On April 17, 2024, the SEC provided Registered Investment Advisers (RIAs) with its observations regarding firms’ compliance with the Marketing Rule. It is imperative for RIAs to take note of those observations and to be observant as they implement their compliance programs. By sharing these observations in the risk alert, the SEC’s Division of Examinations is strongly encouraging investment advisers “to reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.”
Observations Regarding RIAs’ Policies and Procedures
Examiners observed a number of instances where RIAs’ policies and procedures were not reasonably designed or implemented to foster compliance with the Marketing Rule. Examiners encountered firms whose policies and procedures:
- Consisted only of general descriptions and expectations and did not require compliance tests intended to identify unusual patterns;
- Did not address the marketing channels utilized by the RIA, such as websites and social media;
- Were informal instead of being in writing;
- Were incomplete and not current;
- Were not tailored to address the RIA’s specific advertising content, such as testimonials, endorsements, and third-party ratings;
- Did not adequately address preserving and maintaining advertisements and related documents; and
- Were updated in response to the Marketing Rule but were not implemented.
The risk alert offered the example of an RIA whose compliance manual required it to include net-of-fees performance when advertising returns. However, the firm’s advertisements only included gross-of-fees performance.
Observations Related to Books and Records
Examiners observed that most RIAs had updated their policies and procedures to ensure compliance with the Marketing Rule’s books and records requirements. Nevertheless, certain advisers failed to retain copies of questionnaires or surveys submitted to obtain a third-party rating. Some advisers failed to maintain social media posts. In addition, examiners identified RIAs that did not maintain documentation to substantiate performance results advertised.
Observations Related to Form ADV
Examiners discovered that certain RIAs inaccurately reported on Form ADV, Part 1A, that they did not advertise:
- Third-party ratings;
- Performance returns; and
- Hypothetical performance.
Examiners also learned that some RIAs were still referring to the prior Cash Solicitation Rule in their Form ADVs. Certain RIAs reported having no referral arrangements, which was inaccurate. Other RIAs omitted compensation information related to referral arrangements and did not disclose material terms.
Observations Related to the Seven General Prohibitions in the Marketing Rule
Not surprisingly, the risk alert focused on the seven general prohibitions in the Marketing Rule and whether RIAs violated any of them. Here are some of the violations that examiners found:
Untrue or unsubstantiated statements of a material fact
- The RIA’s advertisements stated that the firm had no conflicts of interest, which was not the case;
- Advisers embellished their qualifications or boasted that they had a network of personnel performing advisory services, which was not true;
- Material facts about advisory services or products were misstated, such as claiming the firm adhered to investment mandates or purportedly used securities screening processes that did not exist; and
- Advisers falsely claimed that they had received certain awards or accolades.
Omission of material facts or misleading inference
- RIAs advertised that they were different from other advisers because they acted in clients’ best interest but did not disclose that all investment advisers owe a fiduciary duty;
- Advertisements recommended certain investments without disclosing the RIA’s conflicts of interest, such as the compensation paid to or received by the advisers for making those recommendations;
- Advertisements that contained untrue or misleading claims, such as stating that the advisers were “seen on” national media without disclosing that the RIA paid for those appearances;
- Advertisements containing images implying that celebrities endorsed the RIA, which was not the case;
- Advertisements containing untrue or misleading performance claims, such as applying lower fees in net-of-fees performance calculations than were offered to the intended audience;
- Advertisements mentioning advisers’ registration status to imply that SEC registration demonstrated a particular level of skill or ability, or that the Commission had approved of the RIA’s business practices;
- Misleading advertisements of third-party ratings;
- Misleading testimonials; and
- Misleading performance advertisements, such as comparisons to an index without defining it or not disclosing that the benchmark results did not include the reinvestment of dividends.
Fair and balanced treatment of material risks or limitations
Examiners observed advertisements that included statements about the potential benefits of the RIA’s services or methods of operation without providing fair and balanced treatment of any material risks or material limitations arising from them. For example, certain social media advertisements highlighted performance returns without disclosing the potential risks and limitations.
References to specific investment advice were not always presented in a fair and balanced manner. Certain RIAs only advertised their most profitable investments. Some RIAs specifically excluded certain investments without providing sufficient information and context to evaluate why they omitted them from the advertisement. Examiners further noted that some RIAs had not established criteria in their policies and procedures to ensure that references to specific investment advice were presented in a fair and balanced manner.
Inclusion or exclusion of performance results or time periods in manners that were not fair and balanced
Examiners observed advertisements that included or excluded certain performance results or presented performance time periods in ways that were not fair and balanced. As an example, some RIA advertisements included only realized investment data in the total net return and ignored unrealized investments.
Advertisements that were otherwise materially misleading
The seventh general prohibition is a catch-all provision. Examiners observed situations where the RIA’s advertisements were materially misleading but did not violate any of the first six general prohibitions. For example, an RIA violates this provision if it presents disclosures in an unreadable font on websites or in videos.
Takeaways
Smart Chief Compliance Officers will use risk alerts to evaluate their supervisory, compliance, and other risk management systems. They will utilize guidance in risk alerts to enhance their compliance programs. Always remember that the strongest policies and procedures are meaningless if they are not fully implemented by the RIA.
The Risk Alert is available here.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 – sales@ria-compliance.com
Recent Comments