other Marketing Rule aspects, including: (1) testimonials and endorsements; (2) third-party ratings; and (3) amended Form ADV items. In addition to the additional areas of emphasis noted above, the Alert indicates that, during the Sweep, the SEC is continuing to focus on Advisers’ compliance with aspects of the Marketing Rule that were mentioned in the 2022 Risk Alert, including: (i) General Prohibitions (e.g., making untrue statements, representations that are not fair and balanced, materially misleading statements, etc.); (ii) Substantiation Requirements (e.g., having a reasonable basis for believing that a material statement can be substantiated); (iii) Performance Advertising Conditions (e.g., those related to the use of net performance, model performance, extracted performance, and related and hypothetical performance); (iv) Policies and Procedures Requirements (e.g., policies and procedures related to the dissemination of hypothetical performance to an intended audience); and (v) Books and Records Requirements (including related amendments to Rule 204-2 under the Advisers Act). See SEC, Risk Alert, Examinations Focused on Additional Areas of the Adviser Marketing Rule (Jun. 8, 2023), https://www.sec.gov/files/risk-alert-marketing-rule-announcement-phase-3-060823.pdf.
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