A registered investment adviser based in New York has settled charges with the SEC relating to the use of endorsements from professional athletes in its advertising. It agreed to pay a civil penalty of $250,000.

The SEC alleges that Wahed Invest, Inc used advertisements across social media and its own website and email featuring MMA fighters and other athletes without including the disclosures required under the SEC’s Marketing Rule. The disclosures should have mentioned that these were paid endorsements from people who were not current clients or investors of the firm, and it should have specified any material conflicts of interest on those people’s part.

The advertising campaign ran for more than 18 months.

Ring of success

The athletes were said to have been paid $30,000-$35,000 a month for their appearances alongside marketing messages such as: “Step into the ring of financial success with Wahed in 2023.”

In one case, a pro soccer player appeared in an endorsement, with the text reading, “Join the 300,000+ people investing with Wahed. (The soccer player) is investing, are you?” (The name of the athlete is not included in the settlement.)

However, the soccer player wasn’t a client, and he was paid for his appearance with stock from Wahed’s parent company worth about $500,000, creating a conflict of interest for that player. According to the Commission, Wahed didn’t disclose any of this information.

In another ad on its website, Wahed brought in four professional mixed martial arts (MMA) athletes for an ad, and like the soccer player, they’re not named in the settlement. The ad included the name of one of the athletes with text saying: “Join the fight.” The firm also advertised with the MMA fighters on social media and email, including text like “step into the ring of financial success with Wahed in 2023.” 

The rule now requires advisers to standardize certain parts of a performance presentation to help investors evaluate and compare investment opportunities.

But, as mentioned above, the athletes weren’t Wahed clients and were paid well to appear in the ads. More to the point, Wahed didn’t disclose this to clients, the SEC said. The order says that the firm stopped using advertisements, including endorsements, last May. 

The commission also accused the firm of using hypothetical performance in ads for more than 17 months on its website without the necessary policies and procedures.

Penalty

The SEC’s order found that Wahed willfully violated the antifraud provisions of Section 206(4) of the Advisers Act and Rules 206(4)-1(b) and (d) thereunder.

Without admitting or denying the order’s findings, Wahed consented to a cease-and-desist order, plus a censure; to comply with undertakings not to advertise hypothetical performance without having the requisite policies and procedures; to ensure its advertisements comply with the Marketing Rule; and to the civil penalty of $250,000.

Marketing rule cases, risk alert

In September 2023, the SEC charged nine registered investment firms for using advertised hypothetical performance to mass audiences on their websites without having the required policies and procedures.

A month before that, the SEC brought an action against a New York-based fintech investment adviser for using hypothetical performance metrics in advertisements that were misleading, plus other, alleged compliance failures. It was the first SEC action under the revised rule.

In June 2023, the SEC’s Division of Examinations published a Risk Alert to inform investment advisers, including private fund advisers, about additional areas of emphasis during examinations focused on the amended Marketing Rule.

More recently, earlier this year, SEC examiners noted they were still finding violations of the ad rule among registrants, including advisers falsely claiming they were “free of all conflicts,” according to its third risk alert released related to the topic.

Recap of the rule

In December 2020, the SEC finalized amendments to its advertising and solicitation rules under the Investment Advisers Act of 1940, as amended, merging the Advisers Act’s advertising rule operative at the time with a cash solicitation one under the new rule, Rule 206(4)-1.

For example, the rule now requires advisers to standardize certain parts of a performance presentation to help investors evaluate and compare investment opportunities and includes tailored requirements for certain types of performance presentations.

And the new hypothetical performance aspect of the rule precludes firms from providing hypothetical performance information in advertisements unless they have a clear grasp of the audience’s likely investment objectives and financial situation.