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The SEC sweeps, the SEC scores – five further firms fined under Marketing Rule

The SEC has fined five registered investment advisers for hypothetical performance advertising, hindering their consumers’ ability to make an informed judgment around financial decisions. Now, the regulator is spelling the dos and don’ts of the Marketing Rule.

25 April 2024 5 mins read
By Aarti Agarwal

In brief:

  • Five investment advisers have been fined a combined penalty of $200k as a result of violating the SEC’s Marketing Rule
  • As a result, the SEC has issued a risk alert to highlight the shortcomings of existing policies and procedures firms already have in place
  • Investment advisers must look to implement proper policies and procedures in place when advertising hypothetical performance to prevent investors from drawing an erroneous conclusion

Misinform, mislead, misrepresent

Five registered investment advisors [RIAs] have been fined a collective civil penalty of $200,000 for violating the Securities and Exchange Commission’s [SEC] Marketing Rule 206(4)-1. The rule ‘prohibits an investment adviser from disseminating any advertisement that includes any presentation of gross performance, unless the advertisement also presents net performance’.

All five firms advertised their hypothetical performance on their websites without implementing obligatory policies and procedures, designed to protect investors from being mislead by firms. These regulations are positioned to ensure that any marketing released by these companies was relevant to the financial situation and investment objectives of their intended audience.

Gurbir Grewal, Director of the SEC’s Division of Enforcement’, stated in 2023 that:

“Because of their attention-grabbing power, hypothetical performance advertisements may present an elevated risk for prospective investors whose likely financial situation and investment objectives don’t match the advertised investment strategy.”

The SEC sweep into Marketing Rule violations was offset by an almost identical case in 2023, where nine investment advisers were charged a sum of $850,000 for violating this same rule. In both cases, the bulk of the fine was paid by those firms who not only displayed hypothetical performance advertising, without being able to substantiate their performance, they failed to preserve required copies of their advertisements.

In the 2024 case, one investment adviser failed to also enter into a written agreement with the people it compensated for its endorsements. The other four firms, were granted reduced penalties as they took corrective action in advance of being contacted by the SEC. Thus, demonstrating that accountability by firms goes a long way in the eyes of the regulator. Less than twelve months later and the industry is still seeing mistakes being repeated and rules being broken.

Hypothetical or deceitful?

In turn, the SEC has placed the Marketing Rule high up on its list of examination priorities, and the SEC’s Division of Examinations release of a new risk alert is a testament to just this. This report reveals that several concerning practices still persist:

  • Misleading advertising tactics that incentivize an audience ill-prepared to invest in the way being promoted by investment advisers
  • Inadequacies in policies in procedures oriented around marketing rule compliance, as they consisted of general descriptions, informal and were not officially and formally documented
  • RIAs are not addressing all applicable marketing channels used by advisers
  • Policies were not up to date, and if they were it was only for certain applicable marketing topics
  • Policies did not adequately address the need for recordkeeping of ads and all documents related such as questionnaires or surveys used in the preparation of a third-party rating.
  • Omission of material facts, where advisers did not disclose national media appearances were in fact paid ads, and stated they were acting in the ‘best interest of clients’ without disclosing all investment advisers have a fiduciary duty to act in this way regardless.

Fair and balanced

It is clear that other investment advisers can implement certain measures to ensure that they too will not fall victim to the Marketing Rule. Where there is a large emphasis placed on hypothetical advertising promoting a dishonest picture of firms’ performance model, RIAs should look to create a process for advertisement review before dispersal. These ads must also be preserved and maintained, in order to adhere to recordkeeping rules. In addition, the SEC has placed a large amount of importance unto providing a ‘fair and balanced’ treatment of any material risks of limitations associated with the potential benefits a company may sell as a product.

The time has come for firms to reflect upon their practices, policies and procedures, and appropriately modify their marketing functions to meet compliance regulation properly.

The SEC has made it’s attitude on transparency clear, not only by implementing regulation that reflects this, but also taking an active stance towards ensuring that firms and RIAs are held accountable. Whilst, firms grapple with this new territory, and look to readjust their strategies to comply, the regulator must provide room for growth and change.

As regulators seek to source violations of the Marketing Rule, those firms that seek to course correct must look to co-opt a reliable and effective solution to capture, monitor and preserve all marketing and communications data. Remain regulator ready with Global Relay on your side.