By Jaqueline M. Hummel, J.D., IACCP®
Director of Thought Leadership, SEC3
Advisers can’t claim they haven’t been warned. Since its effective date in November 2022, the SEC has let firms know that it would be closely monitoring compliance with the new Advisers Act Marketing Rule (Rule 206(4)-1). The Division of Examinations (EXAMS) has issued two risk alerts, Examinations Focused on the New Investment Adviser Marketing Rule and Examinations Focused on Additional Areas of the Adviser Marketing Rule, along with the announcement of settlements with nine advisers in September 2023. Most recently, the SEC announced settlements with five more firms, finding that the advisers posted hypothetical performance on their websites “without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience.”
The takeaways from these cases are first, an adviser posting hypothetical performance on its public website is asking for trouble. The overall sentiment is that there is almost no way to satisfy the SEC that such performance would be relevant, and not misleading, to the broad audience potentially reached by a public website. Second, taking action as soon as you are aware of an issue may help decrease the fines and penalties imposed by the SEC. Admittedly, the sanctions imposed in these cases totaled $200,000, which seem relatively small as compared to recent actions against firms for recordkeeping failures. In its announcement, the SEC said that four of the advisers had already begun pulling hypothetical performance off their websites and that is why their penalties were substantially less.
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