Marketing Rule Enforcement Remains Priority: SEC Charges Five Advisers for Marketing Rule Violations

By: Lance C. Dial, Pablo J. Man, Pamela A. Grossetti, and Bradley D. Bostwick

On 12 April 2024, the SEC announced the settlement of charges against five registered investment advisers for violations of Rule 206(4)-1 under the Advisers Act (Marketing Rule). The allegations in these settlements will be familiar: the SEC determined that the five firms advertised hypothetical performance to the general public on their websites. As noted in prior settlements, the SEC takes the view that hypothetical performance should not be included on a firm’s public website, because public website disclosure does not allow firms to ensure that (through the adoption and implementation of policies and procedures) the hypothetical performance is “relevant to the likely situation and investment objectives of each advertisement’s intended audience”, as required under the Marketing Rule. 

One of these settlements also included other allegations of Marketing Rule breaches, including by being unable to substantiate claims that their strategy “outperform[ed] the market over most time frames, even as we assume less risk over those same periods,” and failing to enter into written agreements with two unaffiliated accounting firms giving compensated endorsements.

These settlements serve as a reminder that the Marketing Rule’s performance presentation requirements remain a focus, especially with respect to the public presentation of hypothetical performance, but also with respect to other aspects of the Marketing Rule. It is also notable that the SEC determined to bring these actions, even though four of the firms had removed the hypothetical performance from their websites prior to being contacted by the SEC staff. Each firm had removed these materials on 8 June, 2023, the day the Divisions of Examinations issued a Risk Alert discussing examination focus areas under the Marketing Rule. 

For a comprehensive review of the Marketing Rule, please see our prior alert here.  We have also published a Marketing and Advertising Checklist that serves as guidance while navigating the various and complex requirements related to the Marketing Rule here

Copyright © 2023, K&L Gates LLP. All Rights Reserved.