SEC Examiners Turn Up the Heat on Marketing Rule Compliance

While the compliance date was Nov. 4, the SEC's advertising and marketing rule has been in effect since May 2021.

In its new risk alert, the agency explained that it is now conducting "focused" exams — as well as broad reviews, which include testimonials and endorsements, third-party reviews and Form ADV.

As to testimonials and endorsements, the SEC explains that it will look to see whether disclosures are provided, "including clear and prominent disclosure of whether the person giving the testimonial or endorsement (the 'promoter') is a client or investor, that the promoter is compensated, if applicable, and of material conflicts of interest."

Hanna of Eversheds notes that "by adding compensated promoter arrangements and third party ratings to the mix, they [the SEC] are basically covering all bases under the rule."

Regarding third-party ratings in advertisements, the SEC states that examiners will review whether the advisor provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of:

• the date on which the rating was given and the period of time upon which the rating was based;
• the identity of the third party that created and tabulated the rating;
• if applicable, that compensation has been provided directly or indirectly by the advisor in connection with obtaining or using the third-party rating; and
• if questionnaires or surveys used in preparation of a third-party rating meet certain conditions.

"With respect to these new areas of review, it will be interesting to see what the staff's expectations are regarding the 'clear and prominent' requirement with respect to promoter and third-party rating disclosures," Hanna said.

Hanna said he's also curious as to how examiners "apply the oversight requirement with respect to compensated promoters, as well as the reasonable inquiry requirement with respect to questionnaires used by publishers of third-party ratings."

Kurt Gottschall, partner at Haynes Boone in Denver, said that "for past exams, it's telling that this [new] risk alert encourages advisors to review their websites, particularly with respect to performance advertising that includes extracted performance or hypothetical performance.  That level of specificity suggests the exam staff is seeing weaker compliance in those areas."

Gottschall, former director of the SEC's Denver office, added that the new areas of focus — testimonials, endorsements and third-party ratings — "all relate to what others are saying about advisers. The SEC exam staff appears to be concerned that registrants' early focus on performance advertising may have left gaps in compliance for the other parts of the Marketing Rule."

The SEC amended Form ADV to require advisors to provide additional information regarding their marketing practices, so exam staff will review whether advisors "accurately completed these questions in their annual Form ADV amendments," the risk alert states.

Inclusion of Form ADV disclosures is also notable, Gottschall added, "because the SEC's current senior leadership has not shied away from citing exam deficiencies and even bringing enforcement actions regarding relatively minor inaccuracies."