Navigating the Grey Area – Online Trading Marketing Compliance in the US

Implementing new regulations is an increasingly popular way of guiding advertisers toward acceptable advertising. However, frequently changing rules make it difficult for compliance leaders to keep up with the constantly evolving marketing compliance landscape.

The US is one trading market where this dynamic is evident. Marketing compliance for US traders is enforced by the Securities and Exchange Commission (SEC), which regulates financial businesses, and the Federal Trade Commission (FTC), which oversees advertising standards.

For the online trading industry in the US, marketing compliance is primarily governed by rule 206(4)-1 under the Investment Advisers Act of 1940. This rule prevents "fraudulent, deceptive, or manipulative acts, practices, or courses of business" within investment adviser marketing. It sets out the regulations that traders must follow when promoting their business.

In recent years, it has undergone significant amendments to align with modern marketing practices. Despite the changes, the rules are complex, challenging to follow and open to interpretation with many grey areas. This can have expensive repercussions for trading firms in the form of fines, refunds or compensation payments to clients deemed to have been misled, and brand and reputational damage.

Some of the critical challenges facing compliance leaders in the US include:

Potential misunderstandings and misleading statements

Rule 206(4)-1 prohibits untrue statements and omissions, unsubstantiated material statements, untrue or misleading implications or inferences, omissions of material risks or limitations, and anything else that would otherwise be materially misleading. It’s the word “misleading” that is most open to interpretation. 

For example, investment firm Charles Schwab was fined $186.5 million for adverts claiming “no hidden fees [and] no advisory fees”. The SEC found that the advertised model would reduce investors' returns by approximately the same amount as an advisory fee. The suggestion that investors would end up with more money than if they had paid an advisory fee was considered misleading and non-compliant.

And it’s not always about financial performance. BNY Mellon Investment Adviser, Inc was fined $1.5 million in 2022 for misstatements and omissions about the environmental, social and governance (ESG) quality reviews for mutual funds it managed.

The key word here is substantiation. Any claim featured in promotions must be substantiated. If you can’t justify a statement as being in no way misleading, it needs to be omitted from marketing materials.

Managing testimonials and third-party content

A long-standing part of rule 206(4)-1 prohibited using testimonials. Testimonials are now allowed if they disclose clearly and prominently whether the person giving the testimonial:

• Received compensation for doing so (in which case the terms and a description of the compensation must be disclosed)
• Is a current client or investor, or someone other than a client or investor
• Has any material conflicts of interest relating to the testimonial?

What constitutes a testimonial in an age of affiliate marketing, influencer marketing, and user-generated content? That’s another grey area for today’s compliance leaders to negotiate.

The updated rule’s definition of an advertisement is comprehensive and includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly.

Online traders can also be liable for third-party statements. That means they must remain constantly vigilant about content shared by affiliates and influencers and any edits or amendments over time.

Promises around performance

It’s not just the risk of regulatory censure or litigation that poses a threat — non-compliant marketing can result in you being forced to refund clients who bought from you based on misleading promotions.

Online Trading Academy — an investment training business — was ordered to pay its customers compensation of up to $9.1 million by the FTC. Its strategies were promoted as being able to help anyone to generate substantial income from trading in the financial markets and in any market condition. The FTC ruled that this was misleading.

SEC regulations state that any claim about performance must be for a specific period, refer to net performance rather than gross performance, and not cherry-pick the best performance results from multiple portfolios with similar investment policies.

Again, substantiation is critical: can your claims be proven if you’re required to do so?

All benefit and no risk

Focusing on the benefits of your product or service is advertising 101. However, it’s not quite that straightforward for online traders operating in the US. SEC rules prohibit discussing any potential benefits of a financial product or service without providing "fair and balanced treatment" of the risks or limitations.

What constitutes a fair and balanced treatment of the downside of your offering is something of a compliance headache. It’s challenging enough to manage this internally without keeping track of whether affiliates and other third parties are giving sufficient attention to the limitations of the very thing you — and they — want to sell.

Navigate online trading marketing compliance in the US.

If you’re struggling to get to grips with marketing compliance around online trading in the United States, Rightlander is here to help.

Learn how Rightlander ensures compliance in the face of challenging regulation.