On September 19, 2023, hundreds of current and former senior SEC officials, securities enforcement and attorneys, in-house counsel, and compliance executives assembled for several expert panel sessions at the Securities Enforcement Forum Central conference. Here are the main takeaways for asset managers and broker-dealers.
1. Off-Channel Communications Enforcement Sweep
The first focus area was the August SEC crackdown on off-channel communications and failure to preserve communications by broker-dealers. Employees were communicating firm business using personal devices on apps including iMessage and WhatsApp. By failing to maintain and preserve required records, the firms deprived the SEC of these off-channel communications in various SEC investigations. In addition to combined fines of $289 million, some firms were required to retain independent compliance consultants to conduct comprehensive reviews of policies and procedures related to the retention of electronic communications found on personal devices and their respective frameworks for addressing noncompliance by their employees with those policies and procedures.
Reuters reported that the SEC’s probe has expanded to investment advisers with a request for messages on personal devices or applications that discussed business during the first half of 2021.1
Best practices include:
- Establish an off-channel communication policy
- Develop surveillance protocols to identify off-channel communications and regular review and escalation procedures
- Designate a communications supervisor
- Establish the supervisory process
- Provide ongoing employee training
- Establish consequences for violators
2. Marketing Rule Enforcement Sweep
The SEC’s Marketing Rule went into effect on November 4, 2022 and requires registered investment advisers (RIAs) who use hypothetical fund performance in advertising materials to have a documented reasonable basis for believing the RIA will be able to substantiate material statements of fact and requirements for performance in advertising, testimonials, endorsements, and third-party ratings. This was highlighted as a 2023 exam priority; traditionally, the SEC communicates results on newly effective rules after the first exam cycle, so other firms can learn best practices or understand the SEC’s interpretation of the rule. In a surprising change from this long-standing informal practice, the first enforcement action was announced on August 21, 2023 when the SEC charged an investment adviser for allegedly using hypothetical performance metrics in advertisements that were misleading. On September 11, 2023, the SEC announced settled charges against an additional nine RIAs for failing to implement or adopt policies and procedures to comply with the updated Marketing Rule. The settled charges found that the RIAs disseminated advertisements that:
- Included hypothetical performance that consisted of performance derived from model portfolios
- Included hypothetical performance that consisted of performance derived from model portfolios and performance that was back-tested by the application of a strategy to data from prior time periods when the strategy was not actually used
- Were targeted to the general public rather than to a particular intended audience
“[The] advertisements and disclosures painted a misleading picture of certain of its strategies for investors. This action serves as a warning for all advisers to ensure compliance,” Osman Nawaz, Chief of Enforcement’s Complex Financial Instruments Unit, alleged in an SEC release.
It is unusual that the SEC has already settled enforcement actions for failures to comply with this recently effective rule.
Best practices for RIAs include:
- Ensure that their compliance manuals and training programs cover the Marketing Rule
- Review all marketing materials currently used (even if prepared before the effective date of the Marketing Rule) to confirm that they comply with the rule's requirements—including, but not limited to, the rules related to use of hypothetical returns information
- Confirm that client referral and placement agent relationships comply with the rule
FORVIS has experience providing services to fund complexes with net assets ranging from a couple million to several billion dollars. Our experience allows us to provide tailored services to help meet your unique needs. If you have questions or need assistance, please reach out to a professional at FORVIS.
- 1“SEC Collects Wall Street’s Private Messages as WhatsApp Probe Escalates,” reuters.com, September 25, 2023.