Material Misstatements Lead to SEC Charge | Marketing Rule
SEC Releases
Brief Introduction
The SEC remains active towards the Marketing Rule and has charged another Registered Investment Adviser (“RIA”) with violations towards it.
As we reach the one-year mark since the enforcement date for the new Marketing Rule, multiple RIAs have been charged for violations. So far these have mostly been related to hypothetical performance.
On September 25th, an RIA firm was charged $1 million for material misstatements and omissions in marketing materials. However, this is also related to the use of hypothetical performance.
What Happened?
According to the SEC:
- The RIA created an index tool that explained its convertible bond strategy in 2013, but the performance of the index used data from 2000 forward.
- Two methods were used to calculate that performance from 2000-2012
- From 2000-2002, the performance was based on actual trades of convertible bonds in client accounts. All the separate accounts were weighted as if the holdings were in one account.
- From 2002-2012, the performance was based on contemporaneous trades in a hypothetical portfolio managed by the RIA starting in 2002. Although the trades were selected based on the bond portfolio strategy, no actual investments occurred.
- The performance of the index tool was marketed starting in 2013, with disclosures that were reviewed by legal and compliance teams but did not adequately explain the methods used when creating the index.
- During webinars with clients and potential clients, statements were made that suggested clients had participated in successful investments that were based off model performance.
- Although the Firm’s policies and procedures stated requirements for advertising materials to be accurate, there were no established procedures to verify accuracy or completeness of disclosures, nor were there procedures in place to give compliance officers the information needed to properly assess the materials.
Vigilant’s Conclusion
Due to remedial efforts made by the Firm, the SEC settled for a charge of $1 million. This most recent charge highlights the importance of having descriptive and accurate disclosures.
Simply describing performance as hypothetical will be insufficient when SEC regulators review the material. It is vital that Firms have a thorough and well-documented review process that allows compliance professionals to accurately assess marketing material.
“On-the-fly” compliance, especially in reference to marketing materials, will likely bring costly regulatory burdens to a Firm.
To ensure your marketing material review process is in line with industry standards, reach out to us today.