On August 23, 1940, President Franklin D. Roosevelt signed two bills into law, the Investment Company Act of 1940 and the Investment Advisors Act of 1940 (the “Investment Act”), both of which were aimed to protect investors from a lack of disclosures. The main goal of the Investment Act was to regulate and monitor those who, for a fee, advise people, pension funds, and institutions on investment matters. In 2020, the Securities Exchange Commission (“Commission”) finalized reforms under the Investment Advisers Act and modernized rules governing investment advertisements and payments to solicitors. See Investment Adviser Marketing, Release No. IA-5653 (Dec. 22, 2020) (effective May 4, 2021) (“Commission Release”). The amendments created a single rule that replaced the then-current advertising and cash solicitation rules. The final rule—known as the Marketing Rule (“Rule”)—was designed to regulate investment advisers’ marketing communications comprehensively and efficiently. Id.
The Marketing Rule served as a combination of the previously existing rules because the amendments replaced the broadly drawn limitations and duplicative elements in the previous rules with more principle-based provisions. See Commission Release, supra. For example, under the Marketing Rule, the amended definition of “advertisement” contains two prongs: one that captures communications traditionally covered by the advertising rule and another that governs solicitation activities previously covered by the Cash Solicitation Rule. Id. The Marketing Rule defines an “advertisement” to include “[a]ny direct or indirect communication an investment adviser makes…to more than one person…” Advisers Act Rule 206(4)-1(e)(1).
Additionally, the Marketing Rule prohibits the use of testimonials and endorsements in an advertisement, unless the adviser satisfies certain disclosure provisions such as, “clearly and prominently disclos[ing] whether the person giving the testimonial or endorsement (the “promoter”) is a client and whether the promoter is compensated. Additional disclosures are required regarding compensation and conflicts of interest.” Advisers Act Rule 206(4)-1(b).
Id. For instance, Wahed disseminated an endorsement from a professional soccer player, displaying the individual’s image and text, which read, “Join the 300,000+ people investing in Wahed. [This professional soccer player] is investing, are you?” In reality, however, “the soccer player was not a client and had been compensated for his appearance in the advertisement with stock in Wahed’s parent, Wahed, Inc., worth approximately $500,000.” Order at 4. In addition to compensation, the stock award “provided the soccer player with an ownership interest in Wahed’s parent” and created a “material conflict of interest on the part of the professional soccer player resulting from his relationship with Wahed.” Order at 4. The Commission did not name the soccer player, who was Paul Pogba—a brand ambassador for Wahed since July 25, 2023.[1]
Another advertisement on Wahed’s website “included images of four professional mixed martial arts (“MMA”) athletes, with the name of these MMA athletes and text that read, “[j]oin the fight” in stated investment goals. Order at 4. These advertisements present the same MMA athletes with messages including “Step into the ring of financial success with Wahed in 2023” and “Aim higher, start your journey to wealth.” Id.
Both of Wahed’s communications were considered “advertisements” under the Marketing Rule because they “were made to more than one person” and “offered Wahed’s investment advisory services with regard to securities prospective clients.” 17 C.F.R. § 275.206(4)-1(e). As such, these endorsements would have been permissible under the Marketing Rule had they contained the requisite disclosures informing of: (i) whether the person giving the testimonial or endorsement—Paul Pogba or the MMA athletes—were clients of Wahed; (ii) whether the promoters were compensated for these testimonials or endorsements; and (iii) a brief statement on any material conflicts of interest on the part of the person giving the endorsement resulting from the investment adviser’s relationship with such person. 17 C.F.R. § 275.206(4)-1(b). In the example above, Wahed should have made a statement disclosing Paul Pogba’s material conflict of interest resulting from his ownership stake in Wahed.
Wahed’s ads were devoid of such requirements, resulting in a censure and a $250,000 penalty.
In sum, the Marketing Rule is a significant development in Commission rulemaking. The Marketing Rule includes several provisions that advertisers may find beneficial, including the ability to market materials through the use of testimonials, endorsements, or third-party ratings. Although the Marketing Rule allows investment advisers to advertise in new ways, they must be in strict compliance with the Rule.
About Lowey Dannenberg:
Lowey is a leader in the securities litigation, filing some of the first ever class actions on behalf of investors impacted by violations of the securities laws. Lowey Dannenberg is well equipped to investigate and bring shareholder class action litigation on behalf of affected investors. If you wish to speak to a member of Lowey Dannenberg’s securities practice group, please feel free to contact us using the form below or reach out directly to the author of this article, Alesandra Greco (agreco @lowey.com).
[1] PR Newswire, Wahed launches a digitized endowment feature to tackle the cost of living crisis in the UK with endorsement from World Cup Winner and brand ambassador, Paul Pogba, PR Newswire, (Jul. 25, 2023), https://www.prnewswire.com/in/news-releases/wahed-launches-a-digitised-endowment-feature-to-tackle-the-cost-of-living-crisis-in-the-uk-with-endorsement-from-world-cup-winner-and-brand-ambassador-paul-pogba-301884307.html.