The SEC Marketing Rule Sweep Has Begun

In February, The enforcement unit of the Securities and Exchange Commission's Boston branch commenced Marketing Rule sweeps, notifying affected firms to preserve and produce records.

It is imperative that firms review their websites and marketing practices to ensure that they are compliant with the new Marketing Rule that became effective in November 2022, especially regarding the use or publication of testimonials, hypothetical performance presentations, and rankings/awards/recognitions.

It is also imperative to review and update firm policies and procedures to confirm that they appropriately address the new rule.

And be warned: While it doesn't mean they do not exist, I have yet to encounter a marketing consultant that clearly understands the marketing limitations in the investment advisory industry. So do not rely on them for compliant marketing materials.

As many of you have heard me profess countless times, the use of puffery and/or statements that can't be definitively corroborated could prove problematic, not to mention the inappropriate use of testimonials. Well, that day has apparently come. Avoid using unnecessary adjectives and/or uncorroborated laudatory/promissory statements; always add a modifier like "help," "strive" or "believe." Also avoid using the word "ensure" or other statements that connote a guarantee. Be careful of statements touting "conflict free" advice or services.

Although I have no empirical proof, I am assuming that the SEC is using artificial intelligence to comb through advisory firm websites. I am currently addressing a few of these matters with the Boston branch.

AI Fines

Is your firm using, or thinking about using, AI as part of your practice? Be careful, the SEC may be watching.

On March 18, the SEC announced settled charges against two SEC-registered investment advisers for making false and misleading statements about their purported use of artificial intelligence. The firms agreed to settle the SEC's charges and pay $400,000 in total civil penalties. One firm's charges arose from four years of using misleading statements pertaining to its use of AI in its SEC filings, press releases and website. They claimed to have used AI to generate an advantage in their investment process, but they did not have such resources.

Additionally, these statements were also deemed a violation of the Marketing Rule. The second firm was also found to have violated the Marketing Rule, and its AI misconduct was born from using the term "expert AI driven forecasts." These settlements come on the heels of the SEC proposed rules in July 2023 regarding RIAs' use of AI. These rules would prohibit investment advisers from using AI in a manner that creates a conflict of interest between a firm and its client.

Specifically, investment advisers would need to adopt policies and procedures regarding their use of AI. Advisers would also need to comply with recordkeeping requirements consisting of times the technology was implemented or materially changed.

Regardless of the pending rule, there are important safeguards and recordkeeping practices that should be implemented now if you are using, or intend to commence using, AI. Before using or marketing AI, advisers should consult legal counsel.