The SEC has always been at the forefront of regulating firms, ensuring they maintain good marketing practices. Its risk alerts play an instrumental role, offering firms the much-needed guidance to prepare for impending examinations.
With the marketing rule’s extensive ramifications, firms are now urged to reconsider and, in many instances, adjust their protocols, performance advertising, books, general marketing bans, testimonials, third-party rankings, and their Form ADV submissions.
The SEC has already made its presence felt by conducting on-ground examinations for compliance with the marketing rule. Interestingly, only one fine has been imposed as of the time of writing this piece. Feedback from industry peers and clients resonates with a common theme – a dire need for more direction.
Many firms have decoded the rule, but there remains an appetite for more in-depth details for its application. Fortunately, two Risk Alerts have surfaced, offering some insight into the SEC’s primary areas of concern. The first Risk Alert emerged in September 2022, outlining the initial sectors under review. Fast forward to June 2023, another Risk Alert saw the light of day, emphasising further areas under the scanner.
These alerts underline the significance of regulatory requirements and throw light on the intricate link between a firm’s marketing approaches and its scope. It added that firms should prepare by self-auditing on the following areas.
- Policies and procedures: Do they exist in written form, aimed at thwarting violations of the Advisors Act and the Marketing Rule by advisors and the individuals they oversee? Are they reformed in line with the rule’s principles?
- Substantiation: Can advisors validate material facts stated in advertisements? Is there adequate evidence backing these claims?
- Performance advertising: Are the advisors in sync with the advertising norms established in the marketing rule?
- Books and records: Are they maintaining essential records like advertisements disseminated, performance data, and credentials for verbal advertisements?
- General marketing prohibitions: Are the advertisements devoid of any violations? Are they transparent, comprehensive and fair?
- Testimonials and endorsements: Are the guidelines on the use of testimonials and endorsements in ads being followed?
- Third-party ratings and Questionnaires: If employed in advertisements, do they meet the defined criteria? Are the surveys unbiased?
- Form ADV: Are additional details regarding their marketing practices being included?
Taking cues from the SEC’s Risk Alerts, firms should consider an internal mock audit. This not only equips teams to showcase compliance but also helps in identifying weak spots before a formal audit is undertaken. Although it might seem like a daunting task initially, it’s an invaluable learning opportunity. So, the logical next step? Sync up with your legal and compliance departments to revisit your materials and processes and strategise for a potential assessment.
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