Enforcement News: SEC Enforces Violations of Amended Marketing Rule Against Five Investment Advisors

Print Article

Posted on: May 1 2024

On December 22, 2020, the Securities and Exchange Commission (the “SEC” or the “Commission”) adopted significant amendments to Rule 206(4)-1 promulgated under the Investment Advisers Act of 1940 (the “Amended Marketing Rule”). Rule 206(4)-1 governs marketing by Commission-registered investment advisers.¹

Among other things, the Amended Marketing Rule states that it is unlawful for registered investment advisers, directly or indirectly, to disseminate any advertisement that includes:²

• any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statement made, in light of the circumstances under which it was made, not misleading;³

• any material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;⁴

• any endorsement, and prohibits an adviser from providing compensation (other than de minimis compensation), directly or indirectly, for an endorsement, unless the adviser has a written agreement with any person giving an endorsement that describes the scope of the agreed-upon activities and the terms of compensation for those activities;⁵

• any presentation of gross performance, unless the advertisement also presents net performance: (i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance; and (ii) calculated over the same time period, and using the same type of return and methodology, as the gross performance;⁶ or

• any hypothetical performance,⁷ unless the registered investment adviser “(i) adopts and implements policies and procedures reasonably designed to ensure that the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement; (ii) provides sufficient information to enable the intended audience to understand the criteria used and assumptions made in calculating such hypothetical performance; and (iii) provides . . . sufficient information to enable the intended audience to understand the risks and limitations of using such hypothetical performance in making investment decisions ….”⁸

On April 12, 2024, the SEC announced (here) that it settled charges against five registered investment advisers for violating the Amended Marketing Rule. All five firms – GeaSphere LLC, Bradesco Global Advisors Inc., Credicorp Capital Advisors LLC, InSight Securities Inc., and Monex Asset Management Inc. – agreed to settle the SEC’s charges and to pay $200,000 in combined penalties.

In the SEC’s orders,⁹ the Commission found that the five firms advertised hypothetical performance to the general public on their websites without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience, as required by the Amended Marketing Rule. Four of the five firms – Bradesco, Credicorp, InSight, and Monex – received reduced penalties because of the corrective steps they undertook in advance of being contacted by the SEC staff.

The SEC also found that GeaSphere violated other regulatory requirements, including by making false and misleading statements in advertisements, advertising misleading model performance, being unable to substantiate performance shown in its advertisements, and failing to enter into written agreements with people it compensated for endorsements. In addition, the SEC found that GeaSphere committed recordkeeping and compliance violations and made misleading statements about its performance to a registered investment company client and that the misleading statements were included in the client’s prospectus filed with the Commission.

“The Marketing Rule’s provisions are crucial to protecting investors from misleading advertising claims,” said Corey Schuster, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Today’s actions show that we will continue to employ targeted initiatives to ensure that investment advisers fully comply with their obligations under the rule. They also serve as a reminder of the benefits to firms that take corrective steps before being contacted by Commission staff.”

Without admitting or denying the SEC’s findings, all of the firms consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured, cease and desist from violating the charged provisions, and comply with certain undertakings. GeaSphere agreed to pay a civil penalty of $100,000. Bradesco, Credicorp, InSight, and Monex agreed to pay civil penalties ranging from $20,000 to $30,000, which reflected certain corrective steps taken by each of these firms prior to being contacted by the Commission staff.

This is the second set of cases that the Commission has brought as part of an ongoing targeted sweep concerning Amended Marketing Rule violations after charging nine advisory firms in September 2023 (here).

Footnotes

See Investment Adviser Marketing, Release No. IA-5653 (Dec. 22, 2020) (effective May 4, 2021).
The Amended Marketing Rule defines an “advertisement,” in pertinent part, to include “[a]ny direct or indirect communication an investment adviser makes . . . to one or more persons if the communication includes hypothetical performance, that offers the investment adviser’s investment advisory services with regard to securities to prospective clients … or offers new investment advisory services with regard to securities to current clients.” Rule 206(4)-1(e)(1).
Rule 206(4)-1(a)(1).
Rule 206(4)-1(a)(2).
Rule 206(4)-1(b).
Rule 206(4)-1(d)(1).
“Hypothetical performance” is defined as “performance results that were not actually achieved by any portfolio of the investment adviser” and includes, but is not limited to, performance that is backtested by the application of a strategy to data from prior time periods when the strategy was not actually used during those time periods. Rule 206(4)-1(e)(8)(i)(B).
Rule 206(4)-1(d)(6).
The five orders can be found here, here, here, here, and here.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.