SEC Risk Alert: EXAMS’ Review of Marketing Rule Compliance to Focus on Testimonials/Endorsements, Third-Party Ratings, and Form ADV

On June 8, 2023, the U.S. Securities and Exchange Commission (SEC) Division of Examinations (EXAMS) issued a risk alert (the Risk Alert) informing the industry that the SEC’s staff will focus on testimonials and endorsements, third-party ratings, and Form ADV in their reviews of investment advisers’ compliance with Rule 206(4)-1 (the Marketing Rule) of the Investment Advisers Act of 1940, as amended. The Risk Alert emphasizes that these additional areas of focus will not affect the staff’s focus on the initial areas of review for the Marketing Rule outlined in its September 19, 2022 risk alert.^[1] Please see our discussion of that alert here.

The SEC’s staff noted that it has been and will continue to focus on the Marketing Rule’s policies and procedures requirements, substantiation requirements, performance advertising requirements, and books and records requirements. Moreover, the staff continues to encourage advisers to review their websites and other marketing materials to comply with the Marketing Rule. The staff also discussed its continued focus on whether advisers have disseminated advertisements that violate any of the general prohibitions found in subparagraph (a) of the Marketing Rule.

According to the Risk Alert, the staff is conducting more focused examinations on the following additional areas when reviewing an investment adviser’s compliance with the Marketing Rule:

• Testimonials and Endorsements: The SEC’s staff is conducting focused examinations of testimonials and endorsements made in advertisements. Specifically, the staff will review whether:
  • there is a clear and prominent disclosure as to whether the person providing the testimonial is a client or an investor, whether that person is compensated, or if there are any conflicts of interest;
  • advisers have a reasonable basis for believing that the testimonials comply with the Marketing Rule;
  • written agreements are entered into where required, such as with those providing testimonials, unless that person is an applicable affiliate of the adviser and such affiliation is apparent and already disclosed or such person receives de minimis compensation (i.e., $1,000 or less, or the equivalent value in noncash compensation, during the preceding twelve months); and
  • advisers knew or reasonably should have known that a person providing a testimonial was ineligible to do so because, for instance, that person is a “bad actor” prohibited from acting as a promoter.
• Third-Party Ratings: The SEC’s staff will conduct focused examinations on whether advisers are complying with the Marketing Rule’s requirements on the use of third-party ratings in advertisements. Specifically, the staff will examine whether:
  • the adviser provides (or reasonably believes that the third-party rating provides) clear and prominent disclosures as to (1) the date on which the rating was provided and the period during which it applies, (2) the identity of the third party that created the rating, and (3) whether or not compensation was provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating, and
  • the questionnaires or surveys used to prepare the third-party rating meet specific conditions, such as a reasonable basis for the adviser’s belief that the questionnaire was fair and not designed to create a predetermined result.
• Form ADV: The SEC’s staff will conduct a focused review on whether the advisers accurately provided additional information regarding their marketing practices in their Form ADV. Investment advisers were required to answer new questions relating to the Marketing Rule in their most recent amendments to Form ADV.

We are available at your convenience to discuss the matters addressed in the Risk Alert, including assisting you with reviews of your compliance policies and procedures, as well as other ways such matters may affect your business.

---

^{[1] EXAMS’ Risk Alert is available at https://www.sec.gov/files/risk-alert-marketing-rule-announcement-phase-3-060823.pdf.}