SEC Marketing Rule Enforcement Actions Could Be on Their Way
In 2023, examiners are reviewing marketing materials “provided to highly sophisticated private fund investors and separately managed accounts for institutions,” the attorneys state.
Gottschall, former director of the SEC’s Denver office, and Addleman, former director of the SEC’s Atlanta office, added that they’ve been “struck by the breadth” of marketing rule requests by examiners.
“Every SEC examination is supposed to be risk-based, so the staff always face tradeoffs as to the number of issues they review versus the depth,” the attorneys said. “In FY 2023 exams, the staff seems to be devoting significant time to Marketing Rule compliance in initial request lists, interviews with firm personnel, and then follow-up document requests.”
SEC examiners are “asking certain investment advisors to produce documents relating to their hypothetical performance advertising and to preserve additional documents reflecting all of their policies, procedures and ads” following the mandatory Nov. 4 compliance date, the attorneys said.
The SEC has also focused its attention on firm “websites and other broadly disseminated advertisements that include various forms of hypothetical performance, including: (1) model portfolios; (2) backtested application of strategies; and (3) the projected performance of portfolios or strategies,” Gottschall and Addleman said.
Exam Focus
The Risk Alert the SEC exam staff released last September sets out specific areas the agency will be looking at during initial exams, Lamba explains. One focus area is on making sure advisors “can substantiate material statements of fact in their marketing materials.”
The SEC exam sweep also zeroes in on written policies and procedures, performance advertising and books and records.
Maureen Kiefer-Goldenberg, senior vice president of compliance at Mariner Wealth Advisors, said on the webcast with Lynch that “there’s not a lot of meat” to the SEC’s updated FAQ released in January.
State-registered firms, Kiefer-Goldenberg said, may also be having a tough time complying with the new marketing rule, as only Arkansas, Massachusetts, Rhode Island and Wyoming have issued harmonized rules.
Lamba of IAA agrees that the SEC’s updated FAQ distributed in January to clarify an issue involving gross/net performance “has thrown a monkey wrench into the compliance programs” of many advisors.
Many advisors “devoted significant resources and effort, including obtaining advice from outside counsel, to try and address an issue that was unclear and known to the staff prior to the compliance date,” Lamba said.
The updated FAQ, however, came out “with a different position than advisers had taken in good faith,” he continued. “Exam staff then tell them — through a formal written deficiency — that despite making good-faith determinations on how to comply, they got it wrong.”
Firms “are now having to spend more time and money to change their compliance programs to reflect the staff’s view in the FAQ,” Lamba said.
The FAQ, Lamba said, “raised additional uncertainties.”
Senior SEC officials were able to provide some additional clarity during a recent IAA event, according to Lamba.
For example, Lamba said, according to SEC staff, “a table showing the gross performance of all individual holdings in a portfolio must include the net performance of each of the individual holdings.”
