This week the SEC announced its first charges under the new Marketing Rule that went into effect in May 2021. Tital Global Capital Management USA was fined $850,000 for “using hypothetical performance metrics in advertisements that were misleading” and for “multiple compliance failures that led to misleading disclosures about custody of clients’ crypto assets, the use of improper ‘hedge clauses’ in client agreements, the unauthorized use of client signatures and the failure to adopt policies concerning crypto asset trading by employees.”
No firm and certainly no Compliance officer and no Marketing team wants to run afoul of the Marketing Rule. The assessment of this fine is the conclusion of an investigative process that was no doubt quite unsettling for those involved. May all those not involved learn from these first charges and take a beat to consider how taking care in the communication planning process can help avoid such unpleasantness.
Compliance routing involves submitting a specific communication for Compliance review. Compliance reviews what’s on the page, applies applicable standards and returns with comments. That’s the process Marketing is accustomed to.
What’s different about the Marketing Rule is that it doesn’t include specific prohibitions. Rather, the Marketing Rule is built around general prohibitions. Compliance will know them, of course. But think of the time to be saved if Marketing practitioners internalized the rules and seek to apply them themselves—early in the planning as opposed to later in the process when a communication is ready to be reviewed. This is fundamentally different from seeking to avoid certain specific activities.
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“Think of the time to be saved if Marketing practitioners internalized the rules and seek to apply them themselves early in the planning process.”
There are seven general prohibitions that, together, are the foundation of the new rule:
- Making an untrue statement of a material fact: This includes making any untrue statement of a material fact or omitting a material fact necessary to make the statement not misleading.
- Making a materially misleading statement: This includes making a statement that would be misleading due to a material omission or by presenting material information in a way that could cause confusion or misunderstanding.
- Making an unsubstantiated material claim or statement: Advisors must refrain from making material claims or statements that could be considered misleading if they lack substantiation or factual basis.
- Discussing potential benefits without clear and prominent mention of associated risks: If an advertisement discusses the benefits of services, fees, or methods, it must also provide clear and prominent discussion of the associated material risks or limitations.
- Referring to specific investment advice in a way that isn’t fair and balanced: Investment advisers may not misrepresent the advice they gave.
- Including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced: Performance data must be presented in a way that is fair and balanced, without cherry-picking favorable time periods or specific results.
- Otherwise including information that would be likely to mislead: This is a catch-all provision that prohibits any information, activities, or practices not covered by the other specific prohibitions that would be reasonably likely to mislead prospective clients or investors.
In the case of Titan Global Capital Management, the SEC says this about its performance representations (emphasis added): “The order alleges that Titan’s advertisements were misleading because they failed to include material information, for example, that the hypothetical performance projections assumed that the strategy’s performance in its first three weeks would continue for an entire year.”
This is a good example of the need for a principles-based approach. Rather than avoiding some specific prohibition about presenting hypothetical performance, the need is to apply the relevant general prohibitions to specific advertisements.
From the SEC’s news release:
“When offering and marketing complex strategies, investment advisers must ensure the accuracy of disclosures made to existing and prospective investors. The Commission amended the marketing rule to allow for the use of hypothetical performance metrics but only if advisers comply with requirements reasonably designed to prevent fraud,” said Osman Nawaz, Chief of Enforcement’s Complex Financial Instruments Unit. “Titan’s advertisements and disclosures painted a misleading picture of certain of its strategies for investors. This action serves as a warning for all advisers to ensure compliance.”
The bottom line for marketing and communications professionals is the need to understand the principles and be ready to collaborate with compliance professionals to put them into practice. We’re not compliance attorneys—and you should for sure get direction from your own Compliance team—but as we create content for our clients and assist with materials, we keep these principles in mind.
Lowe Group offers a range of content marketing services. To learn more, send us a note and we’ll follow up with you.