SEC Spotlights Testimonials, Endorsements, and Third-Party Ratings in Latest Exam Risk Alert

The SEC continues to grill investment advisers about how they are complying with the Advisers Act Marketing Rule (Rule 206(4)-1) according to the Division of Examinations (EXAMS) Risk Alert, Examinations Focused on Additional Areas of the Adviser Marketing Rule. This alert follows one issued in September 2022, Examinations focused on the New Investment Adviser Marketing Rule (see our blog post). In that risk alert, SEC EXAMS warned that it would be looking at how advisers complied with the rule’s requirements, including reviewing their policies and procedures, their process for substantiating material claims of fact, calculating and presenting performance, and maintaining books and records. In addition to these areas, the latest alert indicates that EXAMS will focus on compliance with the Marketing Rule’s requirements for using testimonials and endorsements and third-party ratings, as well as associated Form ADV disclosures.

EXAMS also noted that it would be looking at whether investment advisers are complying with the seven general prohibitions under the Marketing Rule (see our blog post), which generally require firms to ensure that their advertisements are not materially misleading and provide a fair and balanced view of the risks and benefits of what the adviser has to offer. 

The additional “areas of emphasis” discussed by EXAMS include compliance with the SEC Marketing Rule’s requirements for using testimonials and endorsements (see our blog post on these requirements). More specifically, the staff will be looking at:

• Disclosures – the Marketing Rule requires clear and prominent disclosure of whether the person giving the testimonial or endorsement is a client or investor, the compensation, and any material conflicts of interest.
• Oversight – the Marketing Rule requires that advisers have a reasonable basis for believing that testimonials or endorsements they use comply with the rule’s requirements.
• Written Agreements – the Marketing Rule requires written agreements in situations where a promoter receives more than $1,000 in cash (or non-cash compensation) during the preceding 12 months.
• Vetting promoters – the Marketing Rule prohibits certain bad actors from acting as promoters, and advisers should have a reasonable belief that the promoters are not subject to the prohibitions.

Another tricky area of the Marketing Rule that EXAMS will be reviewing is the use of third-party ratings. EXAMS staff will be looking at whether:

• The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure of the date of the rating and the period covered, the identity of the party that created the rating, and, if applicable, whether the adviser has provided any compensation in connection with obtaining or using the rating.
• The adviser has a reasonable basis for believing that the questionnaires or surveys used to create the rating make it equally easy for a participant to provide favorable and unfavorable responses and are not designed to produce a predetermined result.

This risk alert contains nothing new or surprising – it simply reviews the general requirements and prohibitions of the Marketing Rule. Moreover, most firms have already received the message that the SEC is committed to enforcing the new rule. Presumably, EXAMS is giving advisers a heads-up that the next wave of examinations will delve even deeper into the Marketing Rule’s requirements by focusing on testimonials, endorsements, and third-party ratings.  In any event, advisers should be ready for an in-depth review of their marketing policies, procedures, and processes during their next examination.

How we help

ACA is your go-to partner for compliance, performance, and technology to help your firm implement changes, review policies and materials, and manage your marketing review process to comply with the SEC Marketing Rule and SEC risk alerts.

Our Marketing Rule Compliance Assessment assists your firm by:

• Reviewing updated marketing practices, materials, and policies and procedures to evaluate compliance with the new Marketing Rule.
• Reviewing performance metrics to confirm that they have been categorized appropriately under hypothetical, extracted, predecessor/portable, and related performance categories.
• Providing a summary report identifying findings from our review and explain any enhancements needed to ensure adherence with the Marketing Rule. 

To learn more, contact our team here.

Contact us