The Securities and Exchange Commission settled charges with a cadre of advisory firms that failed to meet Marketing Rule compliance mandates.
Five firms, incl GeaSphere, Bradesco Global Advisors, Credicorp Capital Advisors, Insight Securities AND Monex Asset Managementwill pay a collective $200,000 to settle charges that they violated the advertising rule.
It is the second set of cases stemming from the SEC's “ongoing targeted sweep” that checks registrants' compliance with the rule. The commission settled its first action related to advertising rules in August 2023, with nine firms clearing fees for $850,000 a month later.
GeaSphere will pay $100,000, the largest fine of the group by a significant margin, because it allegedly violated some aspects of the rule that other firms did not. The other four firms began mitigating the problems before they were contacted by SEC investigators.
“Today's actions demonstrate that we will continue to use targeted initiatives to ensure that investment advisers fully comply with their obligations under the rule,” said Corey Schuster, Co-Chief of the Enforcement Division's Asset Management Unit. “They also serve as a reminder of the benefits to firms that take remedial steps before being contacted by Commission staff.”
According to the settlement papers, AUM for the five firms ranged from GeaSphere's $86 million to Credicorp Capital Advisors' $516 million.
According to the commission's settlement with the firm, Rhode Island-based GeaSphere posted ads on its website and social media that contained numerous false statements. The firm allegedly created a promotional video for its website claiming that GeaSphere clients would not be charged twice for mutual fund management fees and advisory fees. (In reality, clients paid both.) The firm also claimed that money invested with GeaSphere was “never commingled” with clients as it is with mutual funds. However, client money was regularly mixed with other fund investors, including GeaSphere clients.
According to the SEC, GeaSphere also posted fact sheets on its website that portrayed portfolio performance that “were consistently inaccurate,” both overstating and understating performance. Some data sheets also showed gross performance without showing net performance, violating the advertising rule.
GeaSphere's ads also included hypothetical performance, using backtesting data from a time when the strategy was not being used. According to the SEC, the firm could not support its performance shown in its marketing and did not enter into written agreements when compensating third parties for endorsements.
The other four firms paid fines ranging from $20,000 to $30,000, with the commission focusing on how the firms apply hypothetical performance to ads.
In the InSight settlement, the commission said the firm “distributed hypothetical performance in advertising to a mass audience rather than presenting hypothetical performance relevant to the potential financial situation and investment objectives of the target audience.”
However, all four firms had tried to improve their compliance procedures even before the commission came knocking on their door, resulting in lower penalties.
The SEC approved changes to its marketing and ad rule at the end of 2020upon entering effect in May 2021 and a compliance date in December of the following year. The rule mandated how and when advisers could use testimonials and endorsements, and the types of metrics firms could use in marketing materials. An SEC risk alert from last June detailed the bugs they were finding.
The emphasis on hypothetical performance was particularly notable, as it was entirely illegal before the new rule, according to Thayne Gould, director of Vigilant Compliance.
But its use comes with strings, including the fact that it can only be used with specific audiences. According to Gould, if a firm posts hypothetical performance metrics on its website, it is not being selective about its audience.
“The SEC has said that certain conditions must be present in order to be able to do this. What are you presenting? Could it be misleading? What is the audience you're using it with?” he said. “That's a lot of infrastructure to support.”
In contrast to WhatsApp and out-of-channel communications fines in recent years, which started with massive firms, the commission is starting with smaller registrants with advertising rule violations. Gould speculated that the commission would pursue larger firms for such violations if they could.
“But because it's an infrastructure issue, larger firms are vetting this more carefully before using it,” he said. “It stands to reason that perhaps these smaller firms haven't considered the implications.”