Page 32 - Investment Advisor July/August 2023

As to testimonials and endorsements,
the SEC explains that it will look to
see whether disclosures are provided,
“including clear and prominent disclo-
sure of whether the person giving the
testimonial or endorsement (the ‘pro-
moter’) 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 arrange-
ments 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 advi-
sor 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; “For past exams, it’s telling that this [new]
• the identity of the third party that
created and tabulated the rating; risk alert encourages advisors to review
• if applicable, that compensation
has been provided directly or indi- their websites, particularly with respect
rectly by the advisor in connection to performance advertising that includes
with obtaining or using the third-
party rating; and extracted performance or hypothetical
• if questionnaires or surveys used in performance. That level of specificity
preparation of a third-party rating
meet certain conditions. suggests the exam staff is seeing weaker
“With respect to these new areas of
review, it will be interesting to see what compliance in those areas.”
the staff’s expectations are regarding
the ‘clear and prominent’ requirement —Kurt Gottschall
with respect to promoter and third-
party rating disclosures,” Hanna said. performance. That level of specificity information regarding their market-
Hanna said he’s also curious as to suggests the exam staff is seeing weaker ing practices, so exam staff will review
how examiners “apply the oversight compliance in those areas.” whether advisors “accurately completed
requirement with respect to compen- Gottschall, former director of the these questions in their annual Form
sated promoters, as well as the reason- SEC’s Denver office, added that the new ADV amendments,” the risk alert states.
able inquiry requirement with respect areas of focus — testimonials, endorse- Inclusion of Form ADV disclosures
to questionnaires used by publishers of ments and third-party ratings — “all is also notable, Gottschall added,
third-party ratings.” relate to what others are saying about “because the SEC’s current senior
Kurt Gottschall, partner at Haynes advisers. The SEC exam staff appears leadership has not shied away from
Boone in Denver, said that “for past to be concerned that registrants’ early citing exam deficiencies and even
exams, it’s telling that this [new] risk focus on performance advertising may bringing enforcement actions regarding
alert encourages advisors to review their have left gaps in compliance for the relatively minor inaccuracies.”
websites, particularly with respect to other parts of the Marketing Rule.”
performance advertising that includes The SEC amended Form ADV to Washington Bureau Chief Melanie Waddell
extracted performance or hypothetical require advisors to provide additional can be reached at [email protected].

30 InvesTmenT ADvIsor July/August 2023 | thinkAdvisor.com