Washington RIA takes $430k penalty over misleading advertisements

The SEC has meted out a $430,000 penalty against a Bellevue, Washington-based investment over its failure to comply with the new marketing rule amendments adopted in December 2020.

According to the SEC, the Pacific Financial Group, which manages approximately $3.7 billion in regulatory assets, didn’t ensure that hypothetical performance data shown on its public website was relevant to its intended audience’s financial situation and investment objectives.

The violations occurred after the compliance deadline of November 4, 2022, the federal regulator said.

The SEC's order detailed how during that period, the firm’s website featured communications that included hypothetical performance data based on returns derived from model portfolios.

Those communications, the regulator maintained, amounted to “advertisements” – one of the major pitfall areas for marketing rule compliance – as they “offered Pacific Financial’s investment advisory services with regard to securities to prospective clients and offered new investment advisory services with regard to securities to current clients.”

Under the marketing rule, RIAs are not allowed to feature any hypothetical performance data in their advertisements unless they meet specific requirements.

Among those, the advisor must “[adopt] and [implement] policies and procedures reasonably designed to ensure that the performance is relevant to the likely financial situation and investment objectives of the intended audience of the advertisement.”

Because the communications were made available to the general public rather than to a specific audience tailoring the content to specific audiences, the SEC argued the Pacific Financial Group failed to abide by that rule.

"[B]ecause the advertisement would be available to mass audiences, an adviser generally could not form any expectations about their financial situation or investment objectives,” the regulator reasoned.

The SEC highlighted that this failure to tailor performance data could mislead potential and existing clients about the adviser's services.

In March this year, Pacific Financial went through a shakeup of its C-suite as it appointed a new CEO, CCO, and chief legal officer. The new leadership team wasted no time, promptly assessing the facts and gave their full cooperation to the SEC’s staff.

Aside from the $430,000 penalty, the SEC ordered the firm to cease and desist from further rule violations and have policies in place to make sure its advertisements didn’t clash with the marketing rule.