SEC Sends Additional Message To Registered Investment Advisers On Marketing Rule Obligations Through Enforcement Actions

Summary

On September 9, 2024, approximately one year since its first flurry of similar Marketing Rule actions,¹ the Securities and Exchange Commission (the SEC) announced settlements with nine SEC-registered investment advisers (the Advisers) with respect to alleged violations of Rule 206(4)-1 (the Marketing Rule) under the Investment Advisers Act of 1940 (the Advisers Act).² The Advisers ranged in size from $191 million to $5.2 billion in regulatory assets under management and paid civil monetary penalties ranging from $60,000 to $325,000. The combined civil penalties totaled $1,240,000. The alleged violations were found primarily on the Advisers' public websites and, in one instance, the public websites of third parties, social media sites, online videos, a jumbotron and promotional merchandise (e.g., bags and flags).

The alleged violations included:

• Untrue statements about:
  
  • Third-party ratings and
  • Membership in an organization that did not exist;
• Claims the adviser would provide conflict-free advisory services without substantiation (and in contradiction to other disclosure);
• Claims the principal received an award without substantiation;
• Claims the advertisement included two testimonials but neither came from existing clients;
• The inclusion of endorsements that did not contain required disclosures, e.g., that the endorser was a paid, non-client; and
• The inclusion of third-party ratings more than five years old without required disclosures, e.g., the dates of the ratings and the periods of time upon which the ratings were based.

Recommended Actions for Investment Advisers

The SEC Division of Examinations had previously indicated that compliance with the Marketing Rule would continue to be an examination priority in 2024, just as it was in 2023.³ Additionally, the Marketing Rule sweep exams are ongoing. Therefore, we urge investment advisers to:

• Address obligations under the Marketing Rule broadly and ensure its policies and procedures (i) are reasonably designed to avoid a violation and (ii) include reviews of publicly available material on websites, social media, merchandise, etc. An investment adviser must assess its obligations under the Marketing Rule, including the seven general prohibitions, and make all necessary arrangements to meet them. Almost all of the settlements involved, among other things, an alleged violation of Rule 206(4)-1(a)(1), the first of the general prohibitions.
  
  Advisers should also consider policies and procedures regarding initial and regular reviews of its publicly available material as such material may include typographical errors or stale information that could be considered misleading.
• Ensure that the adviser is able to substantiate all material statements of facts in advertisements (including, in particular, on its website and any other publicly available content). An adviser must have a reasonable basis for believing it will be able to substantiate each material fact upon SEC demand, i.e., the investment adviser should confirm that it has substantiation for each claim. Additionally, advisers should avoid claims of being "conflict free" or other statements claiming the elimination of conflicts.
• Ensure that terms defined in the Marketing Rule, e.g., "testimonial" and "endorsement," are used, in line with those definitions. An adviser must use defined terms, e.g., "testimonial" (defined as statements of approval, support or recommendation from current clients or investors), in accordance with the Marketing Rule definitions and must not use the term "testimonial" to reference an "endorsement" (defined as statements of approval, support or recommendation from persons who are not current clients or investors).
• Ensure compliance with the testimonial/endorsement disclosure requirements. An adviser must ensure that any testimonial or endorsement includes disclosure on:
  
  • Whether it is being given by a current client or investor or a person other than a current client or investor;
  • Any cash or non-cash compensation that was provided, if applicable; and
  • A brief statement of any material conflicts of interest on the part of the person providing the testimonial or endorsement resulting from the investment adviser's relationship with such person.

  Note that the SEC staff also took the position that an endorsement includes materials that call the adviser an "Official Wealth Management Partner" or similar sponsorship relationships.

• Ensure compliance with the third-party ratings requirements, including with respect to awards or other recognitions received either by the adviser or any of its principals or employees. An adviser must ensure that any third-party ratings meet the following requirements:
  
  • Adviser has a reasonable basis for believing that any questionnaire or survey used in preparation of the rating is structured to make it equally easy for a participant to provide favorable and unfavorable responses and is not designed or prepared to produce any predetermined result;
  • Adviser clearly and prominently discloses, or the adviser reasonably believes the third-party rating clearly and prominently discloses:
    
    • The date on which the rating was given and the period of time upon which the rating was based;
    • The identity of the third party that created and tabulated the rating; and
    • If applicable, that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.

A summary chart of the enforcement actions is included below.

Summary of Enforcement Actions

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We will continue to monitor the developments coming out of the SEC and provide further updates. Please reach out to the authors of this alert or the Goodwin lawyer with whom you typically consult if you have any questions.

Footnotes

¹ Brynn Peltz, Gregory Larkin, Jonathan Hecht, Cynthia Wells, Daniel Ji, and Grace Willingham, Goodwin Law, "SEC announces the First Enforcement Action under the New Marketing Rule" (Aug. 24, 2023) available at SEC Announces the First Enforcement Action under the New Marketing Rule | Insights & Resources | Goodwin (goodwinlaw.com) and "SEC Marketing Rule Enforcement Actions Emphasize Need for Policies and Procedures Regarding the Use of Hypothetical Performance" (Sept. 21, 2023) available at SEC Marketing Rule Enforcement Actions Emphasize Need for Policies and Procedures Regarding the Use of Hypothetical Performance | Insights & Resources | Goodwin (goodwinlaw.com).
² U.S. Securities and Exchange Commission, "SEC Charges Nine Investment Advisers in Ongoing Sweep into Marketing Custody Rule Violations" (Sept. 9, 2024) available at SEC.gov | SEC Charges Nine Investment Advisers in Ongoing Sweep into Marketing Rule Violations.
³ U.S. Securities and Exchange Commission, "2024 Examination Priorities Report" (2024) available at 2024 Examination Priorities Report (sec.gov).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.