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SEC Fines RIA $430K For Advertising Performance The Wrong Way
Be careful how you advertise after the market crash
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Happy Sunday everyone, and welcome to Benzinga’s financial advisor newsletter.
Today we’re talking about the importance of marketing correctly, in light of the SEC’s recent $430,000 fine to an advisory for violating the Marketing Rule - something that’s especially important now that many are looking for advice on how to deal with the aftermath of last Monday’s market crash.
So, let’s get into the Industry Chatter!
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INDUSTRY CHATTER
Given the spike in retirement plan trading after this past Monday's market downturn, many investors are looking for help with what to do now that the markets are stabilizing. Advertising is key to that - but it's important to remember that financial advisors have to be careful how they advertise their services, and to whom.
A recent $430,000 fine imposed on The Pacific Financial Group by the Securities and Exchange Commission (SEC) is a good example. The advisory group was fined for violating the Marketing Rule by advertising hypothetical performance on its public website without proper safeguards.
What Happened
Here's what happened. Pacific Financial published advertisements on its website offering investment advisory services. Those ads included hypothetical performance derived from model portfolios and were disseminated to the general public rather than a specific intended audience.
Because of that, the SEC ruled that the firm failed to adopt and implement policies ensuring the relevance of the performance data to the likely financial situation and investment objectives of the intended audience, as required by the Marketing Rule.
Advisor Marketing Must Be Tailored To A Specific Audience’s Needs
The SEC order states that Pacific Financial's actions resulted in "disseminating hypothetical performance in advertisements to a mass audience" instead of tailoring it to a specific audience's needs.
As of March 27, Pacific Financial reported approximately $3.7 billion in regulatory assets under management.
In addition to the fine, the SEC ordered Pacific to undertake certain compliance measures.
Marketing Rule Makes Hypothetical Performance Marketing Tricky
This enforcement action highlights the importance of adhering to the Marketing Rule, which the SEC adopted in December 2020 with a compliance deadline of November 4, 2022. The rule prohibits registered investment advisers (RIAs) from including hypothetical performance in ads unless they implement policies ensuring the relevance of the data to the intended audience.
The case serves as a reminder for RIAs to carefully consider their marketing practices, especially when using hypothetical performance data. It underscores the need for tailored advertisements that align with the specific financial situations and investment objectives of intended audiences, rather than broad dissemination to the general public.
Double-Check Compliance Before Marketing Widely
As the SEC continues to enforce the Marketing Rule, RIAs should review their advertising practices and ensure compliance with the regulation to avoid similar penalties. Especially as advertising performance gets more tempting the more volatile markets get.
Of course, none of this is legal advice. Please get a professional opinion if you have any questions about your marketing strategy's compliance with regulations.
PREPARE YOUR CLIENTS FOR TOMORROW
If recent earnings misses, unemployment numbers, and the market’s panicked reaction is to be believed, the economic tide may be turning.
So it’s more important than ever to stay ahead of where the stock market is going for your clients. That’s why Benzinga is inviting you to the Benzinga Smallcap Conference on October 10th, 2024 in Chicago.
There you’ll get to meet the companies that will be tomorrow’s success stories, and meet with the hedge funds, family offices, and other investors driving that success.
You’ll get to connect with smallcap executives and asset managers, and much, much more.
MARKET RECAP
Wall Street experienced a wave of panic selling at the start of the week, driven by fears the U.S. economy might be heading into a recession after the release of a jobs report that came in cooler than expected.
As a result, traders fully priced in a 50-basis-point interest rate cut by the Federal Reserve in September, with speculation even swirling around the possibility of an emergency cut.
The bearish momentum paused following the release of the Institute for Supply Management survey, which reported a stronger-than-anticipated expansion in the U.S. service sector for July.
The market began to recover after the Bank of Japan said it would not raise interest rates during periods of volatility. This dovish statement helped the dollar regain ground against the yen, following significant losses due to the unwinding of carry trades.
A report of weaker-than-expected jobless claims further eased concerns and boosted risk sentiment, propelling the S&P 500, as tracked by the SPDR S&P 500 ETF Trust (SPY), to its best daily performance Thursday since February 2023.
By the end of the week, traders were giving almost equal odds to a 25-basis-point or a larger 50-basis-point cut in September ahead of the highly awaited Consumer Price Index inflation report for July scheduled for next week.
Trump And Fed Influence
Donald Trump suggested that U.S. presidents should have influence over Federal Reserve interest rate decisions, potentially challenging the Fed’s political independence. He said he believes his instincts surpass those of Federal Reserve officials and hinted at possible changes to the central bank’s operations.
Mortgage Rates Drop
As expectations for rate cuts rise, mortgage rates have dropped to their lowest levels in over a year, relieving pressure on homebuyers. The 30-year fixed rate fell to 6.47% and the 15-year fixed rate to 5.63%. Goldman Sachs analysts suggest this decrease could potentially boost home price appreciation.
Fed Rate Cut Predictions
A Benzinga poll reveals that 75% of respondents believe Federal Reserve rate cuts could prevent a recession. Additionally, 68% view the recent market downturn as temporary, reflecting overall optimism about economic stability despite short-term market volatility.
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THE WEEK AHEAD
Economic Data
Monday: U.S. monthly consumer inflation expectations
Tuesday: U.S. monthly Producer Price Index, Small business optimism numbers
Wednesday: U.S. monthly inflation numbers, EU quarterly GDP numbers
Thursday: U.S. monthly retail sales
Friday: U.S. monthly housing permits and building starts
Earnings
Monday: Barrick Gold (GOLD), Sun Life Financial (SLF)
Tuesday: Home Depot (HD), Nu Holdings (NU)
Wednesday: Cisco Systems (CSCO), Dole (DOLE)
Thursday: Walmart (WMT), Deere (DE)
Friday: Flowers Foods (FLO), Panbela Therapeutics (PBLA)
Click here for the full calendar of economic data and earnings reports.
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