Page 34 - Investment Advisor June 2023

In statements last November, William SEC examiners are “asking certain cast with Lynch that “there’s not a lot
Birdthistle, director of the SEC’s Office investment advisors to produce docu- of meat” to the SEC’s updated FAQ
of Investment Management, called the ments relating to their hypothetical per- released in January.
new marketing rule one of the agen- formance advertising and to preserve State-registered firms, Kiefer-
cy’s more “ambitious” rulemakings, and additional documents reflecting all of Goldenberg said, may also be hav-
stated: “I would very much encourage a their policies, procedures and ads” fol- ing a tough time complying with the
rigorous compliance with the rule.” lowing the mandatory Nov. 4 compli- new marketing rule, as only Arkansas,
While the compliance date was Nov. ance date, the attorneys said. Massachusetts, Rhode Island and
4, the SEC’s advertising and marketing The SEC has also focused its attention Wyoming have issued harmonized rules.
rule has been in effect since May 2021. on firm “websites and other broadly dis- Lamba of IAA agrees that the SEC’s
Kurt Gottschall and Kit Addleman, seminated advertisements that include updated FAQ distributed in January to
partners at Haynes Boone, clarify an issue involving
told me in an email that “Every SEC examination is gross/net performance “has
given the “relatively long supposed to be risk-based, so the thrown a monkey wrench
time” advisors have had to into the compliance pro-
comply with the marketing staff always face tradeoffs as to grams” of many advisors.
rule, they expected the SEC Many advisors “devoted
to have “little patience with the number of issues they review significant resources and
firms that had not under- versus the depth,” the attorneys effort, including obtaining
taken a robust review and advice from outside coun-
revision” of their policies said. “In FY 2023 exams, the staff sel, to try and address an
and procedures. seems to be devoting significant issue that was unclear and
As with enforcement mat- known to the staff prior
ters following the adoption time to Marketing Rule compliance to the compliance date,”
of Regulation Best Interest Lamba said.
and Form CRS, Gottschall in initial request lists, interviews The updated FAQ, how-
and Addleman say they with firm personnel, and then ever, came out “with a dif-
expect the SEC exam divi- ferent position than advisers
sion “will make enforcement follow-up document requests.” had taken in good faith,”
referrals whenever they he continued. “Exam staff
encounter firms that do not —Kurt Gottschall and Kit Addleman then tell them — through a
appear to have made a good formal written deficiency —
faith effort to consider all new aspects” various forms of hypothetical perfor- that despite making good-faith deter-
of the marketing rule. mance, including: (1) model portfolios; minations on how to comply, they got
In 2023, examiners are reviewing (2) backtested application of strategies; it wrong.”
marketing materials “provided to highly and (3) the projected performance of Firms “are now having to spend more
sophisticated private fund investors and portfolios or strategies,” Gottschall and time and money to change their compli-
separately managed accounts for insti- Addleman said. ance programs to reflect the staff’s view
tutions,” the attorneys state. in the FAQ,” Lamba said.
Gottschall, former director of the SEC’s exAM FoCus The FAQ, Lamba said, “raised addi-
Denver office, and Addleman, former The Risk Alert the SEC exam staff tional uncertainties.”
director of the SEC’s Atlanta office, added released last September sets out specific Senior SEC officials were able to pro-
that they’ve been “struck by the breadth” areas the agency will be looking at dur- vide some additional clarity during a
of marketing rule requests by examiners. ing initial exams, Lamba explains. One recent IAA event, according to Lamba.
“Every SEC examination is supposed focus area is on making sure advisors For example, Lamba said, accord-
to be risk-based, so the staff always face “can substantiate material statements of ing to SEC staff, “a table showing the
tradeoffs as to the number of issues they fact in their marketing materials.” gross performance of all individual
review versus the depth,” the attorneys The SEC exam sweep also zeroes in on holdings in a portfolio must include
said. “In FY 2023 exams, the staff seems to written policies and procedures, perfor- the net performance of each of the
be devoting significant time to Marketing mance advertising and books and records. individual holdings.”
Rule compliance in initial request lists, Maureen Kiefer-Goldenberg, senior
interviews with firm personnel, and then vice president of compliance at Mariner Washington Bureau Chief Melanie Waddell can
follow-up document requests.” Wealth Advisors, said on the web- be reached at [email protected].

32 Investment AdvIsor June 2023 | ThinkAdvisor.com