In April 2024, the Securities and Exchange Commission’s Division of Examinations (“EXAMS”) posted another Risk Alert concerning the Marketing Rule (Advisers Act Rule 206(4)-1). This was EXAMS’ third Risk Alert about the rule, following those it published in June 2023 and September 2022. While I did not find anything in this trilogy that compared to Darth Vader against Luke Skywalker or Indiana Jones against, well, anybody, registered investment advisers (RIAs) are well-served to note EXAMS’ recurring message of substantiation and recordkeeping. To wit:
Nevertheless, the staff observed Marketing Rule-related books and records deficiencies, including: [a]dvisers completed questionnaires or surveys used in the preparation of a third-party rating but did not maintain a copy of such questionnaires[;] [a]dvisers did not maintain copies of information posted to social media[; and] advisers did not maintain documentation to support performance claims included in advertisements.
April 2024 Risk Alert at 2.
As previously announced, the staff has been reviewing the following areas: . . . [s]ubstantiation requirement, such as whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
June 2023 Risk Alert at 2.
The Marketing Rule prohibits advertisements that ‘[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission’.
September 2022 Risk Alert at 2.
None of this should come as a surprise. Advisers Act Rule 204-2 requires an RIA to keep, among other things, various records for the marketing it creates. See Rule 204-2(a)(16).
So what does this mean?
I once worked for a lawyer who was fond of saying something to the effect of “it does not matter if it is a velvet painting of dogs playing poker or Michelangelo’s David, it is still art.” I think that it is useful tactic here. Substantiation can mean different things to different people, but all can agree that it means something. And something does not have to be elegant. If you have put together an article from different sources, then scan those articles for your backup file. If these from the internet, then put the relevant links in a Word document in your files, or better still, print those articles to .pdf for the file. (No, Dr. Rick, I am not recommending that anyone print the internet. ) If you have put together a spreadsheet for certain calculations, then keep that spreadsheet in the file.
Dogs playing poker indeed.
Because broker-dealers, registered investment advisers and their associates want to spend their time serving their clients, not their regulators.
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