On April 12, 2024, the SEC announced the settlement of administrative proceedings brought against five registered investment advisers for alleged violations of Rule 206(4)-1 under the Investment Advisers Act of 1940, known as the Marketing Rule. Among other things, the Marketing Rule prohibits advisers from using hypothetical performance information in advertising material unless they have adopted and implemented policies and procedures to ensure that the information is relevant to the likely financial situation and investment objectives of the advertisement’s intended audience. Hypothetical performance information includes the performance of model portfolios and backtested performance returns derived from applying a strategy to historical data from periods when the strategy was not actually employed.
The SEC alleged that all five advisers advertised hypothetical performance information on their public websites without adopting and implementing policies and procedures required by the Marketing Rule. In addition, the SEC alleged that one of the advisers violated other provisions of the Marketing Rule, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements, and that the adviser also violated recordkeeping and compliance rules. The SEC also alleged that this same adviser made misleading statements about its performance to a registered investment company client, which were then incorporated into the client’s prospectus filed with the SEC.
The SEC found that the five advisers willfully violated Section 206(4) of the Advisers Act, which makes it unlawful for any adviser to engage in fraudulent, deceptive or manipulative business practices, as well as the Marketing Rule. In addition, the SEC found that one adviser violated Section 206(2) of the Advisers Act, which makes it unlawful for an adviser to engage in fraud or deceit upon any client or prospective client, Section 204 of the Advisers Act and rules thereunder, which set forth advisers’ recordkeeping requirements, and Section 34(b) of the Investment Company Act of 1940, which makes it unlawful for any person to make any untrue statement of a material fact, or omit to state any fact necessary in order to prevent the statements made in the light of the circumstances under which they were made from being materially misleading, in any registration statement or other document filed or transmitted pursuant to the Investment Company Act.
Without admitting or denying the allegations, the advisers agreed to cease and desist from future violations, to be censured, to comply with certain undertakings and to pay civil monetary penalties ranging from $20,000 to $30,000, except that the adviser alleged to have violated additional provisions of the Marketing Rule, the Advisers Act and also the Investment Company Act agreed to pay a civil monetary penalty of $100,000.
These settlements represent the second set of enforcement actions settled by the SEC stemming from the SEC’s ongoing targeted sweep examinations concerning Marketing Rule violations. In September 2023, the SEC settled enforcement actions against nine registered investment advisers involving alleged violations of the Marketing Rule. In announcing the five most recent settlements, Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stated that, “[t]oday’s actions show that we will continue to employ targeted initiatives to ensure that investment advisers fully comply with their obligations under the [Marketing Rule]. They also serve as a reminder of the benefits to firms that take corrective steps before being contacted by Commission staff.”
The SEC’s press release announcing the settlements can be found here.
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