August 19, 2024
What Happened?
The SEC fined Pacific Financial Group $430,000 for advertising that presented hypothetical performance. In an order issued on August 9, 2024, the SEC pointed out that Pacific Financial Group advertised hypothetical performance on its public website without implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience.
Under the Marketing Rule, registered investment advisers are prohibited from including any hypothetical performance in their advertisements unless, among other things, the adviser “[a]dopts and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement.” See Advisers Act Rule 206(4)-1(d)(6)(i)
In the adopting release of the Marketing Rule, the SEC said: “We believe that advisers generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation. In that case, because the advertisement would be available to mass audiences, an adviser generally could not form any expectations about their financial situation or investment objectives.”
Pacific Financial Group published hypothetical performance from model portfolios on its public website. On a public website it is impossible to know if the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience, because an adviser cannot know the financial situation of a general audience.
What Does This Mean for Me?
Do not put hypothetical performance on a public website – This is the latest of a series of fines against advisers who presented hypothetical performance on public facing websites. The SEC’s stance is that public presentations of hypothetical performance cannot meet the requirements of the Marketing Rule. If it is still on your website, take it down now.
Choose an Intended Audience – While the SEC believes that retail investors should not see hypothetical performance in advertising, plenty of investors are sufficiently sophisticated. If such an ad would be relevant to their likely financial situation and investment objectives, then presenting hypothetical performance in a discreet, non-public medium is permitted. Firms have made their own policies around intended audiences that are suitable to receive hypothetical performance advertising. Institutional investors, Qualified Purchasers and other advisers are all groups that would likely “have access to the resources to independently analyze this information and who have the financial expertise to understand the risks and limitations of these types of presentations.” This is the standard the SEC referenced in the adopting release of the Marketing Rule. If your intended audience is short on these resources and expertise, consider if presenting hypothetical performance to them is worth the compliance risk.
As much attention as a website may garner with the hypothetical performance, a $430,000 fine means it is probably not worth it. Choose your audience carefully and make sure only the selected audience receives such advertisements. If you have any questions, or if you would like to speak with one of our regulatory experts, let us know.
