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SEC Case Highlights the Perils of Hypothetical Performance
Background:
- On August 9th 2024, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) settled an administrative proceeding with an investment adviser for violations of the SEC’s Investment Adviser Advertising Rule (206(4)-1) for posting hypothetical performance on a website.1
- The adviser paid a $430,000 civil penalty.
Key Facts and Allegations:
- Hypothetical Performance Posted on Website – The adviser published advertisements on its website which contained hypothetical performance and “offered investment advisory services”. During this time, the adviser failed to adopt and implement policies and procedures reasonably designed to ensure that the performance was relevant to the likely financial situation and investment objectives of the intended audience.
Takeaways:
- Hypothetical performance is likely never appropriate for websites – In its order, the SEC highlights that: (1) anything posted on a website is considered to be disseminated to a mass audience; and (2) the marketing rule requires hypothetical performance to always be tailored to the financial condition and investment objectives of the target audience. Mass distribution makes such tailoring impossible, calling into question whether hypothetical performance can ever be posted on a non-protected section of a website.
1 In the Matter of Pacific Financial Group, Inc. File No. 3-21987