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Commission Sanctions 9 Advisors Based on Marketing Rule

Commission Sanctions 9 Advisors Based on Marketing Rule

T. GormanPosted on September 13, 2023 Posted in SECActions

Marketing is frequently a key element for a business. It gives the company an opportunity to showcase its products to those who might be interested. While at times claims are exaggerated, or are what is sometimes called “puffery,” many members of the publich have been conditioned to listening to claims such as “the world’s best hamburger.”

Marketing is also a key issue for investment advisers. In that context, however, the claims often differ from those of a business selling the best burger. Indeed, the marketing conducted by investment advisers is subject to a number of rules promulgated by the Commission to protect investors. Presently, the agency is conducting a “sweep” to assure compliance with those rules. To date the agency has filed nine settled actions involving investment advisers and the marketing rules (here). The case below is typical of those actions.

In the Matter of Banorte Asset Management, Inc., Adm. Proc. File No. 3-21636 (September 11, 2023) is typical of these cases. Respondent has been a registered investment adviser since March 2019. The Huston, Texas based firm has about $139 million in regulatory assets under management.

This action centers on amendments to Advisers Act Rule 206(4)-1 that were adopted by the Commission in December 2020. The Commission set a deadline of November 4, 2022, for compliance. Under the amended Marketing Rule a registered investment adviser cannot include any hypothetical performance in an advertisement unless the firm adopts “and implements policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement” under Rule 206(4)-1(d)(6)(i). Under this rule the Commission believed that advisers would not generally be permitted to include hypothetical performance in advertisements directed to a mass audience or for general circulation.

Following the compliance date Banorte published communications on its website that constituted advertisements which included hypothetical performance derived from models. The firm had not adopted policies and procedures designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience. Accordingly, the firm violated Advisers Act Section 206(4) and Rule 206(4)-1(d).

In resolving the matter, the firm agreed to implement certain undertakings designed to ensure compliance with the amended Marketing Rule as to hypotheticals. The Advisory also consented to the entry of a cease-and-desist order based on the Section and Rule cited above and a censure. Respondent will also pay a penalty of $50,000.

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Prepared:

Thomas O. Gorman

DC Attorney specializing in securities
and other agency litigation

Former SEC Senior Counsel, Enforcement
and Special Trial Counsel, GC Office
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