Recent SEC enforcement actions charging nine firms for non-compliance with the Marketing Rule reaffirms the importance of continued diligence in advertising review. The enforcement actions also provide meaningful takeaways for investment advisors (IAs). This blog will call out some lessons learned from the most recent enforcement actions, but first let’s quickly look at historical context.
Historical context of the SEC Marketing Rule
Since the adoption of Rule 206(4), the SEC has published what I would consider a good bit of guidance and information for IAs. The promise of a sweep was projected to follow soon after the effective date in November 2022, and it has since materialized. In 2023, the SEC’s Examination Priorities described the Marketing Rule as a “significant change to a core examination review area” and acknowledged that “substantive requirements” demanded the industry’s attention. In particular, the 2023 report highlighted the requirement for substantiation of claims surrounding performance reporting, third-party ratings, testimonials, and endorsements. In 2024, the Examination Priorities again alerted the industry that its examiners would be reviewing firms’ marketing practices, this time stressing that related disclosures in Form ADV would be a consideration. I think the SEC’s consistency and persistence is adequate to establish that we have been duly warned!
We have also been showered with guidance. The SEC has published Risk Alerts, Staff Bulletins, and FAQs to help keep the industry apprised of its expectations. It has responded to common questions and informed the industry of its examination findings. (For more background on the rule, you can read this blog.)
The SEC charges nine firms for marketing rule violations
And here we are in the third quarter of 2024 with the SEC announcing charges against nine firms for marketing rule violations, nearly a year to the day of charges against the first batch of nine firms to be charged with non-compliance. Where the first set of enforcement actions focused on firms that were found to have advertised hypothetical performance to mass audiences on their websites without having the required policies and procedures in place (in line with the 2023 Priorities), the second set demonstrates that the SEC expects truthfulness, substantiation, and disclosure in IA marketing (consistent with the 2024 Priorities). I take this as a clear indication that the SEC will continue its quest to promote compliance with the Marketing Rule among its IA constituents in specific focus areas.
I will share my takeaways from the enforcement actions in hopes of keeping you ahead of the curve. Let’s look at the primary categories of the SEC findings underpinning the 2024 batch of nine.
“Conflict-free” findings
Four firms have been sanctioned for non-compliance due to statements in their advertising that claimed they eliminated or had no conflicts of interest between their firm and its customers. The SEC found that the advertising at these firms contradicted disclosures made in their Form ADV. Each firm had in fact disclosed and described in their Form ADV how they have eliminated or mitigated conflicts that exist.
As noted above, the SEC had broadcast its expectation that firms will make the connection between marketing, Form ADV, and the fiduciary standard. There are, of course, other conflicts in most firms; but advertising compensation and its “we are not a BD” counterpart seem common themes in IA marketing. They are also frequently disclosed as conflicts of interest in the ADV.
Many IAs, and apparently those charged in the recent enforcement actions, advertised an alignment of interests based on fee-based compensation or even “conflict-free” status, presumably a differentiator when compared to broker-dealers. In a Staff Bulletin discussing conduct standards for both BDs and IAs, the SEC pulled no punches, stating, "Make no mistake: compensation is a conflict of interest.” In earlier published FAQ guidance for IAs regarding conflict-related Form ADV disclosures, the SEC took a consistent stand. In an FAQ, a question was posed asking whether all broker-dealers and IAs have conflicts of interest. To this, the SEC responded “Yes.” This highlighted the economic incentive to recommend products, services, or account types that have the potential to provide more revenue or other benefits, regardless of the best interest of the retail investor. The SEC concluded its advice with the statement, “[Compensation] can create substantial conflicts of interest for both firms and financial professionals.”
I suggest taking insights from the SEC’s charges to take the following steps:
- Search existing materials for claims similar to the following (each cited in the SEC Orders) in your advertisements and replace them when found:
- “A true fiduciary that puts the client first by aligning incentives and eliminating conflicts of interest.”
- “Free from conflicts of interest.”
- [We] “deliver an unbiased, conflict-free, best-in-class level of service to our clients.”
- [The firm]“provides clients with conflict-free advice.”
- Language claiming to put the client first by “aligning incentives and eliminating conflicts of interest.”
- Prior to approving advertisements, check any claims made against disclosure documents including Form ADV, Part 2A and 2B.
Charges of untrue statements regarding third-party ratings
The SEC’s Marketing Rule contains a general prohibition from making any untrue statement of a material fact, or omitting a material fact, necessary to make the statement in the subject advertisement not misleading. This is not new to compliance professionals. Importantly however, in the recent enforcement actions, the SEC applied the general prohibition specifically to third-party ratings, finding that four firms included third-party ratings in their advertisements without disclosing when the ratings were given, what periods of time the ratings were based on, or that the ratings were aged as required in the Marketing Rule (Rule 206(4)-1( c )1, Rule 206(4)-1( c )2).
Ebook download → Navigating regulatory compliance: three questions to help you get on the right path
In what is typically a principles-based environment, the precision of the Marketing Rule regarding the promotion of third-party ratings stands out to me for its concise and prescriptive tone. It mandates both the criteria for due diligence to ensure the balance and integrity of the award and its sponsor, and it recites specific disclosure requirements.
The takeaway I drew from this was that compliance departments have the opportunity to provide very specific instructions to the advertising review team to achieve compliance. No interpretation needed for the principles behind the rule—just the written requirements. In addition, just a few nuances worth sharing based on the Orders:
- Awards five years old or older may simply be too old to be touted; but for certain if they are, prominence should be a factor when disclosing the date on which the rating was given and the period of time upon which the rating was based;
- Misstating the name of an award, even by a single word, is problematic, thus reinforcing the importance of substantiation.
Testimonials
With the implementation of the Marketing Rule, we have put our age-old instincts aside and carefully digested the new and substantially refreshed framework regarding testimonials and solicitations.
Previously expressly prohibited client testimonials are now permissible provided they conform to prescribed standards, include required disclosures, and are subject to adviser oversight and compliance. We are permitted to incorporate endorsements from non-clients (previously “solicitors”) into our advertisements under certain terms and conditions that include disclosures.
In the Marketing Rule, the SEC’s rulemaking for testimonials and endorsements is again prescriptive. The definitions are precise, as are the disclosure requirements (Rule 206(4)-1(b)(1)).
Among the most recent charges, the SEC found a firm to have disseminated material it presented as testimonials, which were not statements from current clients. Another was charged for having distributed endorsements without disclosing that the endorser was both (i) a non-client and (ii) paid for its endorsement.
I typically find principles-based rulemaking to be elegant and flexible, allowing a firm to overlay its culture and impose parameters that are tailored and reflect the enterprise. This said, I could be convinced that the prescriptive components of the Marketing Rule, including those related to testimonials and endorsements, are helpful to compliance professionals looking to implement the rule with precision.
My advice: review the definitions, draft and implement the rule precisely as stated, then train the advertising personnel to look for the criteria and disclosures as mandated.
Summary
As I laid out in the introduction, the SEC’s scrutiny has been in lock step with its guidance. Its enforcement areas can be reconciled to its guidance, allowing firms to follow along its open book. The 2024 Exam Priorities was published well ahead of the new year. With luck, the 2025 version will hit our inbox in Q4 with ample time to focus on the target areas.
Just in case that doesn’t happen (and even if it does), in parting, I offer my go-to reference: the year’s latest version of the SEC’s Initial Observations Regarding Advisers Act Marketing Rule Compliance. So far, since the rollout of the Marketing Rule, the Observations have been updated and released year after year. They are concise, comprehensive, and readily convertible into a checklist for review of your marketing programs. The Observations provide insight on how the industry is implementing aspects of the Marketing Rule, some or all of which may be relevant to your firm. Enjoy.
For more on the regulatory landscape for financial services marketing, download the ebook, Navigating regulatory compliance: three questions to help you get on the right path.
The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Fidelity and any other third parties are independent entities and not affiliated. Mentioning them does not suggest a recommendation or endorsement by Fidelity.
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