Ongoing SEC Marketing Rule Sweep: A Recap
Since the SEC’s “new” Marketing Rule came into effect on November 4, 2022 and the subsequent retirement of decades-old tried-and-true “no action” letters, compliance professionals have been waiting with bated breath for further guidance into just how exactly the SEC intended to interpret this new rule.
In September 2023, we received one of our earliest gifts of guidance stemming from the SEC’s Marketing Rule Sweep, with a specific focus on hypothetical performance. This portion of the sweep resulted in the SEC settling with nine firms and the imposition of $850,000 in combined penalties. In each of the settlements, the SEC harkened back to the Marketing Rule’s adopting release wherein the SEC provided its view that advisers “generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation” because the adviser would not be able to satisfy the requirement of adopting policies and procedures designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience, given that a public-facing website can be viewed by nearly anyone. The key takeaway? Never post hypothetical performance results on a public-facing website – like, ever.
In April 2024, the SEC announced settlements with five investment advisers for violations of the Marketing Rule, resulting in the imposition of $200,000 in combined penalties. Each of the five investment advisers had posted hypothetical performance on their public-facing websites, serving as yet another reminder of how important it is to stay informed of SEC enforcement actions. Notably, 4 out of the 5 firms actually took corrective action in advance of being contacted by SEC staff, and, as a result, received reduced penalties. The key takeaway here? Stay informed about SEC enforcement actions. If you find yourself inadvertently in violation of a rule, remedial action may end up being redemptive, especially with regards to financial penalties.
Most recently in September 2024, the SEC announced settlements with nine more investment advisers as a result of its ongoing Marketing Rule Sweep, leading to the imposition of $1,240,000 in combined penalties. This cohort’s violations centered around the dissemination of advertisements that included (i) untrue or unsubstantiated statements of material fact and/or (ii) testimonials, endorsements, or third-party ratings that lacked required disclosures. In the former, the SEC picked up on the growing trend of advisers who tout that they provide “conflict-free” advice and subsequently quashed any expectations that such statements were permissible. Virtually every investment adviser is conducting its business amidst conflicts of interest – one just needs to review an adviser’s brochure to see the existence of conflicts. In the latter, the SEC homed in on the very basic requirements of testimonials/endorsements and third-party ratings, as already clearly stipulated in the Marketing Rule. In particular, when third-party ratings are used, advisers need to ensure, in part, that they are disclosing not only the date on which the rating was given but also the period of time upon which the rating was based. Omission of either is a violation of the Marketing Rule. The underlying reasoning behind this stringency is that ratings from an earlier period may not reflect the adviser’s current state of business and could therefore be misleading unless pertinent details, including the date of the rating, are disclosed. The key takeaways here? Always make sure that you can substantiate any material statements of facts made in advertisements. When using testimonials, endorsements, or third-party ratings, run through the related provisions of the Marketing Rule to ensure you’re checking all of the boxes.
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