From the September 2007 issue of Boomer Market Advisor • Subscribe!

A Web of regulatory scrutiny

As more advisors use the Internet to attract and retain clients, their Web sites may attract unwanted regulatory
scrutiny. Therefore, it is imperative to recognize that your Web site may cause compliance problems.

Rule 206(4)-1 under the Investment Advisers Act of 1940 regulates advertisements. You may not realize that Rule
206(4)-1 also applies to the content of your site. The goal of the rule, as well as similar state regulations, is to prevent false or misleading advertisements.

Regulators are concerned about the use of superlatives. Watch out for words and phrases such as "state-of-the-art, superior, outstanding, cutting edge" and other language that implies you're more qualified than other advisors. Ensure your Web site biography isn't false or misleading in any way, and that it's consistent with your Form ADV.

Too many advisors use language that might be interpreted by clients as a guarantee. You should refrain from statements that indicate your investment strategy or approach to investing is a sure thing. You should not imply that your money management methods are risk-free or that clients are sure to reach their investment goals.

You should avoid promising more than you can deliver. Advisors shouldn't boast that clients will outperform the market or any other particular benchmark. Clients are likely to be dissatisfied if you create high expectations and don't meet them. Disappointed clients are more inclined to complain to prospective clients and securities regulators.

Advisors should keep in mind that Rule 206(4)-1(a)(1) prohibits the use of testimonials. Regulators believe testimonials are inherently misleading since advisors only use favorable quotes. You'll never see an advisor's Web site with negative quote.

Your Web site shouldn't refer to specific investment recommendations you've made. The concern is that you'll cherry-pick the good recommendations and ignore those that lost money. Rule 206(4)-1(a)(2) restricts advertisements that refer to specific recommendations made by an investment advisor that would have been profitable to a client.

Rule 206(4)-1(a)(3) forbids references to a graph, chart, formula or other device that can be used by itself to make investment decisions, unless the advertisement prominently discloses the limitations of this approach. Rule 206(4)-1(a)(4) precludes an advertisement that offers a free report, analysis or other service, unless it will in fact be furnished without charge or obligation.

You also need to be careful when you're linking your Website to other Internet sites. You might link to a Web site that has drastically changed its content. If you do link your Web site to other Internet sites, you should consider using a disclaimer that says, "Hyperlinks on this Web site are provided as a convenience and we disclaim any responsibility for information, services or products found on Web sites linked hereto."

Regulators will always scrutinize performance advertising on your Web site. Generally, if you use performance advertising, you must present results on a net-offees basis. You can't avoid this requirement, even if you use disclaimers.

A Web site can be an effective marketing tool but can also invite regulatory problems if it is false or misleading in any way. You must be able to substantiate all of the content and retain records for a period of not less than five years (Rule 204).

Les Abromovitz is senior consultant with National Compliance Services Inc. in Delray Beach, Fla.

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