REGULATORY MONITOR

• Published in: The Investment Lawyer Vol. 31; no. 3; pp. 30 - 33
• Main Authors: Martin, Lori A, Tutor, David, Mann, Justin
• Format: Trade Publication Article
• Language: English
• Published: Englewood Cliffs Aspen Publishers, Inc 01.03.2024
• Subjects: Advertising; Audiences; Compliance; Enforcement; Fines & penalties; Investment policy; Marketing; Violations
• ISSN: 1075-4512

SEC Update Ongoing SEC Marketing Rule Enforcement Sweep Results in Charges Against Investment Advisers On September 11, 2023, the Securities and Exchange Commission (SEC) charged and settled proceedings with nine registered investment advisers for misrepresenting hypothetical performance of advisory products in connection with an ongoing Division of Enforcement (Enforcement) sweep of violations of the Marketing Rule (Rule 206(4)-l under the Investment Advisers Act of 1940).1 Under the Marketing Rule, amended in December 2020, registered advisers are prohibited from, among other things, including hypothetical performance in their advertisements unless they have adopted and implemented policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the advertisement's intended audience. Among other things, the Marketing Rule (1) prohibits advertisements that "[i]nclude a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;" (2) establishes certain performance advertising requirements, which include prohibitions on certain types of representations in investment adviser advertisements; and (3) requires investment advisers to make and keep certain records, such as records of all advertisements they disseminate, including certain internal working papers, performance-related information, and documentation for oral advertisements, testimonials and endorsements.7 In September 2022, the EXAMS Staff issued a risk alert stating that the Staff was planning to "conduct a number of specific national initiatives, as well as a broad review through the examination process, for compliance with the Marketing Rule. [...]the Staff indicated that it did not intend to "pounce immediately on suspected compliance lapses" and suggested that initial enforcement referrals would be limited to those who demonstrated a complete failure to comply with the rule.10 However, while the Staffs initial enforcement referrals appear to be focused on clear failures, advisers can expect more aggressive enforcement of the technical requirements in the future. Early Enforcement Action The proceedings against the nine advisers described above closely followed the SEC's first action under the new Marketing Rule, brought less than one year after the compliance date against fintech investment adviser Titan Global Capital Management USA LLC.12 In its August 21, 2023 order, the SEC found that Titan advertised hypothetical performance without having adopted and implemented 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 and by failing to provide certain information underlying the hypothetical performance advertised.13 Specifically Titan "advertised 'annualized' performance results for Titan Crypto as high as 2,700 percent, but its advertisement did not include material information about how the annualized return was calculated, including that the annualized return was based on a purely hypothetical account, rather than an actual account's performance and that the 2,700 percent annualized return figure was based on the assumption that the strategy's performance in its first three weeks would continue for an entire year.