The Securities and Exchange Commission (SEC) is delivering on its promise to be laser-focused on the new Marketing Rule, after recently releasing a new Risk Alert that zeros in on testimonials and endorsements, third-party ratings, and Form ADV.
In addition to what the staff has already announced that it is looking into, such as policies and procedures, performance advertising requirements, and books and records, they are now also conducting focused examinations, as well as broad reviews, for compliance with the following areas:
Testimonials and Endorsements
The staff is reviewing whether advisers are in compliance with the Marketing Rule requirements regarding the use of testimonials and endorsements in an advertisement, including 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.
- 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.
- Written agreements are entered into, where required such as written agreements with promoters, unless the promoters are applicable affiliates of the advisers and such affiliation is readily apparent or disclosed or the promoters receive de minimis compensation (i.e., $1,000 or less, or the equivalent value in non-cash compensation, during the preceding twelve months).
- Ineligible persons have been compensated for testimonials or endorsements, if the adviser knew or reasonably should have known the person was ineligible, including certain “bad actors” that are prohibited from acting as promoters.
The staff will review whether advisers are in compliance with the Marketing Rule requirements regarding the use of third-party ratings in advertisements, including:
- The adviser provides or reasonably believes that the third-party rating provides, clear and prominent disclosure of: (i) the date on which the rating was given and the period of time upon which the rating was based; (ii) the identity of the third party that created and tabulated the rating; and (iii) if applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.
- 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 to make it equally easy for a participant to provide favorable and unfavorable responses, and is not designed or prepared to produce any predetermined result.
The Commission amended Form ADV to require advisers to provide additional information regarding their marketing practices. The staff will review whether advisers accurately completed these questions in their annual Form ADV amendments.
To read the complete risk alert, click here.