November 18, 2024
What happened?
On November 1, 2024, the SEC Division of Enforcements charged Wahed Invest, LLC (“Wahed”), a registered investment adviser, for violating the Marketing Rule. Wahed paid professional athletes to endorse the firm and disseminated these endorsements without the required disclosures. Additionally, Wahed presented hypothetical performance on its public website without adopting and implementing required policies and procedures or ensuring the performance was relevant to the likely financial situation and investment objectives of the intended audience. In a separate enforcement, the SEC charged Invesco Advisers, Inc. (“Invesco”) for misleading statements around the integration of environmental, social, and governance (ESG) factors in investment decisions. Wahed agreed to pay a $250,000 civil penalty to settle the charges, and Invesco paid a $17.5 million penalty.
Endorsements and Hypothetical Performance
Wahed paid professional soccer players and professional mixed martial arts athletes for displaying images of the athlete and the athlete’s name alongside messages that read:
The Marketing Rule definition of endorsement includes any statement by a person other than a current client or investor that:
Even a simple statement like “[j]oin the fight” was enough for the SEC to see a statement of recommendation or solicitation, making it an endorsement in need of disclosures. Endorsements must have clear and prominent disclosure of non-client status, whether compensation was provided for the endorsement and a brief statement of material conflicts of interest resulting from the relationship between the endorser and the adviser. Additionally, the advertisement must disclose the material terms of any compensation arrangement and a description of any material conflicts of interest on the part of the person giving the endorsement resulting from the investment adviser’s relationship with such person and/or any compensation arrangement.
None of the athletes were current clients, while all of them were compensated thousands of dollars for the endorsements. Wahed failed to disclose client status, and that compensation was provided for the endorsers. Further, the soccer player was compensated with an ownership interest, in the form of stock, in the adviser’s parent company. This ownership stake is a material conflict of interest that should also have been disclosed.
In addition to the endorsement issues, Wahed also disseminated hypothetical performance to the general public on their website. Under the rule, advisers must ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement. The SEC reiterated in the order that when hypothetical performance is shared with a mass audience, “an adviser generally could not form any expectations about their financial situation or investment objectives.” Without the possibility of forming such expectations for the public audience of their website, the presentation violated the rule.
Green-Washing
Invesco made misleading statements in board presentations and marketing, claiming a percentage of AUM was “ESG integrated,” such that environmental, social, and governance (ESG) considerations were incorporated into the investment selection process. These statements were made between 2020 and 2022, with the stated percentage of ESG integrated AUM ranging from 70% to 94% of company-wide AUM. However, company-wide AUM included passive ETFs, many of which could not consider ESG factors because they were passive strategies that did not follow an ESG-integrated index. Invesco also had no written policies and procedures on how to calculate what percentage of AUM was ESG integrated.
As revealed by internal documents, there was a belief that hundreds of billions of dollars could be lost to competitors without a rapid ESG integration effort. Marketing claimed ESG integration at a strategy level, but no analysis at a fund or strategy level was ever conducted. Taking into account the substantial number of passive strategies without ESG factors, the percentage of “ESG integrated” AUM was vastly overstated and ran afoul of the anti-fraud provisions of the Advisers Act.
The Acting Director of the Division of Enforcement, Sanjay Wadhwa, summed it up, “Invesco saw commercial value in claiming that a high percentage of company-wide assets were ESG integrated. But saying it doesn’t make it so.”
What does this mean for me?
The SEC continues to find successful charges to bring against advisers. Endorsements need to be presented with compliant disclosures; hypothetical performance cannot be shown to a mass audience and meet the requirements of the marketing rule; and when it comes to statements around “ESG integration,” AI, or any other buzzword – you must do what you say and say what you do.
The SEC will hold advisers accountable for their public statements. As we have seen in the other recently published enforcements, advisers risk large monetary penalties when their marketing and public statements outrun their compliance program. We will continue to monitor the SEC’s approach to enforcement, if you would like to speak with a regulatory expert about your compliance program, please let us know.
