SEC Examiners Turn Up the Heat on Marketing Rule Compliance

Jun 8th '23

  • SEC’s new risk alert shows examiners will be taking a comprehensive look.
  • The agency is conducting broad reviews on areas including testimonials and endorsements, third-party reviews and Form ADV.
  • It’s important for advisors to be able to back up the claims in their marketing materials.


The U.S. Securities and Exchange Commission is beefing up exams of advisors’ compliance with its new Marketing Rule by zeroing in on testimonials and endorsements, third-party ratings and Form ADV, the agency warned Thursday.


In a just-released risk alert, the agency’s exam division warns that while it will continue to focus on policies and procedures, substantiation, performance advertising and books and records, exam staff is now “increasing its focus” on other Marketing Rule-related areas.


With its new alert, SEC examiners “will be undertaking a comprehensive approach” to assessing compliance with the Marketing Rule, Issa Hanna, partner at Eversheds Sutherland’s New York office, said Thursday in an email.


The new risk alert sets out areas of focus not listed in the agency’s alert released in September, adds Sara Crovitz, partner at Stradley Ronon in Washington. The SEC “says that now Exams will look at everything.”


As reported in May, industry attorneys warned that SEC exams have uncovered Marketing Rule compliance deficiencies, with some sent to the SEC’s enforcement division, and that the ”breadth” of marketing rule requests by examiners has been significant.


Amy Lynch, president and founder of FrontLine Compliance, said in another email that the new alert “reinforces what we’ve seen from examiners regarding the need to be able to substantiate claims made in marketing materials by having the backup data on hand.”


Further, Lynch said, “it is now clear that current and future exams of advisors will focus on these areas so any firms using testimonials/endorsements or third-party ratings should be prepared now. It is especially important for advisors using questionnaires for ratings to be able to prove that the questionnaire was not so biased as to produce a known result in favor of the advisor.”


‘Serious’ Marketing Rule Deficiencies

Sanjay Lamba, associate general counsel for the Investment Adviser Association in Washington, told me in May that IAA had “very recently learned that the [SEC] exam staff has found serious [marketing rule-related] deficiencies on a large number of exams — with some being referred to the SEC enforcement staff.”


The risk alert the SEC exam staff released last September included making sure advisors “can substantiate material statements of fact in their marketing materials,” Lamba said.


The SEC said at the time that it would also zero in on written policies and procedures, performance advertising and books and records.


While the compliance date was Nov. 4, the SEC’s advertising and marketing rule has been in effect since May 2021.


In its new risk alert, the agency explained that it is now conducting “focused” exams — as well as broad reviews, which include testimonials and endorsements, third-party reviews and Form ADV.


As to testimonials and endorsements, the SEC explains that it will look to see whether disclosures are provided, “including clear and prominent disclosure of whether the person giving the testimonial or endorsement (the ‘promoter’) 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 arrangements 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 advisor 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;
  • the identity of the third party that created and tabulated the rating;
  • if applicable, that compensation has been provided directly or indirectly by the advisor in connection with obtaining or using the third-party rating; and
  • if questionnaires or surveys used in preparation of a third-party rating meet certain conditions.


“With respect to these new areas of review, it will be interesting to see what the staff’s expectations are regarding the ‘clear and prominent’ requirement with respect to promoter and third-party rating disclosures,” Hanna said.


Hanna said he’s also curious as to how examiners “apply the oversight requirement with respect to compensated promoters, as well as the reasonable inquiry requirement with respect to questionnaires used by publishers of third-party ratings.”


Kurt Gottschall, partner at Haynes Boone in Denver, said that “for past exams, it’s telling that this [new] risk alert encourages advisors to review their websites, particularly with respect to performance advertising that includes extracted performance or hypothetical performance.  That level of specificity suggests the exam staff is seeing weaker compliance in those areas.”


Gottschall, former director of the SEC’s Denver office, added that the new areas of focus — testimonials, endorsements and third-party ratings — “all relate to what others are saying about advisers. The SEC exam staff appears to be concerned that registrants’ early focus on performance advertising may have left gaps in compliance for the other parts of the Marketing Rule.”


The SEC amended Form ADV to require advisors to provide additional information regarding their marketing practices, so exam staff will review whether advisors “accurately completed these questions in their annual Form ADV amendments,” the risk alert states.


Inclusion of Form ADV disclosures is also notable, Gottschall added, “because the SEC’s current senior leadership has not shied away from citing exam deficiencies and even bringing enforcement actions regarding relatively minor inaccuracies.”


Source: ThinkAdvisor. Author: Melanie Waddell.


About the author:

Melanie is Washington Bureau Chief, Investment Advisory Group. She also covers regulatory and compliance issues. Her column, The Playing Field, appears in Investment Advisor and on, and she also writes the briefing and produces the podcast, Human Capital. Earlier in her career, Melanie covered financial issues at American Banker/Thomson Media publications in Washington and New York. She also wrote freelance articles for Institutional Investor in New York. You can reach her at On twitter: @Think_MelanieW


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