RIA Compliance Blog
Whether or not the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) will formally name advertising as among its priorities in 2018, it is clear from its activity and that of the Enforcement Division in 2017 that advertising should remain a concern of every registered investment adviser and chief compliance officer.
In September 2017, OCIE published a Risk Alert identifying the most common compliance issues pertaining to Rule 206(4)-1 of the Investment Advisers Act of 1940, otherwise known as the “Advertising Rule.” An advertisement includes “any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers” advice regarding securities. The Advertising Rule forbids an investment adviser from “directly or indirectly… publishing, circulating, or distributing any untrue statement of material fact, or that is otherwise false or misleading.”
OCIE’s staff alert noted that misleading performance results were a common examination deficiency. In many instances, investment advisers displayed performance results without taking advisory fees into account. In other cases, investment advisers published performance results against an inappropriate benchmark or without identifying the limitations of such comparisons.
OCIE also took considerable note of advertisements that may have contained misleading one-on-one performance presentations. One-on-one communications between an investment adviser and a client generally are not subject to the Advertising Rule. However, if the same information is communicated to more than one client, as was the case with the one-on-one presentations that OCIE observed, one-on-one communications become subject to the Advertising Rule. OCIE found that some of these one-on-one presentations did not inform the advisers’ clients that the performance results did not take into consideration the deduction of advisory fees and other expenses. OCIE also found that certain advertisements may have featured claims that performance results conformed to voluntary performance standards, when in fact it was not obvious that the performance results did conform to those standards.
The Alert also described recurring types of misleading recommendations, such as advisers who only featured profitable stock selections or recommendations in their advertising, a violation of the Advertising Rule known as “cherry-picking.” Some investment advisers published advertisements that contained past specific investment recommendations that were possibly misleading because they featured only selected, and not all, recommendations, to promote an investment strategy.
OCIE also found that certain investment advisers lacked policies and procedures that were sufficiently tailored to achieve compliance with the Advertising Rule. These investment advisers were found not to have adequate policies and procedures relating to a number of issues, such as examining and approving advertising materials before they are placed into circulation, or verifying the truthfulness of performance results.
Finally, OCIE discovered certain deficiencies through the Touting Initiative that it established in 2016. For example, OCIE examined investment advisers who circulated advertisements which mentioned awards or rankings given by third parties but did not disclose material facts about the awards or rankings. OCIE also found that some investment advisers published advertisements that featured possibly untrue or misleading descriptions of professional designations. Finally, OCIE found that some investment advisers’ advertisements featured “statements of clients attesting to their services or otherwise endorsing the adviser that may be prohibited testimonials.”
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.