Nine More Advisers Face $1.24 Million Fallout from SEC’s Marketing Rule Sweep
September 30 is the SEC’s fiscal year-end, so it’s no surprise to see an uptick in enforcement cases this month. The latest slew of settlements involved violations of the Marketing Rule (Advisers Act Rule 204(4)-1) for “untrue or unsubstantiated statements of material fact or testimonials, endorsements, or third-party ratings that lacked required disclosures.”
The trend is undeniable. Since the Marketing Rule was enacted in November 2022, the SEC has brought a steady flow of enforcement actions against advisers for Rule violations. Most of these initial settlements charged advisers with using hypothetical performance on the websites without adopting policies and procedures required under the rule. (See August 2023 (first settlement with Marketing Rule violations charged), September 11, 2023 (nine advisers charged), and April 12, 2024 (five advisers charged). By announcing multiple settlements involving the Marketing Rule, the SEC is keeping compliance with the Marketing Rule on every advisory firm’s radar screen.
The prior cases focused on the firms that advertised hypothetical performance on their websites without having the required policies and procedures. The current nine settlements, however, delve into other aspects of the rule, including unsubstantiated statements about conflict-free advice, misleading endorsements and testimonials, and third-party ratings that could not be substantiated or failed to include required disclosures.
The lessons from these cases include:
- All advisers have conflicts of interest. According to the SEC, the fact that an adviser gets paid a fee for providing advice is a conflict; therefore, no adviser provides “conflict-free” advice. Firms should instead stick to facts they can prove in advertisements, such as discussing an investment process that considers the client’s investment goals and the costs of appropriate investment products.
- Advisers cannot rest on their laurels. In several cases, advisers used ratings more than five years old. The older the rating, the less the SEC likes to see it advertised. As noted in the Final Release of the Marketing Rule, “Ratings from an earlier date, or that are based on information from an earlier period, may not reflect the current state of an investment adviser’s business. An advertisement that includes an older rating would be misleading without clear and prominent disclosure of the rating’s date.”
- Check your facts. In one case, the adviser used statements on its website labeled testimonials, one from a person who was no longer a client and the second from a person that the firm could not verify had ever been a client. Firms using testimonials should adopt a process to confirm whether the individual mentioned in the advertisements is a current client and to update ads when that client leaves.
- Get the disclosures right. The Marketing Rule stipulates that firms use specific disclosures for testimonials, endorsements, ratings and rankings. In most cases, the advisers were cited for failing to include disclosure mandated by the rule. Now is the time for firms to take a fresh look at their existing marketing materials to ensure they include the required disclosures.
Marketing is always a high-risk activity for investment advisers. The current sweep just raises the stakes.
Photo by Alek Burley on Unsplash
Table of Contents
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Regulatory Roundup for September 2024
FinCEN added to advisers’ compliance burden this month by imposing new anti-money laundering policies and procedures for January 1, 2026. The SEC also ended its fiscal year with more heart attack-inducing fines against 11 broker-dealers, investment advisers and a dual registrant for “widespread and longstanding failures” for using unapproved electronic communications methods, known as “off-channel communications.” In a surprise move, the Commission announced the first settlement where an adviser received no penalty for its record-keeping failures, presumably because of its self-reporting and selflessness by helping the SEC build a case against another firm. The SEC also continued its “broken windows” regulatory approach by announcing settlements with 11 investment managers for failing to file Form 13F and 13H with civil penalties exceeding $3.4 million. We wrap up with a case showing that the SEC has not given up on its assault on private funds, charging a firm with fraud for singling out some of its investors for preferential treatment.
Nine More Advisers Face $1.24 Million Fallout from SEC’s Marketing Rule Sweep
September 30 is the SEC’s fiscal year-end, so it’s no surprise to see an uptick in enforcement cases this month. The latest slew of settlements
Regulatory Roundup for August 2024
This month’s big news from the SEC was more piggy-bank breaking fines against 26 broker-dealers, investment advisers and dual registrants for “widespread and longstanding failures” for using unapproved electronic communications methods, known as “off-channel communications.” The SEC’s Marketing Rule (Advisers Act 206(4)-1) enforcement continued with a settlement involving an investment adviser for using hypothetical performance on its public website. Next, in a case undoubtedly meant to serve as a warning for advisers after Minnesota Governor Tim Walz was added to the Democratic presidential ticket, the SEC fined an adviser $95,000 for a $7,150 campaign contribution made in violation of the “look back” provision under the Pay-to-Play Rule (Advisers Act Rule 206(4)-5). New rule making activity was less dramatic as the SEC adopted a final rule increasing the dollar threshold for defining a “qualifying venture capital fund” under the Investment Company Act of 1940 from $10 million to $12 million.
How Much Testing Is Enough?
Most compliance officers struggle to determine whether they are conducting enough testing to satisfy their obligations under the Advisers Act. In its release adopting Advisers
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