Recent Fines Illustrate Importance of Marketing Rule Compliance for Investment Managers

On September 9^th, the SEC announced charges against nine investment managers for non-compliance with the Marketing Rule, totaling over 1.2 million dollars.  However, the monetary costs will pale in comparison to the reputational damage caused by the non-compliance as well as any potential litigation from clients.

In summary, the SEC found a variety of violations:

• Untrue statements about third party ratings;
• Memberships to organizations that did not exist;
• Claims about services without any substantiation; and
• Endorsements without required disclosures relating to compensation or dates.

These types of mistakes are very common but also very easy to catch.  Unfortunately, a lot of investment managers do not have the time, resources, and in some cases the requisite legal knowledge to prevent these issues in their marketing materials.

In particular – using the claim of membership to non-existent organization as an example – some of these mistakes highlight flaws in many manager’s processes. It is very likely that the creators of the marketing material either added the membership claim after compliance had signed off on the document or the compliance team did not have the time to check that the organization existed.

As Zeidler has outlined in previous posts, the SEC’s power had been narrowed in 2024 which led us to predict that the SEC staff would focus on the remaining areas where they can flex their power: e.g. non-compliance with the SEC Marketing Rule.  The fines to these nine investment managers should be seen as a shot across the proverbial bow for the investment management industry because the SEC will continue with rolling Marketing Rule reviews, most likely at an increased rate.

The actions last month should act as a stark – and potentially scary – reminder that investment managers, large and small, must have a robust process for assessing marketing material compliance.  Despite the recent body blows the SEC has endured, the SEC will always have the ability to target and fine investment managers for compliance failures and firms need to take notice.

Note: The SEC’s Division of Examinations will release their priorities in October and Marketing Rule compliance should be a priority (not great news for firms that do not have a robust marketing compliance process).

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Scott G. Parkin is the Head of US for Zeidler Group

Zeidler Group is a boutique asset management law firm and legal technology firm with newly opened US offices in New York City and Phoenix. Serving over 250 asset managers globally across 70+ jurisdictions, Zeidler Group specializes in cross-border distribution. As well as research-driven legal guidance, we offer various digital solutions for fund managers’ legal and compliance needs, including a Marketing Material Review Tool  (MMR-Tool) that uses Large Language Models for reviewing investment fund marketing materials against the laws of multiple countries as well as a customizable Vendor Due Diligence solution to efficiently manage questionnaire distribution, completion and rating as well as mitigate risk. Zeidler Group provides future-proofed solutions in navigating regulatory landscapes.