RIA Compliance and Practice Management Blog

Top RIA Compliance Deficiencies: Performance Advertising

Posted by RIA in a Box

Jan 3, 2015 10:40:00 AM

The various state members of the North American Securities Administration Association (NASAA) performed coordinated state exams in 2013 during which examiners uncovered the top registered investment adviser (RIA) compliance deficiencies across 20 categories in 44 jurisdictions. Of 1,130 examinations reported, 6,482 deficiencies were exposed across all categories. In addition to the top compliance deficiencies we discussed in our earlier blog series, the 2013 NASAA investment adviser examination report also found a number of other types of deficiencies. Last week we discussed deficiencies related to paying solicitors.

In this week’s segment, we’ll be focusing on performance advertising deficiencies. In 2013, the NASAA report found that 32.7% of all RIA firms that advertised performance had at least one deficiency. This is not that surprising given it can be very difficult for firms to comply with all the regulatory requirements and disclosures as they relate to performance advertising. Investment advisers that do decide to advertise performance should also expect to be under additional scrutiny during SEC or state examinations. RIA firms that choose to advertise performance are governed by the SEC rule 206(4)-1 or similar state rules and should have a firm understanding of all applicable rules.

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The top deficiencies reported by NASAA as it relates to performance advertising in 2013 were:

  1.        No disclosure if results reflect reinvestment of dividends or other earnings (10.9%)
  2.        Results compared to dissimilar index without disclosure of material differences (9.1%)
  3.        Actual portfolios: Misleading results due to inclusion or exclusion of any accounts (7.3%)
  4.        Suggestion of profit not balanced by disclosure of possible loss (7.3%)
  5.        Effects of material market or economic conditions not disclosed (7.3%)

If your firm is considering or already utilizing performance advertising, the SEC staff no-action letter issued on October 28, 1986 to Clover Capital Management provides great insight into what is and is not acceptable. As RIA compliance consultants, we recommend that investment advisory firms exercise extreme caution when it comes to performance advertising. We also strongly encourage the Chief Compliance Officer (CCO) of each RIA firm to take a few minutes to review the firm’s current advertising procedures to ensure it is staying in compliance with all relevant SEC or state statutes. 

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Topics: RIA Compliance

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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