$430k Marketing Rule Fine on Hypothetical Performance
SEC RELEASES
Introduction
An RIA based in Washington was charged by the SEC on August 9th, 2024, for Marketing Rule Violations.
The SEC continues to make Marketing Rule compliance a top priority. They have announced a Risk Alert in April and enforcements in April, September, and last August.
This recent enforcement serves as a reminder that Firms failing to implement proper policies and procedures risk potential significant financial penalties.
What Happened?
According to the SEC:
- After the Marketing Rule went into full effect on November 4, 2022, the Firm offered Investment Advisory Services via public communications on its website that included performance derived from model portfolios.
- When this Hypothetical Performance was advertised to the public, the Firm had failed to adopt and implement policies and procedures reasonably designed to ensure that the hypothetical performance took into consideration the financial situation and investment objectives of their intended audience.
- When the Firm appointed new leadership in March 2024, their team quickly addressed this issue and fully cooperated with the SEC.
- The firm was fined $430,000.
Important Takeaways
- RIAs are prohibited from including any Hypothetical Performance in advertisements unless reasonable steps have been taken to ensure that this hypothetical performance is relevant to the specific goals of their audience.
- There is no practical situation in which hypothetical performance can be disseminated to a mass audience.
- Hypothetical Performance is any performance that is calculated for investments that an adviser did not manage, which includes, but is not limited to:
- Model Portfolios;
- Calculating performance for a strategy for prior periods when the strategy was not actually being managed; or
- Targeted or projected performance returns.
- Firms that do not implement policies and procedures designed to ensure their compliance with the Marketing Rule will continue to face costly enforcement.
Keys For Marketing Rule Success
- All performance must be shown net of fees; if gross is shown, the Net Performance must be equally prominent.
- Identify what advertisements contain performance and ensure policies and procedures address its use and it includes appropriate disclosure.
- An experienced Marketing Review Team can help your Firm identify gaps in policies, procedures and disclosures.
- Have a well-documented process to review all communications that could be considered an advertisement.
- While content creators should be aware of the Marketing Rule requirements, it is best practice to have support outside the production process for review of the materials through the eyes of a regulator.
Vigilant’s Conclusion
Vigilant continues to provide on-going Advertising and Marketing Review Services to clients, so that they can focus on their business goals while we handle the complexities of the Marketing Rule.
Vigilant leverages its deep industry insight and experience to help Firms navigate this aggressive regulatory climate.
If you have any questions or concerns about Marketing Rule enforcement, and how it may affect your business, please reach out to us directly.