The SEC sent another shot across the bow to warn Registered Investment Advisers (RIAs) that the Commission is deadly serious about enforcing the Marketing Rule. On April 12, 2024, the SEC charged five RIAs with violating the Marketing Rule. All of those firms agreed to settle the SEC’s allegations and to pay $200,000 in combined penalties. They also agreed to other sanctions imposed by the SEC.
The SEC found that all five RIAs advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures that were reasonably designed to ensure that the illustrated results were relevant to the likely financial situation and investment objectives of the advertisement’s intended audience. Four of the firms received reduced penalties because they took corrective measures before being contacted by the SEC.
The Fifth RIA Made Several Other Compliance Mistakes
According to the SEC’s order, the fifth RIA also violated several regulatory requirements. Not surprisingly, this RIA paid the highest civil money penalty of $100,000.
This firm, which is headquartered in Cranston, Rhode Island, allegedly made false and misleading advertisements on its public website and its social media sites. As an example, the firm’s promotional video claimed that, unlike other RIAs, it did not charge clients twice. According to the SEC, however, individual clients who invested in the RIA’s pooled investment vehicle did pay the fund’s management fee, as well as an advisory fee based upon the value of their assets under management. The video also falsely claimed that money invested in the RIA’s fund would never be commingled with other clients as is the case with mutual funds.
In addition, the RIA advertised certain factsheets on its public website that illustrated misleading model portfolio performance. Certain factsheets advertised gross performance without net-of-fee returns. Furthermore, the factsheets presented performance that was consistently inaccurate.
The SEC’s complaint alleged that the RIA made material statements of fact in certain advertisements without being able to produce substantiating documents. Specifically, the RIA could not produce records to substantiate the performance shown in its factsheets and could not prove its statement that the firm’s models outperformed the market over most timeframes while taking less risk.
Along with its compliance problems related to hypothetical performance advertising, the RIA paid more than $1,000 to each of the two unaffiliated accounting firms for endorsements intended to obtain clients through referrals. The RIA did not, however, have a written agreement with either firm providing the endorsements.
The RIA also made misleading statements to investors in its fund regarding the performance of a tracking account that the firm advised. The misleading statements were included in a prospectus filed with the SEC.
In addition to other deficiencies, the RIA failed to keep copies of advertisements published on its public website. Furthermore, the firm did not maintain records or documentation that was necessary to calculate the model portfolio performance contained in the factsheets.
On top of its other alleged transgressions, the RIA failed to adhere to certain compliance policies and procedures. For example, the RIA’s Chief Compliance Officer (CCO) failed to review and approve all marketing materials in writing prior to their dissemination and to maintain a log of those approvals. Although the Marketing Rule does not require CCOs to preapprove advertisements, they must do so if their compliance manual stipulates that they will. This particular RIA’s compliance manual also required any person giving an endorsement for compensation to provide referred individuals with certain disclosures and to obtain written confirmation that the referred client did, in fact, receive those disclosures.
Takeaways
Without admitting or denying the SEC’s findings, all of the firms consented to the entry of orders finding that they violated the Investment Advisers Act of 1940. They were censured and ordered to cease and desist from violating the provisions identified. The Enforcement Actions can be found at SEC.gov | SEC Charges Five Investment Advisers for Marketing Rule Violations.
This is the second group of enforcement actions the SEC has brought as part of an ongoing targeted sweep pertaining to the Marketing Rule. The SEC previously charged nine RIAs in September 2023.
The SEC’s actions demonstrated that the Commission will continue to target RIAs that fail to fulfill their compliance obligations and remind them that they must take corrective steps immediately. RIAs will face fewer sanctions if they take these corrective actions before being contacted by the SEC.
Always keep in mind that RIAs are likely to have problems with examiners if they fail to comply with their policies and procedures in every respect. When compliance deficiencies occur, examiners are likely to blame inadequate policies and procedures or the firm’s failure to adhere to their compliance manual.
During almost every examination, examiners will be on the lookout for false and misleading statements in RIAs’ SEC filings, press releases, and advertisements. On March 18, 2024, two RIAs were charged with making false and misleading statements regarding their purported use of artificial intelligence. The SEC found that the firms exaggerated their artificial intelligence and machine learning capabilities. The firms agreed to pay a combined amount of $400,000 in civil penalties. More information regarding those enforcement cases can be found at SEC.gov | SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 – sales@ria-compliance.com
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