Multiple sources have told affiliate title Regulatory Compliance Watch that the Securities and Exchange Commission has launched its long-anticipated Division of Examinations (DoE) sweep tied to the IA marketing rule.
RCW has obtained a copy of what is described as the sweep exam letter, as well as a second recent exam letter that includes even more marketing-related questions and suggests the agency has reasoned that advisers have had enough time to demonstrate compliance with revised Advisers Act rule 206(4)-1 (IA marketing).
Of course, other exams earlier this year have dipped into marketing compliance post the new marketing rule, but a sweep signals a concerted campaign to judge firms’ compliance with marketing.
The sweep exam letter
A sign that supports the interpretation that the new letter is the sweep exam letter is that the exam period cited by the DoE begins November 4, 2022 – the date of formal implementation of the marketing rule.
There are many similarities between the sweep letter and the second exam letter obtained by RCW. Both exams are current and ongoing. For instance, both letters contain definitions of key marketing terms, from what is and isn’t an advertisement to a “third-party rating.”
Both letters also veer off into other compliance topics as well. For instance, the sweep letter – which came out of the SEC’s New York Regional Office – asks about remote offices and branches and other business “arrangements.”
Examiners also wanted to know what tools compliance uses, plus a “list of all compliance testing performed.” Perhaps as an indicator of the SEC’s interest in the use of artificial intelligence, both letters request a “list of any automated systems or tools used to carry out compliance-related oversight.”
Notes from CCOs
RCW also spoke this week with two CCOs at advisory firms who are shepherding their firm’s current SEC exams. One CCO – at a firm that advertises GIPS compliance – reported being surprised at how interested examiners are about the firm’s documentation around GIPS.
The second CCO emphasized that examiners “wanted to know specifically when you implemented the [marketing] rule.” You may recall firms could have adopted the marketing rule ahead of that Nov. 4th effective date. However, they had to have new compliance P&Ps in place and comply fully with the new rule. Be aware that if you engaged the new rule early, examiners may insist on seeing evidence that you were fully prepared to comply with the marketing rule as of that time.
The sweep letter asked about staff training on the new marketing rule. As with other recent exam letters that probed marketing, this letter sought an “inventory” of all adviser ads, and provided a long list of examples, including “mass emails or form letters.”
The adviser was asked to hand over a list of all “seminars, conferences, luncheons, dinners, functions, tournaments, or other similar events” where adviser advertisements were distributed. “If the event was recorded, please indicate whether it was made available to” clients or investors, the sweep letter reads.
A similar request follows for any events attended by the adviser or where the adviser “presented.”
As with similar recent exam letters, this one asks for a “list of all parties compensated (through cash or non-cash benefits) for referring” clients to the adviser or to “raise capital.” This same section asks about use of testimonials and endorsements, and probes the fees paid and total cash and non-cash compensation provided, whether the compensated party is an adviser affiliate and the names of clients referred to the adviser or who “invested in any Private Fund.”
Exam letter #2
The second exam letter runs much longer than the sweep letter. Both begin with a glossary, one that, for example, notes that use of certain interactive analysis tools don’t produce hypothetical performance marketing.
Its marketing section asks for advertisements maintained by “a third-party on behalf of the Adviser for advertisements created by its IARs.” This exam letter, which comes from a different SEC regional office, still closely matches the sweep letter when it comes to marketing queries, eg, asking about audio and video programs, newsletters, testimonials, etc.
This letter actually asks for more marketing items than the sweep letter and digs deeply into the use of performance composites (e.g., any “change(s) made to the composite” and whether “the composite was included” in any ads). Oddly, its long glossary doesn’t define a performance composite.
Examples of non-marketing inquiries from this exam include for the adviser to flag any clients who hold private fund accounts and to “provide the fund’s name and indicate whether it is managed or Affiliated with the Adviser.”
Other topics of examiner interest:
- A list of all committees and their members, and whether the committees keep minutes
- If the adviser, an affiliate or “a Supervised Person has full power of attorney” over any client accounts
- Any recent contract or fee schedule changes made to its standard advisory contract, and what these changes were
- Compensation and “outside” compensation to key staff
As the SEC announces a new round of settlements in its electronic communications sweep, this exam letter sought any “steps taken by the Adviser to monitor, review, and retain electronic communications related to the Adviser’s business.” The firm was asked if “supervised persons are permitted to use personal devices for firm business,” and what steps the firm takes to approve such use.
Editor’s note: RCW has shared other DOE exam letters tied to marketing after the new rule took effect. Here’s one and a second.
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