In a development that represents the first of its kind, the U.S. Securities and Exchange Commission (SEC) recently announced its decision to level charges against a FinTech Investment Adviser. This marks the first recorded violation of the Marketing Rule, which consequently resulted in additional compliance violations.
As reported by Seward & Kissel LLP, the Adviser is accused of utilizing hypothetical performance metrics in their advertisements. This action stands in direct violation of the anti-fraud rules etched within the Investment Advisers Act of 1940 (the “Advisers Act”).
The SEC further claims that the Adviser is responsible for several compliance failures. The fallout from these compliance breaches led to disclosures regarding the custody of clients’ crypto assets that were fundamentally misleading. Additionally, the Adviser is charged with using inappropriate “hedge clauses” with its client base.
This determination by the SEC forms a stern reminder to all investment advisors about the importance of maintaining robust compliance mechanisms, especially when it comes to advertising and disclosures related to the safekeeping of clients’ assets. It also serves as a precedent-setting case, considering it’s the first instance where the Marketing Rule violation is being tested.