Marketing Rule Crackdown: SEC Sweep into Marketing Rule Violations Results in Charges Against Nine Investment Advisers

This blog post was written in conjunction with our partner compliance firm, Joot

It's been almost three years since the SEC adopted amendments to the Marketing Rule. Since the amendments were adopted, the SEC has released a risk alert and issued answers to frequently asked questions regarding the rule to assist registered investment advisers (“RIAs”) with implementing the various requirements. In August 2023, the SEC announced the first enforcement action of the amended Marketing Rule which involved the misuse of hypothetical performance. Recently new enforcement actions were announced against nine RIA firms.or violations of the amended Marketing Rule and requirements regarding similar hypothetical performance issues.

Violations of Advertising Hypothetical Performance

The SEC charged nine investment advisers across the United States with violating the Marketing Rule by advertising hypothetical performance on their websites without adopting and implementing the necessary policies and procedures. According to the Marketing Rule, RIAs are strictly prohibited from including any hypothetical performance in their advertisements unless they have adopted and implemented policies and procedures designed to ensure that the hypothetical performance is relevant to the financial standing and situation of the proposed audience. The SEC notes that hypothetical performance results have “attention-grabbing power” and can be misleading to current or potential investors.

Along with these primary findings, the SEC also found that two of the charged RIAs failed to maintain the required copies of their advertisements.

Each of the firms agreed to no longer advertise hypothetical performance without the proper policies and procedures and are ordered to pay civil penalties ranging from $50,000 to $175,000 each. The firms are also required to explicitly document evidence of compliance with the SEC's orders and the Marketing Rule.

How Should You Advertise Hypothetical Performance

Hypothetical performance is intended to be presented to audiences that can understand the nuances of the presentation. For example, institutional investors such as other RIAs or broker-dealers could fall under this category. Although the SEC doesn't directly state in the enforcement actions that hypothetical performance is not intended for mass audiences and the general public (even with the relevant policies and procedures), the Marketing Rule release states this:

We believe that advisers generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation. In that case, because the advertisement would be available to mass audiences, an adviser generally could not form any expectations about their financial situation or investment objectives.

We believe the SEC will continue to issue enforcement actions to those RIAs that include hypothetical performance made available on their websites to the general public. In these situations, there is no amount of disclosure that can overcome the Marketing Rule requirements.

Joot Can Help You Reach Marketing Rule Compliance

While Marketing Rule compliance can be complicated, it does not have to be difficult. Engaging the assistance of an experienced compliance firm like Joot can help your firm stay ahead of the enforcement actions and ensure you are in continued compliance with all aspects of the Marketing Rule. Contact Joot today for any compliance questions.