EXAMS’ Initial Observations — The Amended Marketing Rule
The Division of Examinations or EXAMS published a risk alert on April 17, 2024, regarding the amended Marketing Rule for investment advisers, Rule 206(4)-1. The Observations are divided into two sections. The first focuses on books, records and Form ADV. The second centers on the general prohibitions of the Rule. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.
Book, Records and Form ADV
The staff observed situations in which the policies and procedures were not reasonably designed or implemented to address the amended Marketing Rule. For example, in certain instances the policies and procedures consisted only of general descriptions, did not address applicable marketing channels utilized by the adviser or were informal and not in writing.
In other instances, the policies and procedures were not complete or updated. In others, they had not been tailored to the adviser’s specific advertisement while in certain instances failed to address adequately the preservation and maintenance of the advertisement and the related documents. In some instances, the updated policies and procedures had not been implemented.
The staff also observed situations in which the policies and procedures had been updated but the related books and records had deficiencies. This occurred in situations where, for example, materials referenced had not been maintained such as questionnaires or copies of social media or the documents that supported performance claims.
In some instances, there were deficiencies on Form ADV where the adviser reported, for example, that their advertisements did not include third party ratings, performance results and hypothetical results when in fact they did.
General Prohibitions
Here the staff observed deficiencies such as including untrue statements of a material fact or unsubstantiated statements of a material fact in an advertisement. Similarly, the staff observed instances where the advertisement appeared to omit material facts necessary to make the statement not misleading or to avoid a misleading inference.
The staff also observed situations where a fair and balanced treatment of material risks or limitations about the potential benefits were not adequately set forth. For example, there were instances observed where performance information was highlighted without discussing the material risks and limitations. In some instances involving specific investment advise, the presentation did not appear fair and balanced. Similarly, in some instances there were performance results which were not fairly balanced or where the presentation was materially misleading.
In the end, while many advisers had implanted the amended Marketing Rule, the staff did observe points that should be addressed further and detailed above. Throughout the Alert, the staff has included examples of each of the points presented which aid in clarifying the observation.