SEC Sweep into Marketing Rule Violations Results in Charges Against Nine Investment Advisers

October 3, 2023

Recently, the Securities and Exchange Commission (the “SEC”) announced charges against nine registered investment advisers (the “Advisers”) for advertising hypothetical performance to the general public on their websites without adopting and/or implementing policies and procedures required by Rule 206(4)-1 (the “Marketing Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”).  All nine Advisers agreed to settle the SEC’s charges and to pay $850,000 in combined penalties.

Violations of the Marketing Rule

The SEC’s orders found that each of the Advisers advertised hypothetical performance to mass audiences on their websites, including hypothetical performance from model portfolios and performance that was backtested by the application of a strategy to data from prior time periods when the strategy was not actually used during those time periods.  In addition, the Advisers failed to adopt and implement policies and procedures reasonably designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience.  Two of the Advisers also failed to maintain required copies of their advertisements.  As a result, the Advisers violated Section 206(4) of the Advisers Act and the Marketing Rule thereunder.


Without admitting or denying the findings, the Advisers agreed to a cease-and-desist order, a censure, to comply with undertakings not to advertise hypothetical performance without having the requisite policies and procedures, and to pay civil penalties ranging from $50,000 to $175,000.


These orders highlight the SEC’s focus on hypothetical performance advertisements, and the Marketing Rule in general.  If you have any questions regarding this memo or the Marketing Rule, please contact your Investment Management Group attorney at Seward & Kissel LLP.