Marketing Rule Violations

Did your firm mislead you with their marketing of an investment product? There are strict rules regarding how firms can market their investment vehicles. Firms are not allowed to mislead investors or mischaracterize an investment’s potential performance. For firms that fail to implement appropriate policies, the Securities and Exchange Commission enforces its Marketing Rule with fines or sanctions.

Firms Facing Enforcement Actions

On April 12, 2024, the SEC announced settled charges against the following advisory firms:

• GeaSphere LLC
• Bradesco Global Advisors Inc.
• Credicorp Capital Advisors LLC
• InSight Securities Inc.
• Monex Asset Management Inc.

According to the SEC, these firms advertised the “hypothetical performance” of investment vehicles without ensuring that the “hypothetical performance was relevant to the investment objectives of the intended audience,” as required by the Marketing Rule. The firms agreed to pay a total combined penalty of $200,000.

What is the Marketing Rule?

Here are some of the highlights of the revised Marketing Rule:

• Advisers must not discuss any potential benefits without providing fair and balanced treatment of any associated material risks or limitations.
• Advisers must not make any untrue statement of material fact.
• Advisers must not make a material statement of fact that the adviser does not have a reasonable basis for believing.
• Advertisements must prominently disclose whether the promoter is receiving any compensation for the endorsement.

These points frequently come up in SEC enforcements of Marketing Rules.

Securities Rule Violations

The Marketing Rule is not the only rule prohibiting brokers from misrepresenting investments. Brokers who misrepresent investments may have violated one of the following rules as well.

Misrepresentation and Omission

FINRA Rule 2020 prohibits brokers from misrepresenting investments and omitting material facts. Material facts include tax implications, fees, and maturity dates.

Brokers may omit these facts when describing investments because they know far-off maturity dates or steep fees might dissuade an investor from purchasing a security. Unscrupulous brokers might have their eye on a commission and omit information as part of their campaign to persuade the investor to purchase the investment.

Misrepresentation may involve hiding the cost of trading from customers. FINRA barred a broker in March 2024 following allegations that he hid trading costs of customers. He was allegedly executing an excessive number of trades for his own financial benefit. With a large number of securities transactions, the broker earns more money, but the transactions incur too many fees for the investor to earn a return on their investments.

According to FINRA dispute resolution statistics, misrepresentation is one of the top five most common reasons for investor disputes.

FINRA Rule 2210: Communications with the Public

This rule requires that communications with the public–including advertisements–must be “fair and balanced” and must “provide a sound basis for evaluating the facts in regard to any particular security or type of security.”

FINRA fined brokerage firm TradeZero America $250,000 following allegations that the firm paid social media influencers to create posts that were not fair and balanced and contained exaggerated statements. These posts also allegedly failed to discuss the risks of investing. In one video, FINRA alleges, an influencer stated that TradeZero was for “people who want to trade and make billies” and not for “grandmas and grandpas who trade, like, one stock.”

FINRA Rule 2010: High Standards of Commercial Honor

FINRA regulatory actions may also cite FINRA Rule 2010, which is a broadly applicable rule that calls for brokers to uphold “high standards of commercial honor and just and equitable principles of trade.’

For example, in February of 2024, FINRA alleged that a broker violated FINRA Rule 2010 when they made “negligent misrepresentations” about the performance of two investment funds. These funds allegedly created documents showing inaccurate performance results, and when the broker became aware of certain discrepancies, they allegedly failed to investigate. The manager of one of the funds was allegedly arrested and charged with securities fraud.

What If I Was Misled by a Firm’s Marketing of an Investment Product?

If you believe a firm’s marketing material misrepresented an investment or omitted essential information, you may want to sue your broker. However, brokerage firms prohibit suing in civil court with pre-dispute arbitration agreements, requiring that investors instead go through a process called FINRA arbitration. Securities attorneys can advise clients on whether they have a case that merits FINRA arbitration. Contact Kurta Law securities attorneys today for a free consultation: (877) 600-0098 or info@kurtalawfirm.com.