SEC Takes Action Against Twenty Acre Advisors for Marketing Rule Violations

In a recent enforcement action on June 14, 2024, the Securities and Exchange Commission (SEC) charged Twenty Acre Advisors, LLC, with violating the SEC’s Marketing Rule, specifically regarding using hypothetical performance in advertisements. This case, detailed in the SEC’s administrative proceeding document, underscores the heightened regulatory scrutiny that investment managers face as the SEC continues to enforce compliance with its updated Marketing Rule, which went into effect in November 2022. In this article, Arootah Advisor Michelle McGurk unpacks the details, examining FINRA’s proposed rules, the MFA’s arguments, and the potential implications for the investment management industry.

Summary of the Enforcement Action

The SEC’s action against Twenty Acre Advisors centered on the firm’s marketing practices, particularly its use of hypothetical performance data in advertisements. The SEC’s order detailed that from at least November 2021 through February 2023, Twenty Acre misled prospective investors by advertising performance returns based on the experience of a single investor rather than the performance of the entire private fund it managed. Critically, these advertisements failed to disclose that this investor’s returns were, at times, significantly higher than the fund’s overall performance and the returns achieved by other investors. The discrepancy arose due to certain investment restrictions under FINRA rules, particularly those prohibiting certain individuals from purchasing securities in initial public offerings (IPOs). This omission presented a skewed and overly optimistic view of the fund’s potential performance, misrepresenting the reality of the fund’s overall returns.

The SEC determined that Twenty Acre violated the stringent requirements of the Marketing Rule, which mandates that any presentation of hypothetical performance data must include relevant, appropriate disclosures to prevent misleading potential investors. Twenty Acre’s failure to provide necessary context and tailor its communications to the sophistication level of its audience were critical lapses, leading to this enforcement action.

Without admitting or denying the SEC’s findings, Twenty Acre consented to a cease-and-desist order and censure and agreed to pay a $100,000 civil penalty.

Key Takeaways for Investment Managers

The SEC’s enforcement action against Twenty Acre Advisors provides critical lessons for investment managers:

1. Detailed Compliance with Marketing Regulations

Investment managers must ensure all marketing materials, especially those including hypothetical performance, are accurate and provide comprehensive disclosures that meet SEC standards. These disclosures must clarify the basis of any claims, and the limitations of the data presented.

2. Targeted Audience Communication

Accurately assess the sophistication level of the audience and tailor marketing materials accordingly. This approach prevents misunderstandings and meets the SEC’s requirement for appropriately presenting hypothetical data.

3. Ongoing Compliance Reviews and Mock Audits

Review and audit marketing materials regularly to ensure compliance. Incorporating mock audits can help identify potential areas of risk by simulating an SEC examination of marketing practices, ensuring that every piece of promotional content can withstand regulatory scrutiny.

4. Strategic Legal Consultations

Regularly engage with legal experts to review and update marketing materials, ensuring alignment with the latest SEC regulations and enforcement trends.

5. Enhanced Employee Training

Investment firms should emphasize enhanced employee training as a key preventive measure to ensure compliance with the SEC’s Marketing Rule, particularly for marketing professionals who may not typically interact with compliance regulations. Effective training programs should be interactive, allowing employees to discuss how they would handle similar situations, followed by feedback from compliance officers. They should focus on the intricacies of the SEC’s Marketing Rule, applying its principles to everyday marketing tasks through scenario-based learning that mimics real-world decision-making.

This approach deepens employees’ understanding and reinforces a compliance-focused culture. It significantly reduces risks and upholds legal and ethical standards across the firm, thus protecting against potential regulatory actions.

6. Compliance Checklist Essentials

Use checklists to ensure marketing materials include detailed disclosures on hypothetical performance, present historical and hypothetical results equally, perform regular and mock audits of marketing materials, and tailor content to match the audience’s sophistication level.

The Bottom Line

The SEC’s enforcement action against Twenty Acre for violations of the Marketing Rule is a stark reminder to investment managers of the importance of strict compliance with regulatory requirements. As the SEC continues to scrutinize marketing practices, firms must proactively ensure that their marketing materials are accurate, clear, and fully compliant with the Marketing Rule.

Investment managers should take this opportunity to reassess their marketing practices, enhance their compliance programs, and ensure that their communications with investors are transparent and well-documented. By doing so, firms can mitigate the risk of enforcement actions and maintain their clients’ trust in an increasingly regulated environment.

We expect increased SEC enforcement in this area to continue, making it more important than ever for investment managers to stay vigilant and prioritize compliance in all operations. Our team of experts can help ensure your compliance. Take the first step and discover how Arootah’s Hedge Fund Advisory can support you.