The Securities and Exchange Commission (SEC) has settled charges against another firm for failing to comply with the marketing rule as it applies to advertising hypothetical performance.
This time it was The Pacific Financial Group (TPFG), a registered investment adviser based in Bellevue, Wash. that offers self-directed brokerage account (SDBA) management for advisors helping participants with their 401(k), 403(b), and 457 accounts. The charges concerned advertising hypothetical performance on the firm’s public website without adopting and implementing policies and procedures required by the marketing rule.
Under amendments to the marketing rule that took effect on Nov. 4, 2022, registered investment advisers (RIAs) are prohibited from including any hypothetical performance in their advertisements unless they have adopted and implemented policies and procedures “reasonably designed to ensure the hypothetical performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement.”
The SEC’s order maintains that for more than 13 months—from Nov. 4, 2022, through Dec. 15, 2023—TPFG advertised a quarterly performance report on its public website that provided hypothetical performance for 23 portfolios it offered to clients.
According to the order, during the relevant period, TPFG published communications that constituted “advertisements” because they offered the firm’s investment advisory services concerning securities to prospective clients and offered new investment advisory services regarding securities to current clients. The advertisements included hypothetical performance that consisted of performance derived from model portfolios that were disseminated to the general public rather than to a particular intended audience.
Yet, while advertising hypothetical performance during the relevant period, TPFG apparently failed to adopt and implement policies and procedures specifying how it would identify the intended audience of its advertisements or ensure hypothetical performance was relevant to the likely financial situation and investment objectives of the audience.
In March 2024, the firm appointed a new Chief Executive Officer, Chief Compliance Officer, and Chief Legal Officer. According to the SEC, this new leadership team “promptly assessed the facts and cooperated fully with the staff.”
Consequently, the SEC’s order finds that TPFG “willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-1(d) thereunder.” Without admitting or denying the findings, the firm consented to a civil penalty of $430,000, a cease-and-desist order, a censure, and to not advertise hypothetical performance without having the requisite policies and procedures in place.
SEC Enforcement
In recent months, the SEC has stepped up its enforcement of the marketing rule and hypothetical performance. Like the TPFG order, this past April the SEC found that five firms advertised hypothetical performance on their websites without implementing procedures “reasonably designed” to ensure that the performance was relevant to the likely financial situation and investment objectives of each advertisement’s intended audience.
This issue was also addressed in a Risk Alert issued by the SEC in April. The first violation of the marketing rule was announced in August 2023.
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