On June 8, 2023, the Securities and Exchange Commission’s (“SEC”) Division of Examinations (“Division”) released a risk alert (the “Risk Alert”) outlining the SEC’s broadened examination priorities with respect to revised Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”). The Marketing Rule, which became effective on May 4, 2021, with a compliance deadline of November 4, 2022, significantly reformed old advertising-related rules, and codified numerous SEC no-action letters previously applicable to registered investment advisers’ marketing practices.
Initial Marketing Rule Exam Areas of Review
The Risk Alert expands upon another SEC risk alert issued by the Division on September 19, 2022 (the “September 2022 Risk Alert”), which highlighted the following four examination focus areas with respect to the Marketing Rule:
- Marketing Rule Policies and Procedures (i.e., have advisers adopted and implemented written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder, including the Marketing Rule);
- Substantiation Requirements (i.e., do advisers have a reasonable basis for believing they will be able to substantiate material statements of facts in advertisements upon demand by the SEC, including claims about performance);
- Performance Advertising Requirements (i.e., are advisers in compliance with the performance advertising requirements under the Marketing Rule, including with respect to “predecessor,” “extracted,” and “hypothetical” performance); and
- Books and Records (i.e., are advisers in compliance with the recordkeeping requirements of Rule 204-2 under the Advisers Act, including with respect to advertisements disseminated to prospective investors and clients).
Continuing Review for Compliance with Marketing Rule General Prohibitions
In the Risk Alert, the SEC indicated it has focused, and would continue to focus, on whether advisers have complied with the general principles-based prohibitions under the Marketing Rule. Those prohibitions include, but are not limited