In a development that underscores the steady tightening of regulatory scrutiny, on September 11, 2023, the Securities and Exchange Commission has announced settlements with nine registered investment advisers over alleged violations of the Investment Advisers Act’s new marketing rule (Rule 206(4)-1).
The cornerstone of the conflict, as per the SEC’s allegations, is the incorrect handling of hypothetical performance information. The accused investment advisors advertised these speculative performance metrics without having in place any established policies and procedures reasonably designed to validate that the hypothetical performance is germane to their potential consumer base.
For legal professionals, it’s crucial to appreciate what the enforcement action signifies in terms of the scope of the new Marketing Rule. It necessitates the adoption of internal processes and oversight capabilities to handle delicate matters like public advertising and marketing activities.
While the specifics about the settlements remain undisclosed, we can glean something given the frequency at which aspects like advertising and marketing practices tend to be the cause of litigation in finance. This episode serves to highlight the importance of maintaining stringent safeguards, complete transparency in communication of potential risks and rewards, alongside strictly following regulations in all public-facing messages.
It’s becoming increasingly clear that regulatory bodies like the SEC are keeping a very vigilant eye on areas previously devoid of such regulatory penetration. Thus, investment advisers and large corporations alike need to carefully review and, if necessary, adjust their regulatory compliance strategies to ward off liabilities and penalties.
Law firms advising these entities should likewise guide their clients through every aspect of their advertising and marketing policy, ascertain compliance, and conduct routine evaluations to limit the potential for regulatory infractions. Regulatory compliances must be treated less as a hurdle and more as an instrument that ensures fair advertising, which is ultimately beneficial for both firms and consumers.
This situation offers a broader lesson for investment companies and their advisors – one cannot discount the importance of laying down robust, comprehensive, and strategically sound policies and procedures. These operational guidelines are not just about ticking a regulatory checkbox; they are practical measures that can prevent breaches and secure the integrity of the firm in the eyes of regulators and clients.