SEC Enforcement: RIAs Under Scrutiny For Marketing Rule Compliance

The Securities and Exchange Commission (SEC) recently made headlines by censuring nine registered investment advisors (RIAs) and imposing combined penalties of $850,000 as part of an ongoing examination of firms’ compliance with its revamped marketing and advertising rule. This regulatory action highlights the importance of compliance for RIAs in today’s financial landscape. In this blog, we’ll delve into the SEC’s new marketing rule, how it can affect RIAs, and the role that AdvisorLaw can play in positioning you to remain in compliance.

Understanding The SEC’s New Marketing & Advertising Rule

In 2020, the SEC introduced a comprehensive overhaul of its marketing rule, which mandates how RIAs can advertise their services and communicate with potential clients. One of the key aspects of this rule revolves around hypothetical performance data in marketing materials. The recent enforcement actions mentioned previously are due to the failure to adhere to those provisions.

The SEC’s stance on hypothetical performance is clear: while RIAs are allowed to use such data in their advertising, it must be provided in a manner that is relevant to the likely financial situation and investment objectives of the intended audience. This includes the very important rule that the performance must be shown a net of fees. Additionally, it must be distributed only to a specific pool of potential investors, rather than to a mass audience.

RIAs should exercise caution with hypothetical performance data. The SEC’s message, as emphasized by Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, is that these advertisements, “may present an elevated risk for prospective investors whose likely financial situation and investment objectives don’t match the advertised investment strategy.”

Implications For Registered Investment Advisors (RIAs)

The consequences of failing to comply with the SEC’s marketing rule can be severe, as is evident in the penalties imposed on the nine firms, which ranged from $50,000 to $175,000 per firm. Beyond the financial impact, noncompliance can damage an RIA’s reputation, erode client trust, and lead to potential legal ramifications.

RIAs must not only be aware of the rule — they must also have robust policies and procedures in place to make sure that their marketing materials align with regulatory requirements. Compliance should be a top priority, as the consequences of violations can be detrimental to an RIA’s business.

AdvisorLaw: Your Partner In Compliance

Navigating the intricacies of SEC regulations, especially the evolving marketing and advertising rules, can be challenging for RIAs. This is where AdvisorLaw comes into play. AdvisorLaw’s specialized team focuses on helping RIAs maintain compliance with SEC regulations.

Here’s how AdvisorLaw can assist RIAs in achieving compliance:

  • Policy Development: AdvisorLaw can help RIAs establish and maintain policies and procedures that align with the SEC’s marketing rule. When followed, these policies lead to the creation of marketing materials, including hypothetical performance data, that are accurate, relevant, and appropriately disseminated.
  • Ongoing Compliance Monitoring: AdvisorLaw provides ongoing monitoring and guidance to help monitor an RIA’s marketing practices so that it may remain in compliance with SEC regulations. We stay ahead of regulatory changes and help RIAs adapt their strategies accordingly.
  • Education & Training: AdvisorLaw offers training and educational resources to RIAs and our teams to help keep everyone well-versed in compliance requirements and confidently navigating the regulatory landscape.
  • Risk Mitigation: By proactively identifying potential compliance issues and addressing them promptly, AdvisorLaw helps RIAs minimize the risk of regulatory violations, penalties, and reputational damage.

Compliance with the SEC’s marketing and advertising rule is paramount for registered investment advisors. The recent enforcement actions against nine firms serve as a stark reminder of the consequences of noncompliance. As the regulatory landscape continues to evolve, RIAs must remain vigilant and prioritize compliance.

AdvisorLaw offers a valuable resource for RIAs seeking to navigate the complex regulatory environment. By partnering with AdvisorLaw, RIAs can enhance their compliance efforts, reduce risks, and ultimately focus on what they do best — providing sound financial advice to their clients. In today’s regulatory climate, staying compliant isn’t just a legal requirement, it’s a key component of building trust and success in the financial advisory industry.

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