What triggered the SEC's marketing rule enforcement action against nine advisers?

• The Amended Marketing Rule was issued in December 2020: The SEC issued the new rule on December 22, 2020, with an 18-month deadline for advisers to become compliant.
• A sweep examination followed the compliance deadline: The SEC conducted a sweep examination specifically to determine compliance with the new rule.
• Nine advisers were cited for the same underlying violation: All nine were cited for "advertising hypothetical performance to the general public on their websites in violation of the marketing rule."
• The rule was framed as a transparency measure for investors: The piece states the 2020 rule "makes some important changes that provide transparency for investors, such as outlining requirements for advertising performance."

What is hypothetical performance, and why does the SEC treat it as a specific risk category?

• The SEC's definition centers on results not actually achieved: Hypothetical performance is defined as "performance results that were not actually achieved by any portfolio of the investment adviser, such as those generated by applying the investment strategy to historic market data."
• The risk is investor mismatch with advertised strategy: SEC Enforcement Director Gurbir Grewal stated hypothetical performance advertisements "may present an elevated risk for prospective investors whose likely financial situation and investment objectives don't match the advertised investment strategy."
• Misrepresentation of hypothetical as actual data is the core concern: The piece states "by representing hypothetical data as actual data, investors may be misled as to the performance of the adviser."
• The rule specifically targets cherry-picking and data alteration: The piece states the rule "ensures that Advisers cannot cherry-pick or alter data for advertising purposes without consequence."

What did Convergence find about Chief Compliance Officer structure among the cited advisers?

• A majority of cited advisers had a multi-hatted CCO: 7 of the 9 advisers cited, or 78%, had a Multi-Hatted Chief Compliance Officer.
• Convergence defines the multi-hatted condition specifically: "A Multi-Hatted CCO exists when the CCO also holds other key control roles."
• Convergence compares this rate to an industry baseline: The piece states 78% "is over triple the percentage of high-risk advisers in the industry."
• Convergence connects the condition to workload and rule compliance: The piece states "the failure to comply with the marketing rule may have been caused, in part, by the CCO's heavy workload, which is only exacerbated when they are multi-hatted."
• Marketing material approval is specifically tied to the CCO role: The piece notes "the marketing materials would typically be approved by the CCO before release," raising the question of "how many of these cases might have been prevented by an independent CCO."

What Convergence risk designations were assigned to each of the nine cited advisers?

• Six advisers received a "High-Watch" designation: Banorte Asset Management Inc., MRA Advisory Group, Hansen and Associates Financial Group Inc., Elm Partners Management LLC, and BTS Asset Management Inc. were each designated "High-Watch."
• Two advisers received a "Medium-Watch" designation: Trowbridge Capital Partners LLC and McElhenny Sheffield Capital Management were each designated "Medium-Watch."
• One adviser received a "Medium" designation without the Watch qualifier: Macroclimate LLC was designated "Medium."
• One adviser received a "High" designation without the Watch qualifier: Linden Thomas Advisory Services LLC was designated "High."
• Convergence defines what a "Watch" designation specifically signals: The piece states Watch factors are conditions "that merit a higher level of investor attention," and that "regardless of the Adviser's overall risk score, the 'watch' condition is noteworthy enough for you to pay it more attention."

What does Convergence recommend investors do with this information?

• Investors are advised to look for stress and complexity signals directly: The piece recommends investors "look for signals of stress and complexity in your current or potential Adviser."
• A specific follow-up question is recommended: Investors are advised to "ask them to describe the controls in place to ensure that a proper account review is conducted."
• A named contact is provided for further inquiry: The piece directs readers to "contact Garrett Davies to learn more about high-risk business conditions in SEC actions," reachable at gdavies@convergenceinc.com.
• The piece frames this as part of Convergence's broader tracking function: The piece states "Convergence identifies and tracks business conditions that can create risks that lead to regulatory and civil cases and, worse, to investor losses."