SEC Advertising Enforcement

The SEC's ongoing sweep recently resolved potential claims against nine different SEC-registered investment advisory firms for violations of its Marketing Rule.   The firms paid civil penalties ranging from $60,000 to $325,000.  In total, the SEC secured about $1.2 million in civil penalties.

Marketing Rule enforcement sits in an interesting place after the Jarkesy decision.  The Marketing Rule is Advisers Act Rule 206(4)-1.  It's codified at 17 C.F.R. 275.206(4)-1.  Section 206 of the Advisers Act is an anti-fraud provision.

Jarkesy would seemingly apply to give respondents the right to a jury trial and a federal court proceeding. Although addressing a different portion of the securities laws, the Jarkesy majority put it this way:

According to the SEC, these are actions under the “antifraud provisions of the federal securities laws” for “fraudulent conduct.” App. to Pet. for Cert. 72a–73a (opinion of the Commission). They provide civil penalties, a punitive remedy that we have recognized “could only be enforced in courts of law.” Tull, 481 U. S., at 422. And they target the same basic conduct as common law fraud, employ the same terms of art, and operate pursuant to similar legal principles. See supra, at 10–12. In short, this action involves a “matter[] of private rather than public right.” Granfinanciera, 492 U. S., at 56. Therefore, “Congress may not ‘withdraw’” it “‘from judicial cognizance.’” Stern, 564 U. S., at 484 (quoting Murray’s Lessee, 18 How., at 284).

Had the SEC not reached an agreement to resolve these claims, it likely would have decided to pursue claims in federal court instead of more expeditiously through its in-house administrative process.  

It's unknowable how the change in enforcement procedure may or may not have affected the resolution on these issues.  Consider the largest penalty, $325,000 from Integrated Advisors.  The firm has "approximately $4.2 billion in regulatory assets under management."  The civil penalty resolved a claim arising out of this factual circumstance: 

During the Relevant Period, Integrated Advisors published a communication on the public website of one of its DBA firms that constituted an “advertisement” because it offered investment advisory services with regard to securities to prospective clients, through its affiliation with Integrated Advisors, and offered new investment advisory services with regard to securities to current clients. As the communication was published on a public website, it was made to more than one person.

This advertisement contained the material statement of fact that the DBA firm was “a true fiduciary that puts the client first by aligning incentives and eliminating conflicts of interest” without providing any context for this claim. However, Integrated Advisors has recognized various conflicts of interest inherent in providing investment advisory services, including conflicts of interest disclosed in its Form ADV Part 2A brochures.

Frankly, I see the SEC as having Integrated Advisors dead to rights here, yet I don't know that the misstatement necessarily warranted the biggest penalty of the bunch.  Of course, we're only able to see what made it into the order.  It may be that the SEC was more concerned with how well the firm supervises advisers going out and making statements.  Given its scale, the penalty may be more aimed at ensuring an oversight problem gets fixed.

Other advisers made the same mistakes and walked out with lower penalties.  Consider AZ Apice.  The firm claimed that its advice was "free from conflicts of interest" while also disclosing conflicts on its Form ADV.  It paid just $70,000.  Of course, AZ Apice only has about $325 million in assets under management, so the SEC may have scaled the penalty based on firm size.  

TS Bank, doing business as Callahan Financial Planning made the same mistake, plus more, while also getting a lower penalty.  The firm has a mere $248 million in assets under management. It also claimed not to have conflicts while disclosing conflicts.  Yet it went off the rails by making false claims about being a "member" of an entity that doesn't exist!  This is how the order describes it.

Callahan disseminated an advertisement on its public website containing an untrue statement of a material fact. Specifically, Callahan Financial published an advertisement on its website in which it described Callahan Financial as a “Member” of “Fiduciary Firm.” However, Callahan Financial was not a “Member” of “Fiduciary Firm,” as “Fiduciary Firm” is a non-existent organization. Callahan Financial’s advertisement included a purported logo for this non-existent organization.

For these sins, Callahan paid just $85,000.

From this, we can see the SEC trying to calibrate penalties appropriately--taking into account firm size and the nature of the wrongdoing.  What Callahan did seems worse than AZ Apice and Integrated advisers because it invented a fake entity and even gave it a logo.  It's also the smallest of the three by assets under management.  

Other firms with exposure may be looking at these and trying to figure out where they could resolve issues with the SEC.  Firms with more assets under management should probably expect that they'll end up with a higher penalty.  You might be able to work out what kind of grid may be in play here by connecting the dots behind all nine of the awards.