On 9 September 2024, the Securities and Exchange Commission (SEC) announced settled charges against nine registered investment advisers for violations of Rule 206(4)-1 (the Marketing Rule). Unlike the prior settlements (which focused primarily on the use of hypothetical performance), these settlements focused on other elements of the Marketing Rule: (i) the prohibitions on statements of material fact that are untrue or that the adviser cannot substantiate; (ii) disclosures relating to testimonials and endorsements; and (iii) required disclosures for third-party ratings. Many of these violations were based on website disclosures. In total, nine advisers agreed to pay US$1,240,000 in combined civil penalties, ranging from US$60,000 to US$325,000.
These settlements provide some color as to what the SEC will consider to be “untrue or unsubstantiated statements of material fact,” specifically:
- Incorrectly describing a “Top 100 Women Financial Advisors” rating as a “Top 100 Women’s Advisor”;
- Claiming the adviser was a member of an organization that did not exist;
- Including claims of “eliminating conflicts” or providing “conflict-free” advisory services without context or while disclosing conflicts on Form ADV; and
- Describing an award provided to a principal that the firm could not substantiate.
This set of settlements also addresses violations of the testimonials and endorsement provisions of the Marketing Rule, including the following issues:
- Identifying as a “testimonial” statements from a former client (i.e., therefore an “endorsement”); and
- Endorsements in an advertisement that did not disclose that the endorser was a paid, non-client of the adviser.
Finally, these settlements implicate the Marketing Rule requirements for third-party ratings in advertisements, finding that advisers failed to disclose the dates on which the ratings were given or the periods of time upon which the ratings were based. One such advertisement was described as including a rating that was over 20 years old. The release of these settlements underscores the SEC’s continued effort to bring Marketing Rule enforcement actions, even for relatively minor fines.