Less than one year after the implementation deadline of the SEC’s amendments to Advisers Act Rule 206(4)-1 (the Marketing Rule), the SEC announced a series of enforcement actions involving alleged violations of the Marketing Rule. It is not surprising that this set of enforcement actions focused on the use of hypothetical performance figures in connection with advertisements available to the general public. The SEC and other securities regulators view hypothetical performance figures as presenting a significant risk for confusion, especially where the figures are associated with strategies that may not be relevant for each member of the audience. In fact, the very first SEC enforcement action citing to the Marketing Rule also dealt with the use of hypothetical performance.[1] But unlike the first matter, this recent set of cases would likely not have been made under the Advertising Rule, the predecessor to the Marketing Rule. The shift towards enforcing violations of the Marketing Rule where no identified harm is alleged to have occurred may foreshadow ongoing strong enforcement of the technical aspects of the Marketing Rule.

The SEC recently announced settled charges against nine investment advisers. There does not appear to be a common thread between these firms – other than the cited violations. The firms are dispersed across the country, have varied business models and range in assets under management from $47 million to $1.2 billion. The variety of firms represented in this set of actions may represent a signal that every investment adviser should review its public websites and social media to address the use of any hypothetical performance.

The Standard

The Marketing Rule sets standards applicable to any “advertisement” by an investment adviser; thus, any communication offering investment advisory services sent to one or more persons is subject to the Marketing Rule and would be subject to restrictions as to the use of “hypothetical performance.”

“Hypothetical performance” is defined as “performance results that were not actually achieved by any portfolio of the investment adviser” and includes:

  • Performance derived from model portfolios;
  • Performance that is backtested by the application of a strategy to data from prior time periods when the strategy was not actually used during those time periods; and
  • Targeted or projected performance returns with respect to any portfolio or to the investment advisory services with regard to securities offered in the advertisement.[i]

The Marketing Rule prohibits the use of hypothetical performance in advertisements unless several requirements are met. Of the three specific requirements, the recent SEC actions focused on just one: the requirement to implement policies and procedures reasonably designed to ensure that hypotheticals used are relevant to the likely financial situation and objective of the intended audience. The other requirements mandate disclosures sufficient for the audience to understand the hypothetical performance more clearly.

Points of Distinction

The core violation referenced in the nine matters was anchored by a finding that the firms’ specific failures resulted in the “[dissemination of] hypothetical performance in advertisements to a mass audience rather than presenting hypothetical performance relevant to the likely financial situation and investment objectives of the intended audience.” However, some points of distinction are worth noting because they appear to have played at least some role in the ultimate sanction decisions by the SEC. The fines ranged from $50,000 to $175,000.

In that regard, firms alleged to have utilized only one form of hypothetical performance (for example, model portfolio performance only) with no cited issues other than failing to implement required policies and procedures were generally fined approximately $50,000.[ii] However, one firm, while only utilizing one form of hypothetical performance, was fined $135,000.[iii] We suspect the higher fine was driven by the relevant firm’s failure to remove the hypothetical performance as promptly as most of the other firms.[iv] It is critical that firm’s facing scrutiny consider if corrective measures are necessary and, if so, how promptly they should be implemented.

Firms found to have utilized multiple types of hypothetical performance were generally fined at least $100,000.[v] Another aggravating factor appears to be failing to maintain “each copy” of an advertisement.[vi] Notably, in the context of websites and social media, any change to the content results in a new copy of the advertisement. Investment advisers must ensure they have mechanisms in place to retain copies of prior versions of their website such that the prior versions can be presented to regulators readily. In the event an adviser is relying on a third-party vendor for such retention, the firm should take steps to ensure that the third-party understands the need to retain prior versions as well.[vii]

It may be worth noting that one of the matters limited its finding of an advertisement to the fact that the subject website offered advisory services to prospective clients whereas the others also cited to the websites offering “new services to existing clients.” [viii] Perhaps this distinction was made in the one matter because of the facts at hand. But, in any event, counsel to advisers may wish to consider the utility of limiting the description of an advertisement in a settled regulatory action to one that offers services to prospective clients.

A Quick Reminder on State Law Considerations

The Marketing Rule describes standards and requirements such that the use of performance figures, including hypothetical performance, may become more common. However, state registered investment advisers are reminded that they must consult applicable state regulations because they may subject to greater restriction. For example, the Securities Act of Washington state prohibits any use of “‘backtested or hypothetical model’ performance figures.”[ix]


In August 2023, the SEC announced its first enforcement action related to a violation of the Marketing Rule and it has followed it up this month with a round of actions. At the same time, there has been little formal guidance from the SEC on various aspects of the Marketing Rule, which has resulted in advisory firm clients relying on input from counsel and compliance professionals. At this point, the Marketing Rule enforcement “can” is clearly open; advisers are urged to review and analyze their existing advertising practices and how they can maximize marketing opportunities in a reasonably compliant manner

[1] In the Matter of Titan Global Capital Management USA LLC, Release No. IA-6380 (August 21, 2023)

[i] See Advisers Act Rule 206(4)-1(e)(8).

[ii] In the Matter of Bantore Asset Management Inc, Release IA-6404 (September 11, 2023); In the Matter of Hansen & Associates Financial Group Inc., Release No. IA-6407 (September 11, 2023); In the Matter of McElhenny Sheffield Capital Management, LLC, Release No. IA-6410 (September 11, 2023).

[iii] In the Matter of BTS Asset Management Inc., Release No. IA-6405.

[iv] See Id., Undertaking number 1 requires BTS to remove all hypotheticals from websites and social media. The majority of other actions did not include such a requirement. The only other one involved a very small firm that would be state-registered adviser if its principal place of business was not New York.

[v]  In the Matter of Elm, Partners Management LLC, Release No. IA-6406; In the Matter of Linden Thomas Advisory Services, LLC, Release No. IA-6408 (September 11, 2023); In the Matter of Macroclimate LLC, Release No. IA-6409.

[vi] See Macroclimate matter and In the Matter of MRA Advisory Group, Release No. IA-6411 (September 11, 2023).

[vii] See MRA matter (Finding based on allegation that MRA “failed to ensure that the advertisements had been archived by an outside service provider.”)

[viii] Compare Finding No. 7 in MacroClimate matter to similar paragraphs in other matters.

[ix] WAC 460-24A-100(7)


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