Blogs from September, 2023


SEC Ground Plaque

SEC Announces Settlements with Investment Advisers for Marketing Rule Violations

by R Tamara de Silva

On September 11, 2023, the Securities and Exchange Commission (SEC) made announced settlements with nine registered investment advisers for alleged violations of the Investment Advisers Act's new marketing rule, Rule 206(4)-1. The rule, also known as the "Marketing Rule," pertains to the advertising of hypothetical performance information to the general public on the advisers' respective websites. The SEC found that these firms failed to adopt policies and procedures that would reasonably ensure the relevance of hypothetical performance to the financial situation and investment objectives of their intended audience.

The SEC's Action

In a press release issued on September 11, 2023, the SEC unveiled its charges against the following firms:

  1. Banorte Asset Management Inc.
  2. BTS Asset Management Inc.
  3. Elm Partners Management LLC
  4. Hansen and Associates Financial Group Inc.
  5. Linden Thomas Advisory Services LLC
  6. Macroclimate LLC
  7. McElhenny Sheffield Capital Management LLC
  8. MRA Advisory Group
  9. Trowbridge Capital Partners LLC

These charges stem from the violation of the Marketing Rule, which prohibits registered investment advisers from including hypothetical performance in their advertisements without implementing policies and procedures designed to ensure that such performance aligns with the likely financial situation and investment objectives of the intended audience.

The Settlement Terms

All nine firms charged by the SEC have agreed to settle the charges. As part of the settlements, they will collectively pay a total of $850,000 in penalties. Additionally, the firms have accepted the following terms:

  • Censure: The firms will be censured as a result of their violations.
  • Cease and Desist: They will cease and desist from violating the charged provisions.
  • Undertakings: The firms have undertaken not to advertise hypothetical performance without having the requisite policies and procedures in place.
  • Civil Penalties: Each firm will pay civil penalties ranging from $50,000 to $175,000.

SEC's Ongoing Vigilance

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, emphasized the importance of compliance with the Marketing Rule, especially when it comes to hypothetical performance advertisements. Such advertisements have a powerful impact on prospective investors, making it crucial for investment advisers to implement policies and procedures to ensure compliance with the rule.

Grewal stated, "Because of their attention-grabbing power, hypothetical performance advertisements may present an elevated risk for prospective investors whose likely financial situation and investment objectives don't match the advertised investment strategy. It is, therefore, crucial that investment advisers implement policies and procedures to ensure their compliance with the rule. Until that is the case, we will remain vigilant and continue our ongoing sweep to ensure that investment advisers comply with the Marketing Rule, including the requirements for hypothetical performance advertisements."

The SEC's actions against these investment advisers underscore the importance of adherence to regulations, particularly in the realm of financial advertising. As the SEC continues to enforce the Marketing Rule, it sends a clear message that ensuring the protection of investors and maintaining the integrity of the financial industry remain top priorities.

If you have been charged with an SEC rule violation or would like to speak to experienced white collar defense counsel with deep knowledge of the financial markets, call us today.

R Tamara de Silva

September 13, 2023

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