June 14, 2023 - As described in a recent memo from Fried Frank, “Let the Marketer Beware”. More specifically, the memo notes that the SEC’s Division of Examinations has warned advisers to “review their marketing practices and advertisements to ensure compliance” with the SEC’s recently amended Marketing Rule. We noted the new rule when it was adopted in May 2021 and, in October 2022, discussed some of the challenges facing banks and CLO managers in implementing the revised rule which went into effect in November 2022.
The initial Risk Alert noted that the staff would focus on whether advisers have adopted and implemented written policies and procedures that are reasonably designed to prevent violations by the advisers; Substantiation requirement, such as whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements; whether advisers are in compliance with performance advertising requirements in the Marketing Rule; and, whether advisers are in compliance with books and records requirements; such as keeping records of all advertisements they disseminate.
The new Risk Alert goes further, focusing on Testimonials and Endorsements, Third-party Ratings, and Form ADV.
Testimonials and Endorsements. The staff is reviewing whether advisers are in compliance with requirements regarding the use of testimonials and endorsements in an advertisement, including whether: (i) 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; (ii) Oversight conditions are met, such as whether advisers have a reasonable basis for believing that the testimonials or endorsements disseminated comply with the requirements of the Marketing Rule; (iii) Written agreements are entered into, where required, such as written agreements with promoters; and (iv) Ineligible persons have been compensated for testimonials or endorsements, if the adviser knew or reasonably should have known the person was ineligible.
Third Party Ratings. The staff will review whether advisers are in compliance with requirements regarding the use of third-party ratings in advertisements, including: (i) whether the adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosure the timing of the rating, who provided and tabulated the rating, and, if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining the rating; and (ii) whether questionnaires or surveys used in preparation of a third-party rating meet certain conditions, such as that the adviser has a reasonable basis for believing that such questionnaire or survey is structured fairly and appropriately and is not designed or prepared to produce any predetermined result.
Form ADV. The Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices and the staff will review whether advisers accurately completed these questions in their annual Form ADV amendments.
