RIA Compliance Blog
Last week, the SEC announced a series of enforcement actions tied to its ongoing sweep of investment adviser compliance with the new Marketing Rule. In total, nine firms settled claims that they violated Advisers Act Rule 206(4)-1, the “new Marketing Rule,” resulting in $1,240,000 in civil penalties.
We have previously written about the implementation of the new Marketing Rule, the announcement of the corresponding examination sweep program, and the subsequent enforcement actions that have resulted. While the previous enforcement actions have largely centered around investment advisers who have failed to adopt policies and procedures designed to prevent violations of the new Marketing Rule, the recent enforcement actions give greater insight into the real-world application of the new Marketing Rule. Namely, the actions detail marketing violations due to the use of third-party ratings by the investment advisers.
Under the new Marketing Rule, investment advisers are required to clearly and prominently disclose, within the advertisement, the date on which a third-party rating was given and the time period for which the rating was based.[1] The SEC has justified these requirements by comparing third-party ratings to a snapshot in time that would be misleading without the required disclosure information. “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.”[2] In the current enforcement actions, advisers were cited for displaying awards without disclosing that the awards were limited to specific years. For example, one adviser displayed an award that the adviser was a “top adviser” in the United States without disclosing that the award was given over fifteen years ago.
In addition to ratings being deemed misleading due to their failure to disclose required information, the current enforcement actions include examples of misleading third-party ratings due to untrue statements of material fact. These untrue statements can be simple, or in some cases even typographical errors, but can have a profound impact on how the statement is perceived by a potential client. For example, one adviser displayed that it was a “Top 12 Financial Advisor,” when the adviser was actually a Top 1200 Financial Advisor.
For the first time under the new Marketing Rule, the SEC included enforcement actions against investment advisers who had no reasonable basis for believing that they could substantiate, if requested, material facts contained on their advertisements, including websites. These actions mainly centered around claims that the investment advisers made that they were “conflict fee” or had “eliminated conflicts of interest.” While such statements appeared on the investment advisers’ websites and other marketing materials, their ADV Part 2A openly disclosed conflicts of interest that existed in the advisers’ businesses. Since these discrepancies were included in the firms’ advertisements, the SEC determined that statements were violations of Rule 206(4)-1(a)(2).
The newest enforcement releases show that the Marketing Rule continues to be a high priority area for the SEC. As such, we expect the SEC to continue monitoring, examining, and taking action against advisers who violate the Rule.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.
[1] See 17 CFR § 275.206(4)-1.
[2] Adopting Release at 162.