RIA Compliance Blog
On April 12, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced they had settled charges against 5 registered investment advisers for violations of the SEC’s Marketing Rule. The announcement follows prior enforcement actions for similar violations, which we have previously addressed: SEC Fines 9 RIAs for Marketing Rule Violations, SEC Fines Adviser Under New Marketing Rule, and SEC Announces Examinations Under New Marketing Rule.
Collectively, the 5 investment advisers, GeaSphere LLC; Bradesco Global Advisors Inc.; Credicorp Capital Advisors LLC; InSight Securities Inc., and Monex Asset Management Inc., were censured, ordered to cease and desist from further violations of the Investment Advisers Act of 1940, and pay civil penalties ranging from $20,000 to $100,000.
The SEC actions founds that the advisers published communications, mainly through their own websites, that contained hypothetical performance information because the communications included performance derived from model portfolios. Because the websites were publicly available, the SEC found that the advertisements were not restricted to a particular intended audience.
Under the SEC’s Marketing Rule, advisers that publish hypothetical performance information must adopt policies and procedures that are reasonably designed to ensure that the presented information is relevant to the likely financial situation and objectives of the intended audience. The SEC has previously stated that websites and other forms of mass communication are improper methods for communicating hypothetical performance information because of the inherent difficulties in managing the intended audience. “[A]dvisers generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation…because the advertisement would be available to mass audiences, an adviser generally would not form any expectations about their financial situation or investment objectives.”[1]
The recent actions show that the SEC is continuing to police the basic aspects of the new Marketing Rule, such as adopting the policies and procedures required to comply with the new Rule. The actions only address areas of the Rule that the SEC has previously issued associated guidance, either through the Marketing Rule’s Adopting Release or the subsequent FAQ’s. To date, the SEC has yet to expand or opine on some of the more nuanced aspects of the new Marketing Rule.
Investment advisers are typically proud of the investment results their strategies produce, and they believe that these results are a major distinguishing factor between their services and their competitors. As such, it is only natural that advisers wish to communicate these results to clients and prospective clients. However, the SEC’s actions show how this marketing practice poses a significant risk to advisers. Investment advisers should understand the requirements and obligations under the new Marketing Rule, namely adopting policies and procedures designed to comply with the Rule and assessing how their prior marketing efforts would be analyzed under the new Rule. Many advisers may find that their websites and other publicly accessible communications need significant revision before continued use is allowable.
[1] See Investment Adviser Marketing, Release No. IA-5653 at 220 (Dec. 22, 2020).
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.