SEC Marketing Rule Enforcement: Charges Against Nine Registered Investment Advisers Over Hypothetical Performance Advertising

On September 11, 2023, the U.S. Securities and Exchange Commission (SEC) announced settled charges against nine registered investment advisers arising out of violations of the investment adviser marketing rule (the Marketing Rule).¹ Under the Marketing Rule, which was amended in December 2020, registered investment advisers are prohibited from including any hypothetical performance in their advertisements unless they have adopted and implemented policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement.²

The SEC found that each of the nine firms violated the Marketing Rule by advertising hypothetical performance to the general public on their websites without having such procedures in place, thereby disseminating their advertisements to a mass audience rather than presenting hypothetical performance relevant to the likely financial situation and investment objectives of the intended audience. The SEC also charged two of the nine firms with failing to maintain required copies of their advertisements.³ Without admitting or denying the allegations, the firms agreed to settle the charges by collectively paying $850,000 in combined penalties that ranged from $50,000 to $175,000. All nine firms also agreed to be censured, cease and desist from violating the charged provision, and comply with undertakings not to advertise hypothetical performance without having the requisite policies and procedures.

Takeaways

The speed with which these actions were brought, less than a year after the compliance date for the Marketing Rule, and the bundling of multiple actions for greater impact are a signal to the industry that enforcement of the Marketing Rule is a priority. These actions follow another recent enforcement action against a fintech investment adviser for similar violations announced in August 2023, which marked the first enforcement action charging violations of the amended Marketing Rule.⁴ Notably missing here was an actual or announced grace period before Enforcement investigations commenced, along the lines of the staged approach taken after the compliance date for Regulation Best Interest Rulemaking where examinations and risk alerts identifying deficiencies preceded enforcement activity. SEC Division of Enforcement Director Gurbir S. Grewal emphasized in the SEC’s press release that “[b]ecause of their attention-grabbing power, hypothetical performance advertisements may present an elevated risk for prospective investors whose likely financial situation and investment objectives don’t match the advertised investment strategy.”⁵

The sequencing and reference to an “ongoing investigation” of potential Marketing Rule violations in the press release suggests there may be enforcement actions to come. In particular, according to Director Grewal, it is “crucial” that investment advisers implement policies and procedures to comply with the rule, and “[u]ntil that is the case, we will remain vigilant and continue our ongoing sweep to ensure that investment advisers comply.”⁶

Consequently, investment advisers should conduct a review to assess whether they have adopted and implemented policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement, including reviewing the website location of any hypothetical performance and any restrictions designed to limit access to a specific intended audience.