SEC Fines 9 RIAs for Marketing Rule Violations

Last week, the SEC brought and simultaneously settled nine (9) administrative enforcement actions against separate RIAs for violating Rule 206(4)-1, the “Marketing Rule,” and specifically the restrictions relating to the use of hypothetical performance. The firms were Artemis Wealth Advisors, LLC; Trowbridge Capital Partners, LLC; MRA Advisory Group; McElhenny Sheffield Capital Management, LLC; Macroclimate, LLC; Linden Thomas Advisory Services, LLC; Hansen & Associates Financial Group, Inc.; Elm Partners Management, LLC; BTS Asset Management Inc. and Banorte Asset Management, Inc.

The sanctioned advisory firms all continued to advertise the returns of model portfolios beyond the November 2022 mandatory compliance date without implementing procedures reasonably designed to achieve compliance with the new rule. For instance, the firms failed to implement policies and procedures designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience.

The sanctioned firms disseminated hypothetical performance to a mass audience rather than only presenting such material to an intended audience for whom the presentation would likely be relevant. Although the settling firms advertised the returns on their public websites, indiscriminate, broad circulation would similarly have constituted a violation.

The new Marketing Rule, the mandatory compliance date of which was November 4, 2022, wrought significant changes to the ways advisers can permissibly market performance. Among the types of performance brought within the rule’s definition of “hypothetical performance” are targeted returns, projected returns, back-tested returns and many others. The rule certainly represents a sea change event for advisers who previously advertised returns of a classic so-called “model portfolio.” Although the use of and manner of presentation of model portfolio returns was somewhat restricted by prior No-Action Letters, those letters were withdrawn and supplanted by the considerably more restrictive Marketing Rule.

Characterizing the advisers’ conduct as “willful,” the SEC imposed civil penalties of approximately $91,000, on average, against the nine advisers. The highest penalty was $175,000. The SEC’s order also required the firms to implement compliant procedures and to file certifications that the adviser’s undertakings had been accomplished.

These enforcement actions are indicative of the SEC’s stated exam priorities. The Commission described the new Marketing Rule as a “significant change” to a “core” exam review subject. As such, it indicated there would be a focus on whether the advisers had adopted sufficient procedures and had complied with the rule’s substantive requirements, “including the requirement that RIAs have a reasonable basis for believing they will be able to substantiate requirements for performance advertising,” among other things. These performance advertising violations follow on the heels of other enforcement cases premised on violation of the Marketing Rule, including one earlier this month in which an RIA settled charges that it made material misrepresentations in connection with its performance claims.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.

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