SEC Charges Robo-Adviser with Marketing Rule Violations

Who may be interested: Registered Investment Companies; Investment Advisers

Quick Take: The SEC recently settled charges against a registered investment adviser for violating the requirements of Rule 206(4)-1 of the Advisers Act (Marketing Rule) by circulating advertisements with paid endorsements from professional athletes that lacked required disclosures, and advertising hypothetical performance on its website without adopting and implementing required policies and procedures.

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According to the SEC’s Order (Order), the adviser failed to comply with the Marketing Rule, which prohibits registered investment advisers from, among other things, including any endorsement in an advertisement unless the requisite disclosures are made. Under the Marketing Rule, the advertisement must clearly and prominently disclose whether the person giving the testimonial or endorsement is a current client or investor in a private fund advised by the adviser and whether such person receives compensation for the endorsement. Advisers are required to disclose the material terms of any compensation arrangement. Advisers are also required to include a brief disclosure of any material conflicts of interest due to such person’s relationship to the adviser.

The Order alleged that for over 18 months, the adviser circulated advertisements on or through its website, social media, and email that contained endorsements from professional athletes who were paid by the adviser, without including the required disclosures in any of the advertisements. The Order specifically noted, among other things, that the adviser failed to disclose that the professional athletes were not current clients and compensation was provided for the endorsements, including that one of the professional athletes received an ownership interest in the adviser’s parent company, which constituted a material conflict of interest.

The Order also covered requirements under the Marketing Rule relating to hypothetical performance which the adviser failed to satisfy. Registered investment advisers are prohibited from including hypothetical performance in their advertisements without adopting and implementing policies and procedures to ensure the hypothetical performance is relevant to the financial situation and investment objectives of the advertisement’s intended audience.

The Order alleged that for over 17 months, the adviser advertised, on its website, hypothetical yearly returns for six different strategies that covered a range of risk tolerances, but failed to adopt and implement the required policies and procedures for presenting hypothetical performance. The Order asserts that the adviser disseminated hypothetical performance in an advertisement to a mass audience that did not present hypothetical performance relevant to the likely financial situation and investment objectives of such mass audience.

The Order found that the adviser violated the anti-fraud provisions of the Advisers Act and the Marketing Rule thereunder. Without admitting or denying the charges, the adviser agreed to a cease-and-desist order and to be censured. The adviser also consented to comply with undertakings not to advertise hypothetical performance without having the requisite policies and procedures and to ensure its advertisements comply with the Marketing Rule. Lastly, the adviser agreed to pay a $250,000 civil penalty.

The SEC’s Order announcing the settled charges can be found here. The SEC Staff also issued a Risk Alert on Marketing Rule compliance earlier in 2024.