How Investment Advisory Firms Can Follow SEC Marketing Rule

The Securities and Exchange Commission’s new adviser marketing rule, finalized in November 2022, saw its first enforcement action on August 21, when a $1 million fine was levied against Titan Global Capital Management USA LLC, an investment advisory firm, for deceptive marketing materials related to hypothetical performance.

The marketing rule applies to all communications delivered to more than one person and offering or describing an adviser’s services, unless it is “extemporaneous live communication”—off-the-cuff or “truly bespoke” communication—according to Dan Bresler, a partner in the law firm Seward & Kissel LLP. Even if the same talking points are delivered to individuals one at a time, it still counts as more than one person, and would also qualify as prepared remarks and would therefore be subject to the rule.

Communication involving hypothetical performance, though, is subject to the marketing rule even if communicated only to a single person. Bresler says the SEC believes that “hypothetical performance raises significant enough concerns from a misleading and conflicts perspective that those communications should go through the required compliance oversight.”

Hypothetical performance can include forward-looking projections, but it more commonly features hypothetical application of past data to a new product, portfolio or strategy that did not previously exist.

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Advisers should avoid looking for creative ways to evade the marketing rule’s restrictions on hypothetical performance and instead find ways to follow it, Bresler recommends. For example, advisers should not worry if what they are saying is technically hypothetical or not, or what the size of their audience is or might be in the future. Instead, the “more common approach is just to accept that it is an advertisement.”

Bresler says advisers should “have a process for preparing materials” that would meet SEC marketing requirements and, “once you have that process running, you can generate materials pretty quickly, and you don’t need to worry if you get into hypothetical performance.”

Even though the SEC charged Titan with violations related to hypothetical performance, Titan was cited for infractions that would have been problematic under the previous marketing rule, according to Bresler. Specifically, citing a 2,700% annual return without mentioning that the figure was based on a cherry-picked three-week window extrapolated to one year was “egregious” and “under any regime, that would be misleading.”

Bresler says the SEC avoided some of the more controversial elements of the marketing rule in the Titan settlement, such as the requirement that marketing materials featuring gross performance must also show net performance by accounting for related fees.

Bresler explains that some advisers may advertise performance of a portfolio by sector or by region and may struggle to aggregate the fee structures among various investments into one number in order to calculate net performance. Because of this ambiguity, “enforcement for those issues would be a big concern for market actors,” and he believes advisers are hoping for additional “guidance before enforcement.”

Tags: Fund Performance, marketing rule, SEC

The Idaho Endowment Fund Investment Board reported a gross return of 10.89% for the fiscal year that ended June 30, just edging its target benchmark’s 10.87% return, according to its quarterly performance review. The returns raised the fund’s asset value to $3.12 billion from $2.87 billion at the same time a year earlier.

The investment board, which manages the proceeds generated by Idaho’s endowment lands, reported a three-year return of 7.74%, a five-year return of 7.20% and a 10-year return of 7.94%, compared with its benchmark’s returns of 7.46%, 6.90% and 7.68%, respectively, over the same time periods.

As of June 30, the fund’s asset allocation was 38.9% domestic equity, 22.7% domestic fixed income, 19.1% international equity, 9.5% global equity, 9.3% real estate, 0.4% cash and 0.1% equitization.

According to the performance review, performed by investment consultant Callan, total equities returned 17.5% for the investment portfolio during the fiscal year and 6.9% over the final quarter. U.S. equities led the way, surging 19.4% and 8.7%, respectively, over the fiscal year and quarter, while international equities appreciated 12.7% for the year and 2.7% during the quarter.

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Fixed-income investments declined 0.2% for the year and 0.6% during the quarter, while real estate, which is lagged by a quarter, underperformed over the trailing year and returned 1.4% during the fiscal year and 0.2% for the quarter.

Meanwhile, the Idaho Board of Land Commissioners, which oversees the endowment fund investment board and the Idaho Department of Lands and which consists of the governor and several other state officials, recently announced it will distribute a record $103.2 million to endowment beneficiaries—mostly public schools, colleges, universities and veterans’ homes—in fiscal 2025. The previous record was the $100.3 million distribution slated for fiscal 2024.

“We were pleased with the endowment fund’s investment returns in Fiscal Year 2023 despite efforts by the Federal Reserve to fight inflation,” Chris Anton, the Idaho Endowment Fund Investment Board’s manager of investments, said in a release. “Financial markets experienced a volatile year, but the U.S. economy has remained very resilient.”