SEC Settles Charges Against Robo-Advisor for Marketing Rule Violations

The Case

The SEC recently settled charges against a registered investment advisor for violating the requirements of Rule 206(4)-1 of the Advisers Act (Marketing Rule) by circulating advertisements with paid endorsements from professional athletes that lacked required disclosures. The advisor’s website advertised hypothetical performance without adopting and implementing required policies and procedures. 

The Order alleged that for over 18 months, the advisor circulated advertisements on or through their website, social media, and email containing endorsements from professional athletes who the advisor paid without including the required disclosures in any of the advertisements. The Order specifically noted, among other things, that the advisor failed to disclose that the professional athletes were not current clients and compensation was provided for the endorsements, including that one of the professional athletes received an ownership interest in the advisor’s parent company, which constituted a material conflict of interest.

Regulatory Implications

The SEC’s enforcement highlights the critical importance of compliance with the Marketing Rule under the Advisers Act, particularly regarding advertisements with endorsements and the presentation of hypothetical performance. 

Key takeaways include:

Paid Endorsements Require Clear Disclosures:
Under the Marketing Rule, endorsements in advertisements must include:

• Whether the endorser is a current client or investor.

• Details of compensation received for the endorsement.

• A clear explanation of material conflicts of interest, such as financial relationships between the advisor and the endorser.

The SEC considers omitting these disclosures a violation of anti-fraud provisions, as seen in this case where paid endorsements created conflicts of interest that were not properly disclosed.

Hypothetical Performance Requires Robust Policies:

Firms are required to implement policies and procedures to validate that a hypothetical performance:

• Is relevant to the financial situation and intended audience’s investment objectives; and, 

• is not broadly disseminated in a manner that could mislead a general, untargeted audience.

Disseminating unfiltered hypothetical performance to a wide audience, as was the case here, increases the risks of misleading investors and regulatory scrutiny.

The SEC’s enforcement underscores that non-compliance with these requirements, particularly in cases involving high-profile endorsements or widely shared hypothetical results, can cause significant penalties.

Practical Guidance for Firms

Investment advisors should review their marketing strategies and adopt structured processes to meet the requirements of the Marketing Rule:

1. Audit Current Advertising Practices
   Evaluate all advertisements, including endorsements and performance data, for compliance with the Marketing Rule.
   
   

2. Clarify Endorsement Disclosures
   Develop clear language to disclose compensation arrangements and any material conflicts of interest tied to testimonials or endorsements.
   
   

3. Adopt Policies for Hypothetical Performance
   Implement written policies to assess the audience's suitability for hypothetical performance data and avoid broad dissemination to general audiences.
   
   

4. Train Teams on Marketing Rule Requirements
   Educate compliance and marketing staff on the specific disclosures and policies required for endorsements and performance data.
   
   

5. Pre-Approve Advertisements
   Establish a process to review and approve all marketing materials before publication to verify compliance with regulatory requirements.

InnReg supports investment advisors by reviewing advertising policies, identifying compliance gaps, and helping implement practical frameworks for marketing oversight. Our expertise helps firms adapt their practices to align with the SEC’s expectations while mitigating regulatory risks.