The SEC’s Investment Adviser (IA) Marketing Rule has reshaped how advisers can promote their services. Effective since November 2022, the rule reflects advancements in technology, emerging threats, and evolving investor needs while offering advisers more flexibility in their marketing efforts. However, with these new allowances come stringent compliance requirements and increased regulatory scrutiny on potential violations.
IA Marketing Allowances and Compliance Requirements
Investment adviser marketing efforts may include the following, provided they comply with SEC regulations relating to:
- client testimonials
- endorsements from third parties (such as referral sources)
- third-party ratings
- performance advertising, including hypothetical performance and projected results
Compliance Requirements
- Testimonials and Endorsements – Advisers must adhere to strict disclosure requirements to prevent misleading representations. For endorsements, promoter agreements and promoter disclosure statements also must be implemented.
- Substantiation of Claims – Any marketing claims must be verifiable, with supporting documentation available upon request by the SEC.
- Performance Advertising – Performance must be presented net of fees, with specific time periods, with proper disclosures and substantiation. For hypothetical performance, it must be relevant to the intended audience’s financial situation and investment objectives, with assumptions disclosed to the end recipient.
- Compliance Programs – Firms must establish and maintain robust policies to ensure full adherence to the Marketing rule.
The SEC continues to prioritize enforcement of the Marketing Rule, particularly as firms increasingly misrepresent their use of artificial intelligence (AI) in their services.
The Rise of AI Misrepresentation
Recent SEC enforcement actions have targeted firms that falsely represented or exaggerated their use of AI, a practice known as “AI washing.”
In the investment space, AI washing can involve misleading statements about AI-driven investment strategies, automation capabilities, or predictive analytics. The SEC has taken action against companies that make false or misleading claims about their use of AI without substantive backing.
On March 18, 2024, the SEC released a Press release on enforcement actions taken against two investment advisers for making false and misleading statements about how AI was used in business operations.[1]
In April 2024, the SEC released a Risk Alert[2] on initial observations on compliance with the Marketing Rule on findings from examinations of investment advisers’ adherence to the Marketing Rule.
It is essential for firms to ensure their marketing accurately represents their services, especially when incorporating evolving technologies.
Impact on Our Clients
With these regulatory shifts and heightened scrutiny, firms must carefully review their marketing materials, ensure proper disclosures, and implement robust compliance protocols to mitigate risks. Additionally, firms integrating AI into their services and marketing must ensure transparency and substantiate all claims.
Navigating these evolving regulations can be complex, but our team is here to help. Whether you need guidance on compliance strategies, a review of your marketing materials, or insights into AI-related regulatory risks, Jacko Law Group can assist.
For more information and assistance, call 619.298.2880 or email [email protected].
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[1] U.S. Securities and Exchange Commission. SEC Charges Two Investment Advisers with Making Misleading Statements About Use of Artificial Intelligence. 18 Mar. 2024, https://www.sec.gov/newsroom/press-releases/2024-36
[2] U.S. Securities and Exchange Commission. Initial Observations Regarding Advisers Act Marketing Rule Compliance. SEC.gov, 17 Apr. 2024, www.sec.gov/compliance/risk-alerts/risk-alert-041724.
