Cheezy Puffs and the Investment Adviser Marketing Rule
If you’re the CEO of a big company, you can imagine watching a football game and thinking it would be fun to catch footballs for touchdowns or throwing or running for them. In your head, you’re probably the quarterback, but even being the kicker would be a blast. Nevertheless . . . that is not going to happen. You are the CEO, and your role is to expand your company’s business and make investors happy. If you’re throwing footballs that is a diversion that, by itself, will not make them happy.
Still, though, the football is fun and you would like to be associated with it somehow. Your company makes and sells fried cheezy puffs and it occurs to you that it could be the Official Cheezy Puff partner of Your City’s Football Team. That would be fun. Maybe your company will get a sky box for the season and you get to say hi to meet the owner at some point and you can grouse good-naturedly about how hard it is to run your respective organizations. You’ll laugh and say, “Oh, we best friends, we sure have a hard time!” And if your company pays the team enough money, you probably can do that.
If you’re the CEO of an investment advisory firm, you may have the same dreams and may want to be associated with a football team in the same way. But it is not quite as easy for you! In late 2020 the SEC revamped its investment adviser marketing rule and on November 4, 2022, everybody was expected to be in compliance with it. Today, for example, it’s possible for an adviser to do such a thing but if you do it counts as an “endorsement” because it indicates approval or support of the adviser by the football team. And if the team is not your client, you have to note that as well as your cash payment for the endorsement.
Howard Bailey Securities LLC
Howard Bailey Securities LLC just found this out last week. Now, its website will tell you, Howard Bailey is “proud to be the Official Wealth Management Partner of Notre Dame Athletics.” It said the same thing “[d]uring the Relevant Period,” or from November 4, 2022, until September 9th of this year, but according to the SEC when it did it omitted to mention: (1) that Notre Dame was not a client; (2) Howard Bailey had paid for the right to say that; and (3) a statement of any material conflicts of interest resulting from the compensation arrangement. By not noting those things, Howard Bailey was violating Rule 206(4)-1(b).
The firm’s website also included statements from people who, because they weren’t current clients, counted as endorsements and not testimonials. Howard Bailey called them “testimonials”, but if you’re going to do that, they have to be from current clients, not past ones or people who were never clients.
Anyway, the SEC just did a marketing rule sweep and published its results on September 9th. The Commission says that nine firms were caught in some form of violation. But it’s just them saying that; they’re only allegations that haven’t been tested in a court.
Some Funny Parts
Some parts of the sweep were funnier than others:
Callahan Financial published an ad on its website in which it described itself as a “Member” of “Fiduciary Firm.” The SEC’s order says, “However, Callahan Financial was not a ‘Member’ of ‘Fiduciary Firm,’ as ‘Fiduciary Firm’ is a non-existent organization. Callahan Financial’s advertisement included a purported logo for this non-existent organization.” I love this misrepresentation and its accompanying logo so much I want to marry them. Did they hire a graphic design firm to do the logo? Did they do it in-house on Microsoft Paint? The inclination to do this sort of thing could be (mis)used in so many entertaining ways. Maybe we’ll hear about them someday.
Abacus Planning Group described “itself as a ‘Top 100 Women’s Advisor’ rather than correctly identifying the rating as ‘Top 100 Women Financial Advisors.’ ” The SEC says “this misstatement suggested the rating related to investment advice provided to women instead of an award for female investment advisers.” I guess? Is one better than the other? I can imagine being a little stumped on this one if I were Abacus.
The SEC repeatedly includes its own interpretations of the marketing rule in the “Facts” sections of these administrative orders. As in, in the Howard Bailey order the Facts noted that in the Adopting Release for the revamped marketing rule, “the Commission observed: “We believe that this disclosure will provide investors with important context for weighing the relevance of the testimonial or endorsement.” I suppose it is a fact that the Commission observed that. I guess they always do this sort of thing, though.
Other Lessons
Somewhat more seriously, the orders contain some lessons other advisers might fall into if they aren’t careful:
A number of these firms advertised third-party ratings without clarifying the dates of the ratings or what time periods they were based on. You can’t carry around a Top 50 or Top 300 or Power 30 award from many years ago, as a number of these firms allegedly did, and advertise it without saying that.
If you advertise that you’ll give your clients conflict-free investment advice, but your Form ADV Part 2A brochure discloses a number of conflicts of interest, you might get caught doing that. Four of the nine firms fell into this trap. It’s easy for the SEC’s staff to check!
We’re adding a table of the SEC’s statements of the law and rules that it lays out in the various administrative orders that you can find here.
Be careful out there . . .
SEC Charges Nine Investment Advisers in Ongoing Sweep into Marketing Rule Violations (Sept. 9, 2024)