Since it came into force on November 4, 2022, the Securities and Exchange Commission (SEC) has not been shy in taking enforcement action to drive home the importance of the Marketing Rule. In September 2023, nine registered investment advisors (RIAs) were fined a combined total of $850,000 for advertising ‘hypothetical performance’ to the public. Five more RIA’s were issued a combined fine of $200,000 in April, 2024 for further violations.
Continuing the regulator’s focus, nine RIAs have now been charged a total $1.24 million for a range of failures to meet the regulator’s marketing expectations – the largest Marketing Rule enforcement fine so far.
What happened?
On September 9, 2024, the SEC announced settled charges against nine RIAs for violating the Marketing Rule by “disseminating advertisements that included untrue or unsubstantiated statements of material fact or testimonials, endorsements, or third-party ratings that lacked required disclosures.” All nine firms agreed to settle charges, with individual penalties ranging from $325,000 to $60,000. The firms in question largely distributed the non-compliant ads via their own websites, and through social media channels.
Alongside the civil penalties, the firms have been censured and ordered to cease and desist form future violations of the Marketing Rule.
Play by the (marketing) rules
While previous Marketing Rule enforcement actions have involved firms advertising “hypothetical performance”, this action involves several different sections of the rule, including:
- Advisers Act Rule 206(4)-1(e)(1): This section of the rule defines what is meant by “advertisement,” which is outlined to include “[a]ny direct or indirect communication an investment adviser makes to more than one person … that offers the investment adviser’s … services … to prospective clients … or offers new investment advisory services … to current client”
- Advisers Act Rule 206(4)-1(a)(1): Outlining that RIAs’ advertisements “may not include any untrue statement of material fact, or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading”
- Advisers Act Rule 206(4)-1(a)(2): RIAs are also prohibited “from including in advertisements any material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission”
These sections speak to the SEC’s goal of protecting investors from potential harm, spelling out that firms must ensure their marketing communications are not misleading or untrue in order to ensure investors can make informed decisions – and not open themselves up to undue risk.
Misleading = mismarketing
The nine firms involved in the SEC’s action exhibited a range of infractions:
- Several of the firms included advertising on their websites featuring third-party ratings that did not “clearly and prominently” disclose important information, like the date when ratings were given or the time period the ratings were based on. In one instance, the rating was more than 16 years old. In another, the RIA identified itself as having been rated a “Barron’s Top Advisor” – despite the fact it was awarded this rating in 2018 and had not attained it since
- At least three of the RIAs disseminated advertising claiming they “provided clients with conflict-free advice” or that their services were free from conflicts of interest, without providing any context for these claims. This put their advertising in conflict with Rule 206(4)-1(a)(2), as they were unable to substantiate these claims on demand
- One of the firms disseminated an advert on its public website containing an “untrue statement of material fact”, describing itself as a “Member” of “Fiduciary Firm” and including a logo for said firm – despite the fact that this is a completely non-existent organization
- Another of the RIAs disseminated communications via several public websites, through its own social media platforms, and via online videos identifying it as “Official Wealth Management Partner of the Athletic Program”, utilizing the Athletic Program’s logo, without disclosing that the Athletic Program was not a current client
All of the nine firms were found to have shared communications on their websites that breached the Marketing Rule because they constituted advertisements:
“During the relevant period, [firms] published communications on its public website … that constituted “advertisements” because they offered [firm’s] investment advisory services with regard to securities to prospective clients and offered new investment advisory services with regard to securities to current clients. As the communications were published on [firm’s] public website, they were made to more than one person.”
Firms need to be incredibly conscious of their communications because the margin between whether something is considered advertising or not can be very thin. They need to consider the intended – and actual – audience based on platform, because this can make all the difference between whether that communication will be received by those it will be suitable for, or those it could potentially harm.
Monitoring for marketing misconduct
Firms looking to ensure that their marketing communications are playing by regulatory rules, like the SEC’s Marketing Rule and Financial Conduct Authority’s Consumer Duty, need to make sure their first step is capturing all their marketing communications.
Whether disseminated through social media channels or their own websites, firms should look to capture and archive their communications data. This means they have a comprehensive record of any and all communications, and evidence at hand should regulators require them to substantiate a claim made as part of their marketing efforts.
This will also allow firms to leverage wider compliance and surveillance workflows and policies to review their marketing messaging against regulatory requirements. They will be able to identify where a communication might be considered to be an advertisement and take appropriate steps to ensure that content is compliant with relevant regulations, like the Marketing Rule. Firms will be able to set up policies that automatically flag where website content or social media posts have used terms that might imply a third-party rating or endorsement, trigger phrases like “conflict-free”, and implement a review workflow to cross-check whether these claims include true statements of “material fact”. They will also be able to evidence full records of marketing materials and their context to be used to substantiate any claims on demand, whether made by the SEC or other regulators.
The final word
The SEC’s summary of the enforcement action leaves firms with no room for doubt – the Marketing Rule will continue to be an examination priority for the regulator. The SEC sees the rule as key in protecting investors and the wider market, with Corey Schuster, Co-Chief of the Division of Enforcement’s Asset Management Unit, saying:
“The Marketing Rule’s provisions regarding truthfulness, substantiation, and disclosure are critical to protecting investors. The advertisements at issue in each of these actions violated the Marketing Rule and posed a serious risk of misleading investors.”
This action is the largest we have seen to date, and should serve as a clear warning to RIAs – invest in the right strategies and solutions to ensure your marketing communications are up to code, because, according to Schuster, the SEC’s enforcements show no sign of slowing down:
“Investment advisers must comply with all aspects of the Marketing Rule, and we will continue to hold them accountable when they fail to do so.”
