Publications

On September 19, 2022, the Division of Examinations (the “Division”) within the Securities and Exchange Commission (the “SEC”) published a Risk Alert identifying its areas of focus during upcoming examinations of SEC-registered investment advisers (“Investment Advisers”), specifically with respect to Investment Advisers’ compliance (mandatory as of November 4, 2022) with the SEC’s amended Rule 206(4)-1 (the “New Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”) governing investment adviser advertisements and payments to solicitors. The full text of the Risk Alert is available here. The following summarizes the areas of focus highlighted in the Risk Alert.

RISK ALERT

A. New Marketing Rule Policies and Procedures

The Division staff will review an Investment Adviser’s written policies to determine whether the Investment Adviser has adopted and implemented written policies and procedures reasonably designed to prevent violations of the New Marketing Rule. In the adopting release for the New Marketing Rule, the SEC noted that an Investment Adviser should have “objective and testable means” designed to prevent violations of the New Marketing Rule. Examples provided by the Division staff in the Risk Alert include conducting internal pre-reviews and approvals of advertisements and creating pre-approved advertisement templates.

B. Substantiation Requirement

The Division staff will review whether an Investment Adviser has a reasonable basis for believing it will be able to substantiate material statements of fact contained in its advertisements. The SEC indicated that an Investment Adviser may be able to demonstrate this “reasonable belief” in various ways, including creating a contemporaneous record along with the advertisement to demonstrate the basis for the belief, or by creating internal policies and procedures clearly identifying how the substantiation requirement will be met. In the Risk Alert the Division notes that if an Investment Adviser cannot substantiate a material claim of fact, the SEC will presume the Investment Adviser did not have a reasonable basis for its belief.

C. Performance Advertising Requirements

The Division staff will review whether an Investment Adviser’s advertisements violate the New Marketing Rule’s prohibitions with respect to inclusion of the following:

• gross performance, unless net performance is also included;

• any performance results, unless they are presented for specific time periods (*performance of private funds are excluded from this requirement);

• any statement that the SEC has approved or reviewed any calculation or presentation of performance;

• performance of any related portfolios, unless the performance of all related portfolios is included (unless excluding the related performance would not lead to a positive skew in the performance presentation);

• “cherry-picking” performance of a subset of investments from a portfolio, unless the advertisement also provides or offers to provide promptly the performance of the entire portfolio;

• hypothetical performance, unless the Investment Adviser has adopted policies and procedures reasonably designed to ensure the performance is relevant to the financial situation and investment objectives of the intended audience and the Investment Adviser provides certain other required information and

• predecessor performance, unless (i) the personnel primarily responsible for achieving the prior performance now manage accounts at the Investment Adviser, and the accounts managed by such personnel at the predecessor firm are sufficiently similar to the accounts the relevant personnel currently manage and (ii) the advertisement clearly and prominently includes relevant disclosure.

The Division staff will examine Investment Advisers’ advertisements to ensure they do not include any of the above prohibited information, and review Investment Advisers’ policies and procedures to confirm that they are reasonably designed to prevent the prohibited information from being included in advertisements.

D. Books and Records; Form ADV

In connection with the New Marketing Rule, the SEC adopted changes to Rule 204-2 under the Advisers Act (the “Books and Records Rule”). The Division staff will review an Investment Adviser’s books and records to ensure they are being kept in accordance with the amended Books and Records Rule. The SEC also amended Form ADV, now requiring Investment Advisers to provide certain information about their advertisements. In the Risk Alert, the Division staff reminded Investment Advisers of their obligations to accurately respond to the questions posed.

TAKEAWAY

In the Risk Alert the Division makes clear that compliance with the New Marketing Rule will be an area of focus for its staff in future examinations. Investment Advisers should continue to review their policies and procedures to ensure they are fully compliant with the New Marketing Rule on or before November 4, 2022. Investment Advisers who have not yet reviewed their policies and procedures in light of the New Marketing Rule should do so immediately and consider working with their compliance consultants and/or legal counsel to ensure the Adviser is fully informed of the New Marketing Rule’s requirements.

For more information on the topic discussed, contact:

• Wayne H. Davis  |  davis@thsh.com  |  212-508-6705
• Michele Itri  |  itri@thsh.com  |  212-508-6732
• Haylie Gordon  |  gordon@thsh.com  |  212-508-6745
• Beth Smigel  |  smigel@thsh.com  |  212-702-3176
• Michael G. Tannenbaum  |  tannenbaum@thsh.com  |  212-508-6701