SEC Charges Five Advisers with Violations of the Marketing Rule; SEC Staff Releases Risk Alert on Marketing Rule Compliance

Who may be interested: Registered Investment Companies, Investment Advisers, Broker-Dealers

Quick Take: The SEC settled charges in separate actions against five investment advisers (Advisers) for violations of Rule 206(4)-1 (Marketing Rule) under the Advisers Act, including failing to adopt policies and procedures reasonably designed to ensure that hypothetical performance information provided in advertisements was relevant to the likely financial situation and investment objectives of the intended audience of each advertisement, as required under the Marketing Rule. Several days after the SEC announced the settlements, the staff of the SEC’s Division of Examinations (Exams Staff) published a Risk Alert (Alert) on investment adviser compliance with the Marketing Rule.

Enforcement Proceedings

According to the SEC’s Orders, since November 2022, each of the Advisers violated the Marketing Rule by failing to adopt policies and procedures reasonably designed to ensure that hypothetical performance information presented on fund websites was relevant to the likely financial situation and investment objectives of the intended audiences.

Additionally, one Adviser was charged with violations of the Marketing Rule resulting from (i) the presentation of gross performance, without including net performance, in the Adviser’s online fact sheets; (ii) an inability to substantiate performance claims to the SEC staff; (iii) a failure to enter into written agreements with accounting firms providing compensated endorsements; (iv) a failure to implement or conduct an annual review of its compliance policies and procedures; (v) false and misleading statements on the Adviser’s website; and (vi) misleading statements about the Adviser’s performance to its registered investment company client, which were incorporated in the client’s prospectus .

Four of the five Advisers received reduced penalties because they undertook corrective measures prior to being contacted by the SEC staff. The one Adviser that failed to take corrective measures prior to SEC staff contacting the Adviser also received a reduced penalty related to its remedial actions and cooperation with the SEC staff; however, the Adviser’s penalty was over three times larger than the next-highest fine because the Adviser had a number of violations in addition to its failure to adopt policies and procedures concerning hypothetical performance.

The SEC’s Orders found that each of the Advisers violated Section 206(4) of the Advisers Act and the Marketing Rule. Without admitting or denying the SEC’s findings, each Adviser agreed to a cease-and-desist order, a censure, and to pay fines. Four of the firms paid penalties between $20,000 and $30,000. The fifth firm paid a $100,000 penalty.

These enforcement actions make up part of an ongoing Marketing Rule sweep by the SEC. In September 2023, the SEC brought nine enforcement actions under the Marketing Rule. In March 2024 the SEC brought two additional enforcement actions under the Marketing Rule relating to AI washing.

Alert

The Exams Staff’s Alert highlighted common Advisers Act Rule 206(4)-7 (Compliance Rule), Rule 204-2 (Books and Records Rule), and Form ADV deficiencies related to the Marketing Rule which the Exams Staff had observed during recent examinations. The Alert also detailed deficiencies related to provisions of the Marketing Rule the Exams Staff had observed in examinations. Such deficiencies included:

1. 1. untrue statements of material fact and unsubstantiated statements of material fact;
   2. omission of material facts or misleading inferences;
   3. failure to give fair and balanced treatment of material risks or limitations associated with potential benefits;
   4. references to specific investment advice that were not presented in a fair and balanced manner;
   5. inclusion or exclusion of performance results or time periods in manners that were not fair and balanced; and
   6. advertisements that were otherwise materially misleading

The Exams Staff encouraged advisers to review their practices, policies and procedures in light of the observations in the Alert and implement any appropriate modifications to their training, supervisory, oversight and compliance programs as necessary.

The SEC’s press release and relevant Orders can be found here. The Alert can be found here.