On September 11, 2023, the Securities and Exchange Commission (“SEC”) settled charges against nine different investment advisory firms for advertising hypothetical performance to the general public on their websites without adopting and/or implementing policies and procedures required by the Marketing Rule. This comes on the back of an August 21, 2023 charges against Titan Global Capital Management USA LLC for using hypothetical performance metrics in advertisements that were misleading.
Key Takeaway(s): The SEC’s “told you so” appears to have landed. Almost exactly a year ago the SEC warned advisers that “sweep exams” were going to focus on policies and procedures, performance advertising and books and records. Marketing Rule compliance was included in the SEC’s Examination Priorities in February 2023. The SEC warned advisers again in June 2023 of the general prohibitions.
Prior to the Marketing Rule’s implementation date of November 4, 2022, the SEC Division of Examinations (DOE) released a Risk Alert highlighting initial areas of focus and initiatives related to compliance with the Marketing Rule. The initial areas of focus were:
- Marketing Rule Policies and Procedures,
- Substantiation Requirements,
- Performance Advertising Requirements, and
- Books and Records.
On June 8, the DOE released a Risk Alert to inform investment advisers of additional areas of emphasis in examinations focused on the amended Marketing Rule (Rule 206(4)-1 of the Advisers Act).
The additional areas of focus represented a natural evolution of the DOE’s review of compliance with the Marketing Rule. Whenever new rules are adopted and implemented, the DOE focuses its initial attention on whether advisers have implemented policies and procedures and are keeping the required books and records. That’s the low hanging fruit. The additional areas of focus required time to show up in advisers’ compliance efforts (e.g. an ADV amendment) and therefore it made sense for the DOE to add these areas to their examinations.
August 11, 2023 Enforcement Action
The SEC charged Titan Global Capital Management USA LLC, a New York-based FinTech investment adviser, with making misleading statements on its website regarding hypothetical performance, including by advertising “annualized” performance results as high as 2,700 percent for its Titan Crypto strategy. The order alleges that Titan’s advertisements were misleading because they failed to include material information, for example, that the hypothetical performance projections assumed that the strategy’s performance in its first three weeks would continue for an entire year. The order also finds that Titan violated the marketing rule by advertising hypothetical performance metrics without having adopted and implemented required policies and procedures or taking other steps required by the Commission’s marketing rule, which was amended in December 2020.
Titan agreed to a cease-and-desist order, a censure, and to pay $192,454 in disgorgement, prejudgment interest and an $850,000 civil penalty that will be distributed to affected clients.
September 11, 2023 Enforcement Action
The SEC announced charges against nine registered investment advisers for advertising hypothetical performance to the general public on their websites without adopting and/or implementing policies and procedures required by the Marketing Rule.
All nine firms agreed to settle the SEC’s charges and to pay $850,000 in combined penalties. Penalties by firm ranged from $50,000 to $175,000.
How Trillium Can Help
Compliance Program Development: Trillium helps you put in place policies and procedures that work for your firm. Developing and applying consistent policies and procedures is paramount to fulfilling a firm’s regulatory obligations and fiduciary duty.
Marketing Material Review and Process: Marketing material review and commentary is included as part of Trillium’s comprehensive ongoing compliance support. Trillium also helps clients design and implement marketing material review processes through the use of technology to ensure proper records are created and maintained.