SEC Brings Recent Cases on Misleading Marketing Practices
On March 18, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced settlements with two investment advisers for making false and misleading statements about their purported use of artificial intelligence. The firms agreed to settle the SEC’s charges and pay $225,000 and $175,000 in civil penalties, respectively. While the cases are sensational because of the use of claims involving “artificial intelligence,” ultimately, the charges involve the risks of making false or misleading statements in the marketing of the services that the registrants offer. Rule 206(4)-1 under the U.S. Investment Adviser’s Act of 1940, as amended (also known as the “Marketing Rule”) prohibits: (i) making an untrue statement of a material fact, or omitting a material fact necessary to make the statement made, in light of the circumstances under which it was made, not misleading; (ii) making 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 SEC; and (iii) including information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the adviser.
On April 12, 2024, the SEC announced settlements with five registered investment advisers for violations of the Marketing Rule. All five firms have agreed to settle the SEC’s charges and pay penalties ranging from $20,000 to $100,000, respectively. The SEC’s orders found that each of the five firms used hypothetical performance presentations on their websites without adopting and implementing policies and procedures required by the Marketing Rule. The primary violation was that each of the firms failed to implement procedures that are designed to ensure that hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience. In very similar cases announced earlier, in September 2023, the SEC settled charges against nine registered investment advisers for advertising hypothetical performance to the public on their websites, again without adopting and/or implementing policies and procedures required by the Marketing Rule. In that instance, the firms agreed to settle the SEC’s charges and pay penalties ranging from $50,000 to $175,000, respectively. As a side note, all of these cases beg the question as to why the firms used hypothetical performance on their website.
Each of these enforcement actions are instructive for firms in the investment management industry. Firms should recognize a very basic need to have written, detailed guidance for supervisory staff to use in the review and approval of marketing materials before such marketing materials are used. Such procedures should help to ensure compliance with the Marketing Rule, as well as potentially any other regulatory guidance that may apply. Most notably, marketing presentations for public and private investment funds and their advisers are often used by FINRA-regulated broker-dealers who introduce the funds and advisory services to their clients. FINRA-regulated firms are subject to similar rules that, under certain circumstances, are even more stringent. All participants in the investment management industry should adopt robust supervisory procedures, and those procedures should be implemented by individuals who are experienced in these matters. You should contact Tom Kennedy – Partner, Regulatory Compliance Practice, at (212) 573-8038 or tkennedy@sadis.com, if you need guidance on the SEC’s or FINRA’s marketing regulations, or any other assistance with implementing your firm’s supervisory procedures.
