The Securities and Exchange Commission's (SEC) marketing rule for investment advisers has ushered in a new era of transparency and accountability in the financial industry. This rule, in effect for nearly a year, carries significant implications for investment advisers and the broader financial landscape. Its primary aim? To safeguard investors by ensuring they receive accurate and transparent information about investment advisory services. Those who diligently adhere to this rule are well-equipped to furnish clients with the data they need to make informed investment decisions.
However, nearly nine months following the rule's implementation, the SEC has taken action against several firms for violations. The most recent development saw the SEC charging nine registered investment advisers for advertising hypothetical performance data to the general public on their websites without adopting and implementing the necessary policies and procedures mandated by the marketing rule.
In a significant move, all nine firms have agreed to settle with the SEC, collectively paying $850,000 in penalties.
The SEC's enforcement actions serve as a stark reminder to investment advisers about the paramount importance of complying with the marketing rule.
The SEC's First Enforcement Actions for Marketing Rule Violations
In these enforcement actions, the SEC alleged that a firm made misleading statements regarding its hypothetical performance metrics and failed to meet specific disclosure requirements. The firm ultimately consented to an SEC order, acknowledging the violations and accepting sanctions.
The SEC's order revealed multiple violations by the firm:
- Misleading Hypothetical Performance Disclosures: The firm advertised hypothetical performance results, including staggering figures of up to 2,700% for its crypto strategy. Crucially, it failed to disclose essential information about the assumptions underpinning these projections.
- Failure to Comply with Marketing Rule Requirements for Hypothetical Performance: The firm promoted hypothetical performance metrics without having the requisite policies and procedures in place, or taking other steps mandated by the SEC's marketing rule. Notably, this rule was revised in December 2020 to permit the use of hypothetical performance metrics, provided advisers adhere to specific anti-fraud measures.
- Conflicting Disclosures About Custody of Crypto Assets: The firm conveyed conflicting information to clients concerning the custody of their crypto assets.
- Misleading Liability Disclaimer Language: The firm included liability disclaimer language in client advisory agreements that gave a false impression of clients waiving non-waivable causes of action against the firm.
- Failure to Adopt Policies and Procedures Regarding Employee Personal Trading in Crypto Assets: The firm neglected to establish policies and procedures concerning employee personal trading in crypto assets.
- Failure to Obtain Client Signatures for Certain Transactions: The firm failed to ensure that client signatures were secured for specific types of transactions within client accounts.
In response, the firm consented to a cease-and-desist order, censure, and agreed to disgorge $192,454, along with prejudgment interest. Additionally, it will pay a civil penalty of $850,000, with the penalty funds being directed toward affected clients.
Staying on the Right Side of the Marketing Rule
The SEC's enforcement action against this firm acts as a potent reminder to investment advisers about the imperative of adhering to the SEC's marketing rule. To mitigate the risk of rule violations and protect investors, advisers should consider the following steps:
- Ensure Accurate and Comprehensive Hypothetical Performance Disclosures: Precise and complete disclosures are non-negotiable.
- Establish and Implement Policies and Procedures: Develop and enforce policies and procedures that align with the marketing rule's requirements for hypothetical performance. This encompasses the selection of assumptions, presentation of results, use of disclaimers, and defining the audience for hypothetical performance data.
- Review Marketing Materials: Scrutinize marketing materials to ensure they are accurate, fair, and balanced.
- Institute Policies for Reviewing and Approving Marketing Materials: Robust policies and procedures should govern the review and approval of marketing materials to ensure compliance with relevant regulations.
- Provide Training: Educate employees about the marketing rule and other applicable regulations.
By taking these proactive steps, investment advisers can navigate the regulatory landscape successfully, prevent rule violations, and uphold investor protection – the cornerstone of ethical and responsible advisory services.
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