A recent risk alert from the U.S. Securities and Exchange Commission (SEC) highlights a central compliance issue facing many registered investment advisers: misrepresentations and omissions in marketing materials. The alert is a reminder to investment advisers of the importance of maintaining transparency and accuracy in all communications with clients and investors. It’s also a cue to encourage anyone with information about potential violations of the SEC’s marketing rule or other securities law violations to report that information through the SEC’s Whistleblower Program.
The SEC's new marketing rule governs how investment advisers communicate with clients and prospective investors. The rule requires advisers to provide accurate and balanced information in their marketing materials, disclose conflicts of interest, and maintain records to support performance claims. Updated in December 2020 (for the first time in over 40 years), the rule allows advisers to use testimonials and endorsements under certain conditions, but they must disclose whether the person giving the testimonial is a client and whether they are compensated. The SEC has emphasized that compliance with the marketing rule is crucial for maintaining investor trust and market integrity.
The SEC's recent risk alert identified several instances where advisers' advertisements contained statements that appeared to be untrue or omitted material facts necessary to prevent the statements from being misleading. Examples of such misconduct include claims by advisers that they were "free of all conflicts" or that their investment processes were validated by professional institutions. In some cases, advertisements recommended certain investments without disclosing conflicts of interest tied to the compensation advisers received for such recommendations. Additionally, the alert noted instances where advisers used images of celebrities to imply endorsements that had not actually been made.
While many advisers have policies in place for marketing rule compliance and provide training on the rule, the SEC found gaps in these policies and procedures. These deficiencies include incomplete or informal policies, as well as a lack of documentation to support performance claims made in advertisements. For example, some advisers failed to keep copies of information posted to social media or maintain documentation to back up performance claims.
This is not the first time the SEC has addressed advertising issues within the industry. Last June, the agency indicated that staff were conducting focused exams and broad reviews, particularly with respect to testimonials and endorsements in ads.
As far as enforcement goes, the SEC announced the same day it published the Risk Alert that five investment advisory firms agreed to pay a combined $200,000 in penalties to settle allegations that they violated the marketing rule by advertising misleading hypothetical performance. And in September 2023, the SEC charged nine investment advisers with violations of the marketing rule in a broad enforcement sweep—specifically, for improperly advertising hypothetical performance to the general public on their websites—for which the firms paid $850,000 in combined penalties.
Investment advisers must maintain transparency and accuracy in all marketing materials to ensure compliance with regulatory requirements. By addressing any deficiencies in policies and procedures and conducting thorough reviews of marketing materials, advisers can mitigate the risk of enforcement actions and maintain the trust of clients and investors.
Investment advisers who have information about potential violations of securities laws, including the marketing rule, may be eligible to report such violations to the SEC through its whistleblower program. The SEC's whistleblower program offers protections and incentives for individuals who provide original information that leads to successful enforcement actions. If you have information about securities violations, including misleading marketing practices, contact us.
