By The Securities and Exchange Commission (SEC) has reached settlements with nine registered investment advisors regarding alleged violations of the new Marketing Rule. As part of the settlement, each firm has been censured and fined $850,000.
Allegations of Advertisements with Insufficient Context
According to the SEC, all nine firms advertised hypothetical performance results on their websites without providing adequate context to explain how their strategies could benefit individual investors. While the Marketing Rule allows advisors to promote hypothetical performance results, it requires them to have implemented policies and procedures that ensure the relevance of the performance to the likely financial situation and investment objectives of the intended audience.
In this case, the SEC alleges that the firms failed to include the necessary additional context in their advertisements.
Potential Risks of Hypothetical Performance Advertisements
The SEC points out that hypothetical performance advertisements have an elevated risk for prospective investors whose financial situation and investment objectives may not align with the advertised investment strategy. Gurbir Grewal, SEC Enforcement Director, warns about the attention-grabbing power of such advertisements.
Settlement Details
The SEC settled charges with the following firms:
- Banorte Asset Management (Houston)
- BTS Asset Management (Lincoln, Mass.)
- Elm Partners Management (Philadelphia)
- Hansen and Associates Financial Group (Sacramento)
- Linden Thomas Advisory Services (Charlotte)
- Macroclimate (San Francisco)
- McElhenny Sheffield Capital Management (Dallas)
- MRA Advisory Group (Parsippany, N.J.)
- Trowbridge Capital Partners (New York City)
It is important to note that all firms settled the charges without admitting or denying any wrongdoing.
Comments from Involved Parties
Linden Thomas Advisory Services declined to provide any comment regarding the settlement, while the other firms did not immediately respond to requests for comment.
Additional Compliance Issues
In addition to the allegations of insufficient context in hypothetical performance advertising, the SEC found that Microclimate and MRA Advisory Group failed to maintain the required copies of their advertising materials.
SEC Cracks Down on RIAs for Violating Marketing Rule
The recent settlements reached by the Securities and Exchange Commission (SEC) represent its first enforcement action under the Marketing Rule, a regulation that has been a major concern for registered investment advisors (RIAs). These settlements also mark the SEC’s efforts to consolidate similar misconduct allegations into a single announcement, rather than dealing with them individually.
Last week, the SEC announced settlements with five RIAs for violating its Custody Rule. Now, the SEC has reached nine new settlements where it found that the firms’ advertisements were based on either hypothetical performance or backtesting of investment strategies that were not yet in use.
The SEC emphasized that these firms disseminated hypothetical performance to a broad audience, without tailoring it to their clients’ financial situations or investment objectives. As a result, each firm has been fined, with penalties ranging from $50,000 to $175,000. Additionally, they have accepted censure and cease-and-desist orders as part of the settlements.
These settlements should serve as a warning to other RIAs, as the SEC’s examination initiative into the Marketing Rule is ongoing. It is crucial for firms to implement compliance policies and procedures to meet the requirements of the rule. The SEC will remain vigilant and continue its sweep to ensure that investment advisors comply with the Marketing Rule, including the provisions related to hypothetical performance advertisements.
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