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SEC Enforcment Roundup & 4 Key Compliance Items

If you've ever wondered whether the SEC's Division of Enforcement is active, here is a recap of 4 kinds of enforcement actions the SEC has been bringing recently.

1. Marketing Rule Violations

The SEC is continuing its sweep of RIAs for compliance with the Marketing Rule, having settled actions against several RIAs in the last 6 months for violations of the rule's performance advertising provisions. In particular, the SEC has focused on:

  • The adoption of policies and procedures by firms advertising hypothetical performance on their websites. 
  • Failing to include net performance alongside advertisements of gross performance.
  • Generally false or misleading claims regarding performance.

Takeaway: make sure your personnel are trained to run performance advertising through your CCO, who should review all ads for marketing rule compliance.    

2. RIA/BD Off-Channel Communications

The SEC has continued its monitoring of the books and records rules under the Exchange Act and Advisers Act, levying over $1.7BN in fines over the last 6 months alone for books and records violations. The most common issue tripping up firms: improper preservation of text messages, typically because the messages are sent off-channel.

Takeaway: make sure you can store and monitor firm-related communications, including online chat functions and telephone messaging.   

3. Internet advisers

In March 2024, the SEC adopted an amendment to the Internet Adviser exemption. The new rule:

  • Requires advisers relying on the registration exemption to operate an interactive website at all times.
  • Eliminated the de minimis exception, thereby requiring all clients to be served online.
  • Amended Form ADV to require advisers relying on the exemption to represent that (among other things) the adviser has an interactive website.

Takeaway: for many internet advisers, be prepared to end your advisory relationship with non-internet-based clients. For other internet advisers, be prepared to register with the SEC!

4. RAUM Miscalculations

Last week, the SEC brought an enforcement action against an RIA for (among other violations) miscalculating its Regulatory Assets Under Management. In its Form ADV filings, the firm's RAUM calculation included assets for which the firm did not provide “continuous and regular supervisory or management services.” 

Takeaway: miscalculated RAUM is low-hanging fruit for the SEC - make sure you have reviewed and understand the SEC's Form ADV instructions and guidance regarding RAUM calculations!