Robo-Advisor's Pro Athlete Ads Broke Marketing Rule, SEC Says

News November 04, 2024 at 03:51 PM
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What You Need To Know

  • Wahed Invest LLC must pay a $250,000 fine.
  • Ads featuring a pro soccer player and MMA fighters who were not clients lacked disclosures.
  • The firm also presented hypothetical, back-tested performance without following proper procedures, according to the regulator.
The SEC building

The Securities and Exchange Commission has ordered Wahed Invest LLC, a Shariah-based robo-advisor, to pay a $250,000 civil money penalty for disseminating ads on its website, on social media and in emails containing endorsements from several professional athletes that failed to provide the disclosures required under the Marketing Rule.

After the Marketing Rule's compliance deadline of Nov. 4, 2022, through May 2024, Wahed also disseminated ads on its public website that presented hypothetical, back-tested performance without adopting and implementing required policies and procedures designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience.

On a Form ADV dated March 22, 2024, Wahed reported that it had more than 19,000 retail and high-net-worth clients and about $523.5 million in regulatory assets under management.

During the relevant period, Wahed's communications constituted advertisements "because they offered Wahed's investment advisory services with regard to securities to prospective clients and offered new investment advisory services with regard to securities to current clients," the SEC's order states.

"As the communications were published on Wahed's public website, they were made to more than one person," the SEC said.

Wahed communications also depicted "non-client professional athletes that constituted advertisements because they included paid endorsements from those athletes," according to the order.

The firm disseminated multiple ads on its website and via its social media accounts and email that contained endorsements "that did not disclose that the endorsements were given by persons other than a current client, that compensation was provided for the endorsements, and any material conflicts of interest resulting from an endorser's relationship with Wahed," the order states.

For instance, the firm "included an endorsement from a professional soccer player displaying the individual's image and text that read, 'Join the 300,000+ people investing with Wahed. [This professional soccer player] is investing, are you?'"

"However, in reality, the soccer player was not a client and had been compensated for his appearance in the advertisement with stock in Wahed's parent, Wahed Inc., worth approximately $500,000," according to the order.

In addition to providing the professional soccer player with compensation, "this award of stock provided the professional soccer player with an ownership interest in Wahed's parent, thereby creating a material conflict of interest on the part of the professional soccer player resulting from his relationship with Wahed," the SEC said.

The SEC did not name the soccer player. Paul Pogba, a French soccer player, has served as a brand ambassador for Wahed, which is backed by Saudi Aramco's venture capital fund.

Wahed failed to include any disclosure in the advertisement on its website stating that the athlete was not a current client, that compensation was provided for the endorsement, and that there was a material conflict of interest on the part of the professional soccer player resulting from his ownership stake in Wahed, according to the order. Wahed also failed to describe the material conflict of interest.

In another ad on its website, the order continues, "Wahed included images of four professional mixed martial arts ('MMA') athletes, with the name of one of these MMA athletes and text that read, '[j]oin the fight' in stated investment goals," the SEC said.

These MMA athletes were not current clients of Wahed and were compensated with $30,000 to $35,000 monthly for their appearance in Wahed's advertisements.

The firm also disseminated ads that were paid endorsements via social media and email.

"These advertisements present the same MMA athletes with messages including, among others: 'Step into the ring of financial success with Wahed in 2023;' and 'Aim higher, start your journey to wealth,'" the order states.

Wahed's ads also included these two paid endorsements from third-party endorsers, yet Wahed failed to disclose the material terms of the compensation arrangements between Wahed and the endorsers, according to the order.

Wahed stopped disseminating advertisements containing endorsements in May 2024, according to the SEC.

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