The watchdog's "principles-based" approach to a new rule governing how firms advertise their wares appears to lack detailed guidance, with the SEC relying too much on hard cases and punishments to give a clearer picture, lawyers have complained. They fear the SEC is making life unjustifiably tough on smaller wealth managers.
In August, when the SEC punished an investment firm for the misleading use of hypothetical performance metrics in ads, the case highlighted how the regulator relies on punishments rather than guidance to show how the rules should work. This is unacceptable, creates uncertainties and stifles competition, lawyers say.
On August 21, the watchdog issued a “cease-and-desist” order against Titan Global Capital Management LLC, under the 1940 Investment Advisers Act. Titan’s strategies include traditional, alternative, and crypto strategy investments, catering mainly to retail clients.
The SEC said that Titan broke the new “marketing rule” requirement – recently introduced – by “advertising hypothetical performance without having adopted and implemented policies and procedures reasonably designed to ensure that the hypothetical performance was relevant [to the] likely financial situation and investment objectives of the intended audience.” Titan was ordered to pay a civil penalty of $850,000 and pay a disgorgement of $192,454.
The regulator, which has adopted a principles-based approach to the marketing rule, appears to be waiting for hard cases to come up to provide the kind of guidance the industry needs to figure out how to behave, Evan K Hall and Shelley Rosensweig, partners at international corporate law firm Haynes Boone, told Family Wealth Report in a call.
It was “extremely frustrating” that the regulator gives general principles of action and then waits to punish firms that, in its specific judgement, aren’t doing it right, Hall said. This appears to require firms to second-guess what the regulator wants, he continued. A consequence is that firms are going to be very cautious in their advertising, Hall said. A takeaway is that firms cannot afford to be “aggressive” in how, for example, they show hypothetical performance data.
With regulators around the world continuing to regulate financial services to ensure that clients aren’t misled, or encouraged to take more risk than is wise, advisors face a difficult task of trying to stay competitive without falling foul of increasingly complex rules. Also, the rise of digital channels and social media adds new elements to the mix.
FWR has emailed the SEC about the matter, and may update in due course.
“No-one in this industry is against going after false or misleading marketing or advertising activity,” Hall continued, adding that rules to deal with these problems exist already. The real issue with the new rule is ambiguity and lack of clarity.
His colleague, Rosensweig, said the new marketing rule has not been fleshed out in detail. There are a few FAQs, but not many, she said.
“Unfortunately what we are finding is that they [SEC] are enforcing the rule through penalties and compliance actions,” Rosensweig said. She mentioned SEC actions brought against nine registered investment advisors for violations of the marketing rule as recently as September 11 (in particular those violations all surrounded the use of hypothetical performance).
“The SEC did not say hypothetical performance disclosures are
prohibited per se but at the same time they immediately conducted
a sweep and initiated sanctions against advisors rather than
initiating a dialogue to assist advisors with compliance of the
rule. They aren’t giving us enough of a roadmap,” she