May 28, 2024
The SEC’s Recent Risk Alert Highlights the Potential for Fraud
On April 18, 2024, the U.S. Securities and Exchange Commission (SEC) issued a Risk Alert summarizing the staff’s preliminary observations involving compliance by registered investment advisers with Rule 206(4)-1 of the Investment Advisers Act of 1940, as amended (the Marketing Rule).
The Risk Alert addresses the “general prohibition” provisions of the Marketing Rule in addition to the requirements relating to (1) adopting and implementing policies and procedures; (2) maintaining books and records; and (3) completing Form ADV questions regarding advertisements, specifically those including actual performance and hypothetical performance.
SEC staff observed and provided specific details regarding compliance deficiencies they have discovered in the following areas:
- Untrue and unsubstantiated statements of material fact regarding the investment adviser’s business;
- Misleading inferences or omission of material facts relating to conflicts, endorsements, performance claims, third party ratings, testimonials, and performance information;
- Fair and balanced treatment of material risks or limitations;
- References to specific investment advice that were not presented in a fair and balanced manner;
- Inclusion or exclusion of performance results or time periods in manners that were not fair and balanced; and
- Advertisements that were otherwise materially misleading because of font size, visibility of disclosures, etc. particularly on websites and in videos.
The Risk Alert emphasizes the SEC’s focus on advertisements and Marketing Rule compliance and highlights the need for registered investment advisers to “reflect upon their own practices, policies, and procedures and to implement any appropriate modifications to their training, supervisory, oversight, and compliance programs.”
What if I witness misconduct or suspect fraud?
If you observe investment adviser misconduct in violation of the Marketing Rule or any other federal securities law, it is critical that you inform the SEC.
The SEC will often pay monetary awards to whistleblowers who voluntarily provide the agency with original information about violations of the federal securities laws.
How do I report this misconduct or fraud to the SEC?
If you suspect misconduct or fraud, contact a lawyer, such as a member of Cohen Milstein’s Whistleblower practice, who can counsel you on the Whistleblower process and help you complete and submit the SEC’s tip, complaint, and referral form (Form TCR).
Such consultations are confidential and free-of-charge.
What type of information is needed to report fraud or misconduct to the SEC?
In addition to your personal observations and a completed Form TCR, the SEC requires supporting information that is original and not in the public sphere.
What if I’m not a company insider?
You do not need to be a company “insider” (like an employee or trader) to witness or report possible fraud or misconduct. Other market participants or victims of fraud or misconduct who observe these actions committed by others may also qualify as whistleblowers.
Does the SEC offer a whistleblower award for reporting fraud or misconduct?
Yes. If your information leads to a successful SEC enforcement action resulting in more than $1 million in monetary sanctions, you will receive an award ranging from 10-30% of any amount collected.
Where do I find more about reporting fraud and becoming a whistleblower?
The SEC’s Office of the Whistleblower provides comprehensive guidelines on the reporting fraud and the whistleblower process.
You can also contact a member of Cohen Milstein’s Whistleblower practice for a confidential and free-of-charge consultation.
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About the Author
Christina McGlosson is special counsel in Cohen Milstein’s Whistleblower practice, where she focuses exclusively on Dodd-Frank Whistleblower representation. She is the former acting director of the Whistleblower Office in the Division of Enforcement at the U.S. Commodity Futures Trading Commission (CFTC). She was also a senior attorney in the SEC Division of Enforcement.
Christina represents whistleblowers in the presentation and prosecution of fraud claims before the SEC, CFTC, FinCen, as part of the U.S. Treasury, and other government agencies.
Christina McGlosson, Special Counsel: Dodd-Frank Whistleblower Practice
Cohen Milstein Sellers & Toll PLLC
1100 New York Avenue, NW
Washington, DC 20005
E: cmcglosson@cohenmilstein.com
T. 202-408-3635
Read Blow the Whistle on Investment Adviser Marketing Rule Deficiencies.