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Exams: A 10 Point Supplement to Prior Advisory Risk Alerts

Exams: A 10 Point Supplement to Prior Advisory Risk Alerts

T. GormanPosted on July 12, 2023 Posted in SECActions

Examinations published a Risk Alert focusing on additional areas of the Adviser Marketing Rule that will be focused on during examinations. The supplement was published on July 8, 2023 (here) and should be considered in conjunction with the others published by the Division.

It begins with a recap of the initial areas of focus. Those include:

1) Policies and procedures – the question begins with if the adviser has adopted them and they are in writing;

2) Substantiation requirement – key is if the adviser has a reasonable basis for believing they can back-up material statements of fact in advertisements;

3) Performance advertising requirements – critical is if the adviser is in compliance with performance advertising requirements in the Marketing Rule; and

4) Books and records – it is always a focus issue to determine if the adviser is maintaining the required books and records, particularly in select areas.

The Division is encouraging advisers to review their websites and other marketing materials to ensure compliance. Exams emphasized that advisers should ascertain if their written policies and procedures are reasonably designed to prevent violations.

Testimonials and endorsements is a second key area addressed by the Alert. Points for consideration are:

1) Disclosures – these should include the identification of the person giving the testimonial and their relationship, if any, to the advisory and if compensation is paid;

2) Oversight –if the adviser has a reasonable basis for believing the testimonials comply with the Marketing Rule is a critical point;

Written agreements – if they have been entered into where required;

4) Ineligible persons compensated – if the adviser knew or should have known that ineligible persons such as “bad actors” have been compensated.

The next area of focus is third-party ratings. Here two points are key:

1) Critical facts for third-party providers – the focus is on key details such as when the rating was done, the time period and, if applicable, the compensation involved;

2) Construction for, or predicate of, surveys – does the advisor have a reasonable basis for believing the survey or questionnaire is structure so that it is just as easy to be on one side as the other is the critical question.

Finally, the Division will focus on if Form ADV meets not just the traditional requirements but also those recently amended or added. Overall, the new Alert provides advisors with 10 key points of focus not just for a visit by Exams, but also for evaluating the advisory.

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Prepared:

Thomas O. Gorman

DC Attorney specializing in securities
and other agency litigation

Former SEC Senior Counsel, Enforcement
and Special Trial Counsel, GC Office
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