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SEC Risk Alert Highlights RIA Advertising Rule Compliance Issues

Posted by RIA in a Box

Sep 19, 2017 9:10:20 AM

September 2017 SEC RIA Risk Alert on Advertising RuleLast week, the Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") released a new National Exam Program Risk Alert providing a summary of observations related to Rule 206(4)-1 (the "Advertising Rule") from recent OCIE investment adviser examinations and as part of a recent audit initiative focused on advisers’ use of accolades in their marketing materials (“Touting Initiative”). It's important for registered investment adviser ("RIA") firm principals to review this latest regulatory compliance guidance.

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In this latest risk alert, SEC OCIE staff notes "the Advertising Rule prohibits an adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading." With more RIA firms adopting new forms of advertising such as social media, the staff also draws attention to the fact that "Adviser statements made through electronic media, or other nontraditional styles of presentation may fall within the purview of the Advertising Rule."

SEC OCIE staff observed a wide range of RIA advertising compliance issues. Some of the highlighted issues related to the Advertising Rule include:

  • Misleading performance results
    • Do the presented performance results include the deduction of advisory fees?
    • Is the proper benchmark being utilized to compare performance results?
    • Do hypothetical performance results explain how the returns were calculated and other potentially material information?
  • Misleading one-on-one presentations
    • Do the performance results indicate that the results do not reflect the deduction of client advisory fees and that returns will be reduced by such fees and other expenses?
  • Misleading claim of compliance with voluntary performance standards
    • Are the results compliant with the Global Investment Performance Standards (GIPS) as claimed?
  • Cherry-picked profitable stock selections
    • Do presentations only include profitable stock selections without complying with the Advertising Rule?
  • Misleading selection of recommendations
    • Are past specific investment recommendations included that may be misleading because they included only certain, and not all, recommendations?

In regards to the Touting Initiative, the SEC OCIE staff also cited a number of specific issues which were observed given the “regularity with which staff encounters advisers that advertise these accolades without disclosing material facts about them.” Some of the highlighted issues related to accolades include:

  • Misleading use of third party rankings or awards
    • Was the accolade obtained by submitting potentially false or misleading information?
    • Are the accolades cited present or are they from years prior and no longer applicable?
    • Is the relevant selection criteria for the award or rankings properly disclosed?
  • Misleading use of professional designations
    • Are the designations listed on advisers’ Form ADV Part 2B brochure supplements still in effect?
    • Are the minimum qualifications required to attain a listed designation properly disclosed?
  • Testimonials
    • Are any prohibited client testimonials listed anywhere (e.g. social media pages or firm pitch books)?

In addition, the SEC OCIE staff notes that in regards to Rule 206(4)-7, advisory firms always need to implement “compliance policies and procedures reasonably designed to prevent deficient advertising practices.” In particular, the staff recommends that the following issues related to the Advertising Rule be specifically addressed:

  • the process for reviewing and approving advertising materials prior to their publication or dissemination;
  • when using composites, determining the parameters for which accounts were included or excluded from performance calculations;
  • confirming the accuracy of performance results in compliance with the Advertising Rule.

As RIA compliance consultants, we highly recommend that the Chief Compliance Officer (“CCO”) and all advisory firm principals review this latest SEC RIA compliance risk alert. In addition, firms should review all additional Advertising Rule regulatory guidance found in no-action letters, SEC Division of Investment Management guidance updates, and other relevant materials cited throughout the risk alert. Investment adviser regulatory compliance issues related to advertising are frequent and the firm’s CCO needs to establish and implement the proper policies and procedures to ensure proper compliance.

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RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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