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SEC's New "Marketing Rule" Approach Draws Fire
Tom Burroughes
28 November 2023
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. Titan case Consequences (Editor's comment: The way the new rule is being applied and explained appears to raise more questions than answers. It would be good to see the SEC, and others, give more guidance. If the industry has to second-guess what a regulator wants, that hurts enterprise, and benefits firms with armies of lawyers and staff, at the expense of smaller competitors. If people want to comment on this matter, please email tom.burroughes@wealthbriefing.com.)
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 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 said.
The SEC said that Titan also made “conflicting disclosures on its website and in its wrap fee brochure about how Titan Crypto assets were custodied”; since at least June 2019, it included in its client advisory agreements liability disclaimer language…which created the “false impression that clients had waived non-waivable causes of action against Titan provided by state or federal law”; Titan also failed to adopt policies and procedures related to the accuracy of its disclosures concerning its internal controls regarding Titan representatives’ personal trading in crypto assets held in the Titan Crypto strategy as it had represented to clients.” The SEC also identified a number of other shortcomings and failings by the firm.
From August 2021 to October 2022, Titan, which offers strategies to retail investors through a mobile trading app, “made misleading statements on its website regarding hypothetical performance, including by advertising ‘annualized’ performance results as high as 2,700 per cent for its Titan Crypto strategy,” the regulator said in its statement.
Modernization
Prior to the SEC’s new marketing rule solicitation, adverts came under different rules, but these have now been blended.
In a social media age, with rapidly expanding digital communication channels, the ways firms describe their wares has changed, and the SEC in around 2018/19 stated that the regime had to be modernized, Hall said. Advertising has to be “fair and equitable and not misleading.”
The lawyers warned that regulators may not have considered how new rules may hurt competition and the very groups policymakers are trying to encourage.
It is imperative that advisors provide education and training for their marketing/business development people, Rosensweig said.
An issue that concerns Hall, he said, is that the SEC appears not to have thought about how various legislative and regulatory actions are hitting smaller firms. “There is a cascading effect…it is much harder for smaller firms to navigate.”
SEC boss Gary Gensler has complained about the lack of competition in the investment industry – issues such as layers of fees, conflicts of interest, and other other matters. A question is whether regulations that weigh heavily on smaller, newbie firms will worsen their plight.
“Fines on small firms can kill the business,” Hall said. There are even implications for new, women/minority-owned financial services firms, something that the SEC should consider, he added.
