SEC Settles Charges with Nine Advisers in Marketing Rule Sweep

Who may be interested: Investment Advisers.

Quick Take: The SEC recently settled charges with nine investment advisers related to their use of hypothetical performance information on their websites without adopting or implementing policies and procedures required by Rule 206(4)-1 under the Advisers Act (the “Marketing Rule”). The SEC has previously indicated that it would be intensely focused on advisers’ compliance with the Marketing Rule following its November 2022 compliance date.  This enforcement action sweep comes shortly after the SEC’s initial enforcement action under the Marketing Rule which also focused on the use of hypothetical performance. This latest sweep, coupled with the prior enforcement action, demonstrates that the SEC intends to aggressively pursue alleged violations of the Marketing Rule.

The Marketing Rule requires advisers using hypothetical performance, among other things, to adopt and implement 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. The SEC’s orders found that the advisers charged in the enforcement actions advertised hypothetical performance without having adopted or implemented applicable policies and procedures. In addition, two of the advisers involved in the sweep failed to keep records of the advertisements as required by Rule 204-2 under the Advisers Act (the “Books and Records Rule”).

As a result of the conduct described above, the SEC’s orders found that the advisers violated the Marketing Rule and for two of the advisers, the Books and Records Rule as well. Without admitting or denying the findings in their respective SEC order, each of the nine advisers agreed to a cease-and-desist order, a censure, and to pay civil penalties which, collectively among the nine advisers, totaled $850,000.

For a Discussion of the SEC’s initial Marketing Rule enforcement action, see S&K’s blog post here.

The SEC Press Release can be found here.