October 15, 2024

On September 9, 2024 the SEC settled charges against 9 registered investment advisers for violations of Rule 206(4)-1 (Marketing Rule) as part of its ongoing sweep.  The 9 firms (mostly small – medium size firms) will pay $1.24M in combined civil penalties, with individual penalties ranging from $325,000 to $60,000.

This is the third wave of enforcement actions the SEC has announced against advisers for violations of the Marketing Rule.  The previous two waves (September 2023 and April 2024) were largely focused on violations related to use of performance in advertisements, most significantly the use of hypothetical performance on the advisers’ public websites without adopting appropriate policies and procedures to comply with the Marketing Rule.  This latest wave is significant because the scope of the violations expands well beyond performance.  The SEC announced in a June 2023 Risk Alert that it intended to expand the focus of Marketing Rule exams, and this announcement proves the SEC followed through on this warning. 

This latest wave of enforcement actions covers violations related to the use of third-party ratings, testimonials and endorsements, untrue statements of material fact and material facts that the adviser could not substantiate.  Below are a few key takeaways from these enforcement actions:

1. Third-Party Ratings – Four of the advisers had violations of the Marketing Rule’s requirements for use of third-party ratings.  In all four instances, the advertisements utilized third-party ratings without clearly and prominently disclosing the date on which the rating was given and/or the time period on which the rating was based, as required by Rule 206(4)-1(c)(2).  In a few instances, the third-party ratings were very old and in the case of one adviser the names of two different awards/ratings were misstated (e.g., Top 12 Financial Advisor rather than Top 1200 Financial Advisor and Top 100 Women’s Advisor rather than Top 100 Women Financial Advisors), which the SEC stated led to an untrue inference.  If you are using a third-party rating in an advertisement that is from many years ago or is no longer relevant to the reader of the advertisement, consider removing the third-party rating to avoid the risk of it being deemed misleading.  Finally, we recommend you review any advertisements that use third-party ratings to ensure the disclosures are complete, clear and prominent and the name of the award is accurate and complete.

2. Testimonials and Endorsements – One adviser was charged with failure to comply with disclosure requirements when utilizing endorsements.  The adviser disseminated communications stating it was the official wealth management partner of a college athletic program on the adviser’s and the athletic program’s websites, social media, the jumbotron during events and on various handouts, such as bags and flags.  Because the adviser paid to be considered the official partner and the partnership with the athletic program implied the athletic program approved of or supported the adviser, this was considered an endorsement.  Disclosures required by Rule 206(4)-1(b)(1) were not included.  Additionally, this same adviser utilized a website page titled “Testimonials,” which included positive statements about the adviser from various individuals, some of whom were not clients.  Inclusion of this violation in the enforcement action underscores how important it is to properly classify these statements as testimonials or endorsements, depending on who provides the statement.

3. Suggestion of Conflict-Free Advice – Four of the advisers disseminated advertisements that included language implying the adviser provided services that were free of conflicts of interest.  The advisers could not substantiate these claims, and in all cases, the statements were contradicted by disclosure of relevant conflicts of interest in the advisers’ Form ADV Part 2A.  All advisers have conflicts of interest as part of serving clients and statements in advertisements that imply otherwise should be removed.

4. Untrue Statement of Material Fact – One adviser indicated in an advertisement that it was a member of an organization that did not actually exist.  The advertisement even included a purported logo for this non-existent organization.

5. Unsubstantiated Material Facts – One adviser indicated in an advertisement that its principal had been named one of the top wealth managers by readers of a local magazine when the award was actually issued by a third-party organization without input from any magazine readers.

We recommend you review your advertisements and Marketing Rule policies and procedures to ensure you avoid the types of violations the SEC highlights in this latest wave of enforcement actions.  If you would like us to review a sample of your advertisements to supplement your Compliance team’s review, please reach out.