SEC Risk Alert Identifies Marketing Rule Lapses
The Securities and Exchange Commission (SEC) determined that while investment advisory firms have generally succeeded in developing systems to comply with the agency’s amended marketing rule, adopted in December 2020, some have fallen shy in ensuring compliance.
The Division of Examinations stated that it discovered some firms’ policies and procedures were “not reasonably designed or implemented to address compliance with the marketing rule,” resulting in gaps in preventing marketing rule and/or books and records rule violations, in a risk alert issued Wednesday.
The regulator also found flaws in Form ADV submissions, particularly those involving third-party ratings, performance results, and hypothetical performance. Some submissions made obsolete references to the SEC’s prior cash solicitation rule.
SEC staff also identified instances in which investment advisers used prohibited advertising material, such as containing an untrue statement of material fact, omitting a material fact required to make a statement, and making a material statement that the adviser may be unable to substantiate when questioned by an examiner.
The SEC stated that it discovered advertisements that had deceptive information that might lead an investor to an incorrect conclusion, contained performance claims that were either misleading or erroneous, or did not give a fair and balanced presentation of important risks and restrictions.
Examples of unfounded or misleading claims included consultants “‘seen on’ national media” without revealing that their appearances were paid commercials, celebrity endorsements, and SEC endorsements or implied endorsements in which the agency’s emblem was utilized in marketing materials.
“In sharing these staff observations, the Division encourages advisors to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs, the risk alert stated.
Last year, the SEC conducted a targeted sweep for violations of the amended marketing rule, fining nine RIAs $850,000. Earlier this month, the regulator settled charges against five more RIAs for violating the rule, ordering them to pay a combined $200,000 in fines.