Articles Tagged with Advertising

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. Continue reading ›

On August 21, 2023, the U.S. Securities and Exchange Commission (“SEC”) issued an order imposing civil monetary penalties against Titan Global Capital Management USA LLC (“Titan”) for violations of the new investment adviser Marketing Rule, Rule 206(4)-1. The new rule had a mandatory compliance date of November 4, 2022, but advisers could voluntarily adopt the rule sooner. 

Titan elected to comply with the new rule in June 2021; however, the firm did not adopt new policies and procedures or adapt its practices as required by the new rule. Between August 2021 and October 2022, Titan violated the new Marketing Rule by advertising hypothetical performance without adopting policies and procedures reasonably designed to ensure the hypothetical performance was relevant to client’s or prospective client’s financial situation and investment objectives and also by failing to provide information underlying the hypothetical performance as required by the new rule.  Continue reading ›

While it comes with little surprise, on Monday the SEC’s Division of Examinations officially announced the areas of focus regarding compliance with the New Marketing Rule. The recently released Risk Alert was expected as the compliance date for the New Marketing Rule is quickly approaching.

Initially introduced in December 22, 2020 the modernized Marketing Rule allowed for an 18-month transition period ending with a compliance date of November 4, 2022. Since adoption, we have previously written about the passage of the New Marketing Rule and some of the significant areas impacted by the new rule. The newest announcement shows that the SEC is going to initially focus on some of the top-level issues under the New Marketing Rule: policies and procedures, substantiation, and performance advertising.

When reviewing policies and procedures, the SEC will look that the investment adviser has adopted and implemented a compliance program that is reasonably designed to prevent violations of the New Marketing Rule by the firm and its supervised persons. The Risk Alert mirrors sections of the Adopting Release and states that the SEC expects a thorough New Marketing Rule compliance program should include objective and testable means to prevent violations. Testing includes some documentable review process for advertisements for compliance with the policies and procedures.

With the date for compliance with the new Investment Adviser Marketing Rule approaching, now is the time for registered investment advisers to consider how the new rule impacts many facets of their regular practices. One area that should be carefully evaluated is the use of “hypothetical performance.” The new rule expands the definition of an “advertisement” to include many one-on-one presentations that were not covered by the former advertising rule. Now, any one-on-one presentation that contains “hypothetical performance” is subject to the general anti-fraud provisions of the new rule, as well as to several specific conditions and limitations on the use of hypothetical performance.

The definition of “hypothetical performance” is “performance results that were not actually achieved by any portfolio of the investment adviser.” That definition expressly encompasses “targeted or projected performance returns.” The illustration of “targets” or “projections” in one-on-one presentations was previously covered by the general anti-fraud rules, but the new regime imposes more onerous requirements and may indeed prevent RIAs from using the types of illustrations they are currently routinely using with new clients and prospects.

A common approach to acquiring new clients involves presenting an illustration of how a proposed portfolio will perform. This is frequently done through the use of reporting software or publishing services such as Morningstar, Riskalyze, and others, although the adviser may have the ability to customize the inputs and the contents of the final report. Sometimes specific returns are projected, while at other times the projections will show a range or band of returns coupled by a specific probability range.

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The U.S. Securities and Exchange Commission yesterday issued long-anticipated changes to the rules governing marketing for RIAs, including managers of private funds. The changes are designed to modernize the rules to account for the era of digital communication and other marketplace “evolutions.” The rule changes also impact firms’ uses of testimonials and paid solicitors.

By a 5-0 vote, the amendments will replace prior separate rules into a single comprehensive rule that deals with advertising and solicitation. The replaced rules date back to the 1970s and earlier.

By and large, the rules allow for more flexibility. For instance, instead of a blanket prohibition of testimonials, the new rule permits testimonials if certain disclosures are made. These disclosure requirements dovetail with the emphasis on preventing conflicts of interests that was the focus of last year’s IA Release 5248, relating to advisers’ fiduciary duty. The rules also create additional questions related to marketing on Form ADV Part 1.

As discussed in our most recent posting on this blog, the SEC has proposed a wholesale rewrite of its existing advertising and cash solicitation rules. While that last post delved into the specifics of the SEC’s proposed amendment of its advertising rule, in this installment, we take up the Commission’s plans for revamping its cash solicitation rule.

The SEC’s Release No. IA-5407, published on November 4th, aims to modernize both rules to reflect the dramatic changes seen in technology and the advisory industry since the initial adoption of these rules decades ago. While just a proposal for now, it offers the best view into what any ultimate final rules will probably look like. At this stage, RIAs and other industry participants are closely reviewing both proposed rules, and many will be submitting public comments to the SEC as permitted pursuant to the Commission’s public comment process. While the public comment process runs a fixed 60 days, the ultimate publication of final rules is at the SEC’s discretion.

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On November 4th, the SEC released for public comment proposed replacements to its decades-old advertising and cash solicitation rules. The proposed rules, which are accompanied by almost 500 pages of explanatory text, are now subject to the SEC’s “notice and comment” process, whereby interested persons will have 60 days to file comments to the SEC, after which time the SEC will likely issue final versions of the new rules. While the content of the final rules ultimately adopted by the SEC may differ substantially from the versions now being circulated, the current proposals are the most likely outcome at this point in time and offer valuable insight into the SEC’s thinking in this area.

According to the SEC, both the advertising and cash solicitation rules are ripe for updates and modernization as a result of “changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices.” Notably, the advertising rule (Advisers Act Rule 206(4)-1) has been largely untouched since its adoption in 1961. Likewise, the cash solicitation rule (Advisers Act Rule 206(4)-3) has not been amended since its adoption in 1979. In this installment of our blog, we will outline some of the more salient points of the SEC’s proposal to replace the advertising rule. Look for our discussion of the proposed cash solicitation rule amendment in an upcoming post.

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The Securities and Exchange Commission recently issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Massachusetts Financial Services Company (“MFS”), an SEC-registered investment adviser.  According to the SEC’s Order, MFS advertised hypothetical returns pertaining to its blended research stock ratings without informing clients that a number of the hypothetical portfolios’ superior returns were based on back-tested models.  Without admitting or denying the allegations in the SEC’s Order, MFS submitted an offer of settlement to resolve the matter.

According to the SEC’s Order, MFS has employed a quantitative-based research department since 2000.  In 2000, the department developed what MFS calls “blended research” strategies, which involve “combining fundamental and quantitative ratings to arrive at a blended stock score, and by using a portfolio optimization process that considers the blended scores along with risk and other portfolio constraints.”  As of May of this year, MFS had approximately $21 million in assets under management invested in blended research strategies.

The SEC’s Order alleges that from 2006 through 2015, MFS created research proofs based on the blended research analysis. The data and a bar chart describing the analysis were featured in MFS advertisements.  MFS subsequently used the bar chart in three different kinds of marketing materials: in a standard slide deck from 2006 through 2015, in responses to formal requests from clients starting in 2012, and in a white paper that discussed MFS’s blended research strategies.  These materials were marketed exclusively to institutional clients, prospective institutional clients, financial intermediaries, and investment consultants.

On April 17, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York against Justin D. Meadlin (“Meadlin”), an investment adviser, and Hyaline Capital Management, LLC (“Hyaline”), his advisory firm.  The complaint alleges that Meadlin and Hyaline made fraudulent misrepresentations and omitted material facts in order to “induce clients, and prospective investors… to invest funds with them.”  These actions caused them to be in violation of Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-8 under the Advisers Act.

The SEC’s complaint alleges that from September 2012 to April 2013, Meadlin sent emails that exaggerated the amount of Hyaline’s assets under management (“AUM”) to clients and prospective investors.  These emails provided that Hyaline had AUM that ranged from $17.5 million to $25 million.  In reality, however, Hyaline had only $5.5 million in AUM during the relevant time period.  Meadlin also sent emails that contained false statements pertaining to expected AUM. Continue reading ›

On October 18, 2016, Parker MacIntyre hosted a seminar addressing legal issues that registered investment advisers (“RIAs”) often face, including developing cybersecurity guidance and implications of the new Department of Labor Fiduciary Rule.  The attendees consisted of sixteen individuals representing thirteen RIAs registered from around the southeast.  Both SEC-registered and state-registered RIAs were represented among the attendees.

Parker MacIntyre was pleased to welcome Noula Zaharis, the Director of the Securities and Charities Division of the Secretary of State of Georgia, as a guest speaker.  She began the seminar with a presentation on how the Georgia Secretary of State registers and regulates investment advisers and common deficiencies encountered by the Georgia regulators.  Highlights from another presentation, entitled “Common Deficiencies, Exam Priorities, and Regulatory Initiatives,” included common deficiencies found in RIA examinations, exam priorities that RIAs should ideally be aware of, and the Secretary of State’s regulatory initiatives. Continue reading ›

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