The United States Securities and Exchange Commission (“SEC”) recently announced an enforcement action against and settlement with an investment adviser firm related to solicitation arrangements with online content providers. The investment adviser firm allegedly paid over $8 million to more than 200 social media influencers and online newsletter providers for prospective client referrals without adhering to the required disclosure and documentation under the former Rule 206(4)-3 of the Investment Advisers Act of 1940. The investment adviser firm has agreed to a cease-and-desist order, censure, and a $250,000 civil penalty to settle the charges by the SEC.
The investment adviser firm was registered with the SEC since 2014, operated an online real estate investment platform and reported approximately $3.3 billion in assets under management.
From February 2016 to December 2021, the investment adviser firm allegedly contracted with online content creators to promote its services. These content creators were paid based on the number of individuals who clicked on hyperlinks and entered their email addresses. Those referred individuals who became clients of the investment adviser firm have accounted for more than $300 million of the investment adviser firm’s assets under management and yielded over $655,000 in investment advisory fees for the firm.
The investment adviser firm did not require the online content creators to provide prospective clients with the investment adviser firm’s Form ADV Part 2A disclosure brochure and a separate solicitor disclosure statement describing in writing the online content provider’s referral arrangement with the investment adviser and the material terms of the compensation associated with such arrangement.
Applicable Statute and/or Rule
The SEC brought this action under Section 206(4) of the Investment Advisers Act of 1940 as amended and the previous Rule 206(4)-3 (also known as the Cash Solicitation Rule) which was in place during the relevant period.
In December 2020, the Commission adopted amended Rule 206(4)-1 (the “Marketing Rule”), which merged and replaced the previous Advertising Rule and the previous Cash Solicitation Rule. This Marketing Rule became effective May 4, 2021 and provided for an eighteen-month transition period for SEC registered investment adviser firms to come into compliance with the new Marketing Rule.
The SEC alleged that the investment adviser firm violated Section 206(4) of the Investment Advisers Act and Rule 206(4)-3 by failing to provide the required Form ADV Part 2A disclosure brochure and separate solicitor disclosure to prospective clients. The SEC’s order also claimed that the firm failed to adopt and implement written policies and procedures concerning the use of solicitors.
Fine & Remedial Efforts
The investment adviser firm has been ordered to pay a civil penalty of $250,000 and has consented to a cease-and-desist order and censure. The SEC considered the firm’s remedial acts and cooperation in reaching this settlement.
Key Takeaways & Best Practices
Although this cease-and-desist order by the SEC was pursuant to the previous Cash Solicitation Rule, it is still a cautionary tale for investment adviser firms which are utilizing promoters such as bloggers, podcasters and other online financial influencers under the SEC’s new Marketing Rule.
Unlike the previous Cash Solicitation Rule, the Marketing Rule does not require an investment adviser firm registered with the SEC (and certain states which have also adopted this new rule) to deliver the investment adviser firm’s Form ADV Part 2A at the time of the referral. However, the Marketing Rule does require the promoter to (i) clearly and prominently disclose to the prospective client at the time of the referral whether the promoter is a client of the investment adviser firm and whether the referral is compensated and (ii) provide additional disclosures explaining the compensation terms and any conflicts of interest associated with the promotion. The investment adviser firm will need to have a reasonable basis for believing that the promoter is making such disclosures to prospective clients at the time of the referral.
In addition to the required disclosures, an investment adviser firm will need to (i) verify that the online financial influencer (i.e., promoter) is not barred by the SEC from serving as a compensated promoter and (ii) enter into an agreement (if compensated more than $1,000 during the past 12 months) with the promoter that complies with the Marketing Rule. For more details, please refer to https://www.law.cornell.edu/cfr/text/17/275.206(4)-1 .
WSP/CoE Section – Advertising
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The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material facts from the proceeding or order. RIA Compliance Consultants, Inc. has not verified the accuracy of the securities regulator’s order and is not offering any opinion whether the allegations made by the securities regulator in the administrative proceeding referenced above are accurate. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules and published guidance for more details about the topics referenced above. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.