What the SEC is Scrutinizing in Its Marketing Rule Exams

An expert panel at the Investment Adviser Association’s 2023 Investment Adviser Compliance Conference explained some of the main areas of focus for the Securities and Exchange Commission’s new marketing rule, which came into effect in November 2022. In particular, panelists warned financial advisers to be sure they can substantiate material facts used in their advertising materials.

Mark Perlow, a partner in the Dechert LLP law firm and a former SEC senior counsel, explained that the SEC will be especially interested in stated facts that relate to performance, ratings by outside parties and the newly allowed use of testimonials and endorsements.

Carlo Di Florio, a partner and global advisory leader at the compliance advisory firm ACA Group, who spoke at a later panel, said SEC officials will be looking closely at marketing materials, including social media posts, in its exams. Regulators will especially be looking at targeted marketing and any references to projected or past investment performance.

Perlow noted that advertising that includes material statements of fact for which the adviser lacks a reasonable basis for believing can be substantiated is the only general prohibition listed in the SEC’s recent risk alert on the marketing rule. In fact, it was the second violation listed in the alert after not maintaining policies and procedures.

The risk alert also says that “if an adviser is unable to substantiate the material claims of fact made in an advertisement when the Commission demands it, we will presume that the adviser did not have a reasonable basis for its belief.” The alert underlined the importance of providing net performance for stated time periods when using gross performance in marketing materials.

The panel also discussed an FAQ published in January by the SEC which said that when advisers market a single fund and a group of investments together, they must show the net performance of both the group and individual investments if they show gross performance. This is intended, in part, to prevent misleading marketing in which underperforming funds are bundled with others to conceal their low performance. Net performance must always be shown alongside gross performance, whether the asset is presented alone or in combination with others.

Thoreau Bartmann, the co-chief counsel at the SEC’s division of investment management, clarified some confusion in the industry about social media interactions that might be construed as an endorsement, which would in turn be covered by the marketing rule. Specifically, he said that merely allowing likes or shares on social media posts does not constitute an endorsement. Also, removing third-party content based on pre-established criteria such as false information or profanity does not automatically make remaining materials, such as comments, an endorsement of their substance.

Danielle Nicholson Smith, vice president and managing counsel at T. Rowe Price, cautioned that comments left on posts from employees of the adviser could be an endorsement and could even turn something that was not intended as an advertisement into an advertisement under the marketing rule. Since employers cannot monitor everything, she said employee training will be key.

She also recommended focusing on substantiating data-based claims rather than claims about an investment’s goals or objectives. Claims on objectives must still be proven, but they are not as tedious to demonstrate. She said advisers should keep separate files on any claims they make that would require substantiation under the rule, so that they can be substantiated and quickly provided to the SEC on demand.