SEC cracks down on 9 firms for Marketing Rule violations

In a sudden and significant crackdown on misleading financial industry marketing, the U.S. Securities and Exchange Commission moved against nine registered investment advisers for alleged violations of the Marketing Rule, which strictly governs the use of hypothetical performance data in advertising.

The SEC said the charges stem from the firms' dissemination of theoretical performance data to the general public on their websites without having requisite policies and procedures mandated by The Marketing Rule.

The nine advisory firms that faced charges ranged from Massachusetts to San Francisco and all agreed to settle with the SEC without admitting or denying guilt.

Gurbir S. Grewal, director of the SEC's Division of Enforcement, said the potential risks posed by hypothetical performance ads can be enticing to investors whose financial situations and objectives don’t align with the advertised investment strategies.

Need for rule compliance cited

"It is crucial that investment advisers implement policies and procedures to ensure their compliance with the rule,” he said. “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 Marketing Rule replaced the former Advertising Rule and Cash Solicitation Rule in late 2020 and gave advisers until November of last year to be in compliance. The rules consolidated previous SEC guidance, no-action letters, and exam findings on questions concerning recommendations, testimonials, and the presentation of performance metrics.
In the recent sweep, the SEC was most interested in cracking down on communications of hypothetical performance.

”Claims related to performance and services must be able to be substantiated, and advisers are on notice that they will need to be able to back up those claims with documentation on demand,” said a recent industry alert from The Bates Group, an Oregon-based securities and financial services litigation and consulting organizations. “Experts say that advisers who can’t substantiate a claim will be presumed not to have a reasonable basis for making it.”

Broad models not relevant, says SEC

In nearly every one of the nine cases, the SEC said the advisory firm advertisements contained broad models of hypothetical performance data aimed at the general public and were not relevant to the likely financial situation and investment objectives of an intended audience. The recently adopted rule prohibits investment advisors from using hypothetical performance data in ads unless it is relevant to the financial situation and objectives of the intended advertisement audience.

In some cases, the ads were derived from model portfolios that employed a “strategy from prior time periods when the strategy was not actually used during those time periods,” the SEC settlement orders said.

The nine firms agreed to censure, cease and desist order, agreed not to advertise hypothetical performance without having the requisite policies and procedures, and incurred civil penalties ranging from $50,000 to $175,000.

The nine investment advisory firms are:
• Banorte Asset Management Inc., Houston
• BTS Asset Management Inc., Lincoln, Mass.
• Elm Partners Management LLC, Wyoming
• Hansen and Associates Financial Group Inc, Sacramento Calif
• Linden Thomas Advisory Services LLC, Charlotte, NC
• Macroclimate LLC, San Francisco
• McElhenny Sheffield Capital Management LLC, Dallas
• MRA Advisory Group, Tampa, Fla
• Trowbridge Capital Partners LLC, New York City

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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