Updated Marketing Rule FAQ Targets Performance

 

Updated Marketing Rule FAQ Targets Performance 

True to its word, the SEC has taken steps to enhance regulatory efficiency and transparency, as evidenced by its most recent updates to the Marketing FAQ on March 19, 2025.

Background: The Marketing FAQ was first published in 2021 to address key questions regarding the new Marketing Rule. It has been updated, as needed over the years, to provide necessary guidance on how RIAs can ensure continued compliance to the rule.

Updated Guidance: The SEC's current version of the Marketing FAQ serves as a guidance tool for registered investment advisors specifically related to the usage of gross performance, as follows:

Gross Performance of Extracted Performance Figures

Definition - Extracted Performance: Refers to the performance of a single investment or a group of investments taken (“extracted”) from a private fund or portfolio, rather than the performance of the entire portfolio.

Guidance - The SEC will allow the display of gross performance of extracted investment or groups, without net, so as long as the following conditions are met:

• Extracted Performance is clearly labeled as gross performance
• Please Note: Advisors must clearly disclose what is extracted and the period of the performance
• Extracted Performance is accompanied by the total portfolio’s gross and net performance and is presented with at least equal prominence to the extracted performance
• Please Note: Equal prominence means that the SEC wants to ensure that the performance presented facilitates comparison between the extracted performance and the total portfolio performance.
• Gross and net performance of the total portfolio is calculated over the period that encompasses the timeframes used for extracted performance.

The SEC believes that if the above conditions are met, displaying the gross performance of extracted performance would not be considered misleading, provided that the data is truthful, accurate, and not intended to mislead clients or investors.

Gross Portfolio or Investment Characteristics

Definition - Portfolio or Investment Characteristics: Specific metrics or attributes that describe an investment portfolio or individual investments. These characteristics may provide insight into risk, composition, or other performance-related factors (e.g. yield, volatility, Sharpe Ratio) but are not necessarily categorized as performance. Guidance - The SEC will not recommend enforcement over the use of gross portfolio or investment characteristics, without net characteristics, so as long as the following conditions are met:

• The gross characteristic is clearly labeled as calculated without fees and expenses.
• Please Note: Advisors must clearly define the characteristic and disclose the period of the characteristic
• The total portfolio’s gross and net performance is presented alongside the characteristics and with at least equal prominence to facilitate comparison between the characteristics and portfolio.
• Portfolio performance over the period that encompasses the timeframes used for the gross characteristic.

The SEC is of the belief that the attempt to display net characteristic figures may be confusing and inadvertently misleading. Therefore, the guidance above is designed to help meet the spirit of the SEC’s intent of ensuring that investors are not mislead.

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A Cautionary Tale: Cash Sweep Programs

 

A Cautionary Tale: Cash Sweep Programs

Recent enforcement actions by the Securities and Exchange Commission (SEC) have placed advisors' cash management programs under scrutiny. While previous attention was given to insufficient disclosures regarding revenue sharing in the SEC's Cash Sweep Program Initiative, a new concern has emerged regarding rising interest rates and fiduciary duty. Specifically, Wells Fargo and Merrill Lynch were cited for failing to establish and implement written policies and procedures governing their cash sweep programs. It was found that Wells Fargo Advisors and Merrill Lynch, or their affiliates, determined the interest rates offered in their bank deposit sweep programs (BDSPs). Consequently, during periods of rising interest rates, the yield differential between these BDSPs and alternative cash sweep vehicles reached nearly 4 percent.

“Cash sweep programs impact nearly all advisory clients, who often pay advisory fees on assets held in these accounts,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “These actions reinforce that advisory firms must have reasonably designed policies and procedures to consider their clients’ best interest when evaluating potential sweep options for cash held in advisory accounts and to ensure that cash held in an advisory account is properly managed by financial advisers consistent with a client’s investment profile.” 

This case highlights two key considerations for advisors: managing cash sweep vehicles and cash as an asset. Custodians often limit sweep options, which are meant for transactions—not investments. In a rising rate environment, alternatives like money market funds or CDs may better serve clients' cash holdings.

In most cases, custodians generate revenue from client assets held within sweep vehicles. While custodians are obligated to disclose this practice to clients, advisors also bear the responsibility of disclosing any revenue-sharing arrangements or incentives related to them. Failures related to this disclosure continue to be a widespread deficiency within the industry. For more information on the Cash Sweep Program Disclosure Initiative, you can review our When Revenue Becomes a Conflict Blog Post.

If your Firm is concerned about its policies and procedures surrounding bank deposit sweep programs or other cash management related positions, please contact AdvisorAssist today!

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A Cautionary Tale: A Lesson Regarding Upcoming AML Regulation Adherence

    

A Cautionary Tale: A Lesson Regarding Upcoming AML Regulation Adherence 

Anti-Money Laundering requirements are coming down the pipeline for Registered Investment Advisors (RIAs) in 2026, and although these regulations have existed for other counterparts of the financial services industry for years, RIA requirements were simplistic in comparison. As the RIA industry endeavors to adopt policies and procedures to comply with the upcoming AML/CFTC regulations, we remind Advisors to be mindful about marketing or inferring compliance when only adopting partial compliance, or none at all. As a reminder, you can review the AdvisorAssist Blog to learn more about these impending requirements:

• Adopted Rule: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers
• Proposed Rule: Customer Identification Program Requirements for Registered Investment Advisers and Exempt Reporting Advisers

“This case reinforces the fundamental duty of investment advisers to say what they do and do what they say,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “ 

In January 2025, the SEC released enforcement action against an RIA for misrepresentations related to its AML procedures and for compliance failures resulting in the payment of a $150,000 civil penalty for willfully violating the Investment Advisers Act of 1940 and related rules. From at least October 2018 until January 2022, the RIA stated in offering and other documents provided to prospective and existing private fund investors that the firm was voluntarily complying with AML due diligence laws, despite those laws not applying to investment advisers, including by conducting specific types of AML due diligence on prospective investors and conducting ongoing AML due diligence monitoring on existing investors. The RIA in fact, did not always conduct the AML due diligence as described, including with respect to an entity owned by an individual publicly reported to have suspected connections to money laundering activities.

This incident was communicated by the Enforcement Division only days before the SEC released charges against LPL Financial with anti-money laundering violations for long-standing failures in its customer identification program, and restricting high-risk accounts (cannabis-related and foreign accounts) which were prohibited under LPL’s AML policies. This is not the first Custodian to encounter such a fine as we consider the activity of Merrill Lynch or Raymond James. It is imperative that RIAs consider these findings as components of their ongoing vendor due diligence, and reliance for AML/CFTC obligations. Additionally, if your policies and procedures outline your process of complying with AML laws, make sure you have documentation to support your assertions.

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Electronic Communications: Trending Fines in the Industry

   

Electronic Communications: Trending Fines in the Industry

Over the past three years there has been a resounding increase in violations surrounding the Securities and Exchange Commission's ongoing recordkeeping initiative due to failure to preserve electronic communications. 2025 started out with January’s release of twelve Advisors charged $63.1 million for electronic communication record-keeping deficiencies, which can now be compacted with the violations and fines reference below, again emphasizing that the SEC is taking off-channel communications seriously and that the requirement CANNOT continue to be ignored.

Electronic Messaging Archiving - It's Not Just Emails. 

Aside from commonalities among the fines referenced below, there appears to be a misunderstanding throughout the industry regarding what needs to be archived:

• It is imperative to understand that electronic communications are not solely communications Supervised Persons have with clients/prospective clients, but also external partners, vendors, and the public. This means any communication that is sent or received on behalf of the Advisor falls under the books and records scope.
• The SEC is clearly making a stance that “internal” electronic communications, among Supervised Persons, are required to be archived. 
• Electronic communications can occur through various means throughout the day. Supervised Persons are communicating, internally or externally, any level of business communication through the following vendors, it must be archived:
• Text Messaging
• Messaging Applications (WhatsApp, Messenger, WeChat, etc.)
• Social Media (Twitter, Instagram, Linkedin, etc.)
• Video and Audio Conferencing Apps with Chat Features (Zoom, Microsoft Teams, Google Meet, etc.)

“Finance, ultimately, depends on trust. By failing to honor their recordkeeping and books-and-records obligations, the market participants we have charged today have failed to maintain that trust.” Securities and Exchange Commission Chair, Gary Gensler

A Review of Past Fines and Considerations

September 2024's release, twelve firms were charged $88 million for electronic communication deficiencies following August 2024's release of twenty-six firms were charged with longstanding failures by the firms and their personnel to maintain and preserve electronic communications totaling $392.75 million in civil penalties. September 2023's release announced ten firms charged for widespread and longstanding failures to maintain and preserve electronic communications, totaling $79 million in fines and penalties. September's release came on the tailwind of August 2023's release where the SEC charged eleven firms with penalties totaling $289 million. The fines and penalties from 2024 and 2023, in conjunction with the total fines and penalties from 2022, brings the tally to over $2.16 billion and over 90 enforcement actions. In reviewing these enforcement actions, the commonalities are: In reviewing these enforcement actions, the commonalities are:

• Failure to reasonably supervise, with a view to prevent and detect violations of federal securities laws.
• Failure to maintain and preserve business communications, whether it be internal or external communications.
• Inadequate policies, procedures, and controls that are compliant and designed to detect and prevent violations.

RIAs have a fiduciary responsibility to their Clients, and recordkeeping has been vital to preserve that integrity. As technology continues to advance, so should the policies and procedures of every RIA to ensure all communications are being maintained. So, how does an Investment Advisor effectively mitigate their risk? Really, an Advisor has two options:

• The Advisor opts to completely ban the use of personal devices and/or other various off-channel communication applications. Examples of certain control measures that can be put into place regarding this policy are:
• Written policies and procedures stating that personal devices and other various off-channel communication applications can not be used for business purposes, and have supervised person’s attest to those policies.
• Enhance review of supervised electronic communications (i.e email) to ensure that off-channel communication is not occurring with clients or members of the firm alike.
• Provide training for all supervised person’s of the Advisor regarding what is and is not acceptable, and the ramifications for violations.
• The Advisor opts to allow for the use of text-messaging and other electronic communication methods with appropriate policies and procedures in place. Examples of certain control measures that can be put into place regarding this policy are:
• Written policies and procedures regarding personal devices and/or electronic communication applications may be utilized on an approved basis by the Chief Compliance Officer.
• Advisors undergo a due diligence process for vendors they seek to utilize as part of the firm’s communication platform. This includes the reviewing the messaging platform for supervised person use, ensuring there are supervisory capabilities, and understanding the archiving set up.
• Provide training for the supervised persons who use the platform and compliance reviewers who supervise the platform, and the ramifications for violations.

Advisors in need of a solution, should start with current vendors they utilize to determine if they can bundle their email, social media, website, and texting platforms which, in turn, streamlines supervision and cost as well.

Whether an Advisor allows the activity or not, having the appropriate testing and supervision measures in place is the best line of defense. Effective supervision, due diligence and proper training are key when it comes to mitigating risk. If you are questioning whether your supervised persons are utilizing personal text messaging or emails to communicate with clients, or that your policies, procedures, and controls are inadequate please contact us today!

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Investment Advisor Representative Continuing Education

  

Investment Advisor Representative Continuing Education 

Investment Advisor Representatives (IARs) have their hands full at year end with such items as required minimum distributions, end of year tax loss harvesting, client gifting, annual meetings, and the list goes on! A requirement, introduced in 2020, has added a yearly addition to certain IARs via the NASAA Model Rule on Investment Adviser Representative Continuing Education. Continuing education (CE) is required for every IAR registered in a jurisdiction that adopts the Model Rule. The program applies to all registered IARs of both state-registered and federal covered investment advisers in adopted jurisdictions.

IARs are free to select an approved course provider, along with applicable classes that interest them or align to their business model, so long as the IAR obtains 12 CE credits each year - 6 credits of Products and Practices and 6 credits of Ethics and Professional Responsibility. States which currently require IAR CE as of December 31, 2024:

• Arkansas (effective in 2023)
• California (effective in 2024)
• Colorado (effective in 2024)
• Florida (effective in 2024)
• Hawaii (effective in 2024)
• Kentucky (effective in 2023)
• Maryland (effective in 2022)
• Michigan (effective in 2023)
• Minnesota (effective 1/1/2025)
• Mississippi (effective in 2022)
• Nebraska (effective in 2025)
• Nevada (effective in 2024)
• New Jersey (effective in 2025)
• North Dakota (effective in 2024)
• Oklahoma (effective in 2023)
• Oregon (effective in 2023)
• Rhode Island (effective in 2025)
• South Carolina (effective in 2023)
• Tennessee (effective in 2024)
• Vermont (effective in 2022)
• Washington, D.C. (effective in 2023)
• Wisconsin (effective in 2023)
• U.S. Virgin Islands (effective in 2025)

IARs have an annual deadline to complete their CE requirement. Should they not complete their CE by December 31st the IAR will pay the registration renewal fee and become “CE Inactive”. This status will allow the IAR to continue doing business, but should the IAR not complete the CE requirement by end of year the IAR will be unable to renew his or her registration and become a status of “Fail to Renew”. If you are CE Inactive, courses completed in the current year will apply to the past year’s deficiency – so you will want to work with your provider and Firm to ensure you are covering prior/current year requirements. IARs should be aware of particular nuances to the Model Rule and CE requirements, which can be reviewed on both the NASAA FAQ and also the Program Handbook:

Newly Registered IARs: Newly registered IARs will be required to meet CE requirements by the end of their first full calendar year following the year in which they first become registered.

IAR Multi-State Registration: An IAR is responsible for the requirements of each state they are registered in during that year, whether it is a home state or additional state, whether they add the in-scope state registration halfway through the year, or whether they withdraw from an in-scope state during the year – requirements apply. For additional considerations regarding in-scope/out-of-scope states, we urge IARs to review the NASAA FAQ for scenario examples, or reach out to state regulators.

Professional Designations: Although there are no exemptions to CE requirements, it would be prudent to work with a provider who can assist IARs in taking classes that cover the requirements for their professional designations and count toward state CE requirements as well.

Dually Registered IARs: Currently, FINRA CE content meets NASAA eligibility to count toward the six credits of Products and Practices credit hours. Dually registered IARs should work with their BD Firm to determine if additional training, such as Annual Firm Element classes, are approved to count toward their completion requirements for IAR CE.

When an IAR completes courses, the vendor/provider reports course completion to FINRA, NASAA’s vendor for program tracking. The responsibility of tracking the vendor/provider’s submission falls on the IAR and regulators urge IARs to open a FinPro account for CE tracking purposes. Advisors can also pull CE reporting through FINRA Gateway to monitor IAR annual completions.

As additional states adopt the Model Rule, CCO’s and other compliance professionals can review the NASAA Investment Advisor Representative Continuing Education training webinar for additional information, or reach out to their AdvisorAssist consultant.

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SEC Marketing Rule Examination Sweep Deficiencies

 

SEC Marketing Rule Examination Sweep Deficiencies

September 9th, 2024 Update: Press Release

On September 9th, 2024 the U.S Securities and Exchange Commission (“SEC”) announced charges against nine Registered Investment Advisors (“RIAs”) for violations of the Marketing Rule as part of the SEC’s ongoing Marketing Rule Sweep Exam efforts. All nine firms agreed to settle, totaling over $1.2 million in combined damages. These actions demonstrate the SEC’s zero-tolerance policy for marketing violations. Additionally, the continuation of these sweep exams codifies the SEC’s dedication to promoting compliance and accountability, indicated Corey Schuster, Co-Chief of the SEC’s Division of Enforcement’s Asset Management Unit. 

The deficiencies identified by the SEC in this tranche of enforcement cases are as follows: 

• Disseminated content that claimed to provide “conflict-free advisory services”, which the firms were not able to substantiate.
• Disseminated content that could not be substantiated regarding awards provided to firm principals.
• Disseminated content that claimed to contain two testimonials, but neither came from current clients.
• Advertised endorsements not fully disclosing that an “endorser” was a paid, non-client in videos, on social media, and on physical objects such as bags and flags.
• Advertised third-party ratings, some of which were more than five years old, without disclosing the dates on which the ratings were given or the periods of time upon which the ratings were based.

As stated in the rule, firms are permitted to include testimonials, endorsements, and third-party ratings provided that each activity is conducted within the scope of the intentions of the Marketing Rule and adhere to the guidance provided within the Additional Resources below when drafting and reviewing marketing materials ahead of distribution. 

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April 12, 2024 Update : Press Release

Five additional registered investment advisors have been added into the Marketing Rule examination sweep deficiency list, bringing the total enforcement actions to over $1 million in combined penalties.

Hypothetical performance continues to be a sore spot, as each of the Advisors advertised hypothetical performance to the general public on their website. Hypothetical performance can be enticing to both current and prospective clients, but unless the Advisor adopts and implements policies and procedures designed to ensure the performance is relevant to the financial profile and goals of the intended audience, the Advisor will be in clear violation of the Marketing Rule. This would suggest, that because an Advisor can not control the audience of public websites and social media, an Advisor should not be publishing hypothetical performance through these mediums or should only do so in a controlled environment, such as a portal to target specific investors.

Additional performance violations consisted of making false and misleading statements in advertisements, advertising misleading performance, and the inability to substantiate performance data. These violations inevitably led to record keeping violations for the Advisor. Furthermore, there was an additional violation for fail

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September 11, 2023 Update: Press Release

On September 11, 2023, the SEC announced charges against nine Advisors for hypothetical performance advertising violations as part of the SEC’s initial sweep into Marketing Rule Violations. These charges related to promoting hypothetical performance on the Advisor’s websites to the general public without adopting and/or implementing policies and procedures as required by the rule. Additionally, two firms were found to have failed to retain appropriate copies of the advertisements within the Firm’s books and records. All nine firms agreed to settle, were censured, and must pay $850,000 in combined damages.

Gurbir Grewal, the SEC’s Director of the Division of Enforcement, emphasized the Commission’s view that hypothetical performance advertising poses an elevated risk to prospective investors, and the importance of firms adopting policies and procedures under the new rule to mitigate this risk. He also made it clear that until the Commission is satisfied that that is the case, they will continue their ongoing sweep to ensure investment advisor’s compliance with the Marketing Rule. AdvisorAssist reminds Advisors that the Marketing Rule is applicable to SEC-registered firms and certain State-registered firms who have adopted it. Under the rule, an Advisor is permitted to include hypothetical performance in an advertisement, provided that the Advisor:

• Adopts policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement
• Provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating the hypothetical performance
• Provides sufficient information to enable the audience to understand the risks and limitations of using hypothetical performance to make investment decisions.
• Important Note: Hypothetical performance should only be distributed to clients and/or prospective clients who have access to the resources to independently analyze such information and who have the financial expertise to understand the risks and limitations of such types of presentations.
• Maintain the relevant data and documentation that supports the hypothetical performance figures presented.

This is the tenth hypothetical performance related violation the SEC has released in less than a month, the first which you can review in the AdvisorAssist blog post released in August 2023.

Marketing Rule violations were the most common deficiency in the AdvisorAssist 2023 SEC Exam Report, and considering the SEC’s stance on continuing targeted examinations, Advisors are urged to review AdvisorAssist's blog post regarding the need for a retrospective review of all marketing pieces, the AdvisorAssist SEC Sample Marketing Exam Request, and to take advantage of our Mock Examination Services should they have concerns or feel the need to enhance current procedures.

If you have any questions or concerns please contact your consultant to discuss!

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