SEC Charges Nine Investment Advisers in Ongoing Marketing Rule Sweep

September 11, 2024

What happened?

On September 9, 2024, the SEC announced that it had settled charges against nine registered investment advisers (“RIAs”) for violating the Marketing Rule by disseminating advertisements that included untrue or unsubstantiated statements of material fact or testimonials, endorsements, or third-party ratings that lacked required disclosures. Combined, these nine RIAs agreed to pay $1,240,000 in civil penalties.

“Investment advisers must comply with all aspects of the Marketing Rule, and we will continue to hold them accountable when they fail to do so.” said Corey Schuster, Co-Chief of the SEC Division of Enforcement’s Asset Management Unit. The following were the specific violations of the Marketing Rule that resulted in charges:

Untrue or Unsubstantiated Statements of Material Fact

• Stating the firm was named a “Top 12 Financial Adviser”
  • When the ranking was actually for the Top 1200 Financial Advisers.
• Claiming investment advice was “free from conflicts of interest” and “conflict-free,”
  • RIAs cannot substantiate a complete absence of conflicts because the ADV Part 2A brochure discloses actual conflicts RIAs have with clients.
• Claiming the CEO was named top manager for “14 consecutive years by the readers of San Diego Magazine.”
  • Could not substantiate the CEO had, in fact, received the rating for each year.
  • Additionally, the readers did not vote on top managers, instead the magazine used a third-party that evaluated independent metrics.
• Stating the firm was “a true fiduciary that puts the client first by…eliminating conflicts of interest.” Another adviser, stating it serves individuals “independently, with no conflicts of interest.”
  • Could not reasonably substantiate this statement upon demand by the SEC.
  • An RIA will never be able to eliminate all conflicts of interest and should not imply this has occurred.
• Claiming to be a “Member” of “Fiduciary Firm.”
  • When not actually a member of such firm, and where such firm was found to be a non-existent organization.

Testimonials, Endorsements, or Third-Party Ratings Lacking Disclosures

• Third-Party Ratings did not clearly and prominently display the date.
  • Ratings received years earlier in 2002, 2007, 2019, etc. did not indicate the date of the rating or the time period the rating covered.
  • Dates must be prominently displayed with the rating and cannot be behind a link to another webpage nor hidden in separate disclosures.
  • Without a clear and prominent date, older ratings also violated the general prohibition against misleading statements.
• Testimonials lacked disclosures.
  • A firm had a “testimonial” page on their website that did not disclose client status, whether they were compensated, and any material conflicts.
  • One testimonial was actually from a former client, and another “client” quoted on the page could not be verified as a client when asked by the SEC.
• Compensated Endorsements lacked disclosures – specifically, sponsoring an athletic program where presentations of the statement “[Firm Name] Official Wealth Manager of [Athletic Program]” was deemed to be an endorsement.
  • The third-party presented the RIA’s name and the statement “Official Wealth Manager of Athletic Program” online, in videos, on physical objects like bags and flags, and on the arena’s jumbotron during games.
  • The SEC found that this statement constitutes an endorsement because it is a statement by a person other than a current client that indicates approval, support, or recommendation of the firm.
  • None of these compensated endorsements included the necessary clear and prominent disclosures: client status, compensation, and a brief statement of material conflicts of interest.

What does this mean for me?

A year ago, on September 11, 2023, we saw a round of enforcements against advisers presenting hypothetical performance.  A year later, another round of enforcement has revealed more of the SEC’s interpretation of this rule. The compliance space was divided on what aspect of the rule would appear in the next enforcements: substantiation or third-party promotion. It turns out the SEC was working on both. For compliance professionals that work on reviewing marketing for RIAs, these enforcements offer some easy fixes and some difficult challenges.

On substantiation, it is clear that the SEC will not accept RIA claims of being free from conflicts of interest.  Right now, compliance programs should review all of their marketing materials, websites, templates, etc., for such claims. Strike them out because you will not win this argument with the SEC. A harder challenge may be the fact-checking of other statements. Is it easy to ask the CEO if he or she really was rated so highly for 14 consecutive years? If you find out otherwise, how hard will it be to rewrite their CV and biographical slides in marketing? The more a factual claim celebrates your people and your firm, the more time you should spend seeing if the claim can actually be substantiated. Collect your proof substantiating the most common claims used to market your firm. Not only will you be ready for the SEC, but you may also find some hidden violations before they earn your firm a monetary penalty.

For third-party promotion, the new Marketing Rule’s disclosures were a big change. It is not a surprise that firms failed to fully adopt the prominent disclosures. Your first task is to look for every third-party award, rating, or ranking and make sure the date and/or time period is disclosed prominently in the same place as the award, ranking, or rating.  Old dates do diminish the power of an award.  That is the tradeoff in the new rule. It is a package deal: you can present stale ratings, but you must disclose the date that reveals how stale they are. If your firm is not comfortable showing the date, then you must take down the rating.

For testimonials and endorsements, these prominent disclosures of client status, compensation, and material conflicts must be present. Before that, if you can’t substantiate client status, you’ve now violated two parts of the rule.  Get your facts straight first, then properly disclose them.

Third-party statements of approval must contain the required disclosures. Many may be shocked at how a bland statement like “official wealth manager” was deemed to be a statement of approval meeting the definition of an endorsement. Let’s take a step back.  Why did the RIA sponsor the athletic program?  Why did the RIA pay for this statement to go out on the website, social media, bags, flags, and jumbotron?  It was to promote the firm.  Like it or not, the SEC has now made clear that even a bland statement of approval is an endorsement. To be compliant, that web traffic, social media mentions, bags, flags, and jumbotron displays would all have to include the required disclosures that the athletic program was not a client, that it was compensated for stating the RIA was the official wealth manager of the program, and a brief disclosure of material conflicts of interest.

If you sponsor an event, be sure that any statements of approval will include these necessary disclosures. As the RIA, you will have to insist on it.  Advisers are held to the requirements of the Advisers Act, and these latest enforcements demonstrate that the SEC is looking for violations.