Report

Top Compliance Concern: an SEC Exam on the Marketing Rule — Forewarned is Fair Play?

Elevated Fears and Stress abound for registered SEC Adviser firms as they evaluate their firm’s readiness for an inevitable SEC examination for compliance with the new Marketing Rule. The SEC’s Division of Examination (“EXAMS”) staff is currently examining SEC Registered Investment Adviser firms for compliance with the Marketing Rule with breakneck focus. Registered SEC Investment Adviser firms were required to be compliant as of November 4 (unless they implemented prior). It’s a complex rule to implement.

Looking back, the warning signs about exam focus in this area has surely been there all along. The long implementation date provided firms with 18 months to prepare for implementing the new rule, which involved complex overhaul of firm marketing content, disclosures and updating performance material. Based on a survey of firms attending our recent webinar in June, nearly 52% said their firm had been planning, preparing and implementing the rule and feel they are ready for an exam. Another 44% said they want more guidance (or additional FAQ guidance); with nearly 4% saying they need more time to fully implement.

The Staff has surely signaled their intent for intense exam scrutiny on this marketing topic. Looking back, their first signal is when the SEC made known their intent for subsequent intense focus on marketing—which was in their “2023 Exams Priorities” letter. In fact, they indicated then that EXAMS has specialized working groups in a diverse portfolio of areas, among them marketing and sales practices. The letter states…“These specialized groups have been and continue to be an invaluable resource to our examiners and our examinations, providing subject matter expertise in their respective areas.”

Then again, among the letter’s “Notable New and Significant Focus Areas,” focus on compliance with the marketing rule was Focus #1. Indeed, advance notice that the EXAMS Division is prioritizing examining for compliance with the newly adopted rule should be no surprise.

The EXAMS Division is assessing:

• Whether SEC registered Adviser Firms have adopted and implemented written policies and procedures regarding the Marketing Rule.
• Whether Adviser Firms are complying with the substantive requirements of the Marketing Rule, such as whether:
• they will be able to substantiate material statements of fact
• they will be able to substantiate requirements for:
• performance advertising
• testimonials,
• endorsements
• and third-party ratings.

The SEC also has stated EXAMS will continue to focus on RIAs to private funds, including compliance with the Marketing Rule, which includes performance advertising and compensated testimonials, endorsements and promoters.

EXAMS also shed light in its Priorities that it focuses on new topics. This, in part, appears spurred by assessing emerging industry trends as well as to inform regulatory policy. For example, they will conduct exams of RIAs offering new products (like crypto) and using emerging technology (automated advice and digital engagement practices), as well as whether recommendations or advice is provided through the use of social media and social trading platforms.

Exams also signalled it will review marketing related to single-stock ETFs, among other focus areas.

The staff have signalled that they understand and acknowledge the rule is a big change. There are many positives to the updated rule, chief among them that it encompasses the multitude of no-action letters into one rule. But, despite the positives, as the industry is experiencing, it’s not a simple rule to implement.

Another clear signal of the importance of exam focus on marketing is the early June 2023 SEC Risk Alert on Marketing (“Risk Alert: Examinations Focused on Additional Areas of the Adviser Marketing Rule”).

Broadly, the Alert highlights that the Staff in its examinations have been reviewing policies and procedures, substantiation, performance advertising and books and records. In particular, the Staff will focus on whether advisers have disseminated advertisements that violate the general provisions and that EXAMS will review testimonials, endorsements, third-party ratings, and accuracy of Form ADV responses to the new marketing related items.

When conducting exams, the Staff continues its long time practice of making sure that advisers are doing what they’re saying they’re doing; i.e., whether the implementation of the practices and policies are in fact being implemented and in compliance with the rule.

Interestingly, the EXAMS staff is also working really closely with the Division of Investment Management to review potential efficiencies before they commence an exam. This is helpful to the industry for consistency across regions and particularly because it’s a new rule without additional SEC interpretive guidance yet. We believe it is also helpful for firms to understand that when they receive a deficiency it has likely been considered informally by both EXAMS and Investment Management.

The biggest signal is how exams themselves are playing out — what we are seeing in exams and the intense scrutiny the industry is experiencing in examinations related to marketing; that is, the intense focus on compliance with the Marketing Rule.

Adam DiPaolo, a CSS Confluence Compliance Services Director, stated in the webinar,

“One of the things that really has been so striking for us from the Compliance Services viewpoint is the activity on the SEC exam front, from the pace of examinations in terms of sheer volume, to (in many cases) the depth, detail and time involved on the exam side—particularly on marketing, as well as other topics.” “It really has been kind of unbelievable on the consulting side. In terms of exam numbers and particular focus, as high as I’ve ever seen it in my career.”

To learn more about our compliance services, including Marketing Rule Reviews or to book a strategy call visit cssregtech.com

Confluence is a leading global technology solutions provider committed to helping the investment management industry solve complex data challenges across the front, middle and back offices. From data-driven portfolio analytics to compliance and regulatory solutions, including investment insights and research, Confluence invests in the latest technology to meet the evolving needs of asset managers, asset owners, asset servicers, and asset allocators to provide best-of-breed solutions that deliver maximum scalability, speed and flexibility, while reducing risk and increasing efficiency. Headquartered in Pittsburgh, PA, with 750+ employees in 15 offices spanning across the United Kingdom, Europe, North America, South Africa, and Australia, Confluence services over 1000 clients in more than 40 countries. For more information, visit www.confluence.com.