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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