On Sept. 14, 2017, the Office of Compliance Inspections and Examinations (OCIE) published its National Exam Program Risk Alert detailing frequently identified compliance issues cited in investment advisor examination deficiency letters.
As noted in the Alert, the Securities and Exchange Commission has furnished extensive guidance relative to Rule 206(4)-1 under the Investment Advisers Act of 1940 with respect to advisor advertising through rulemaking, various no-action and interpretive letters and even enforcement actions.
The Advertising Rule is broad, sweeping and applies to written materials including marketing brochures, newsletters, websites and electronic/social media, as well as radio and TV advertising. My colleague Jeff Lang advises that the alert emphasized commonly detected deficiencies in key categories, such as:
Misleading Performance Results
Presentation of performance results without deducting advisory fees; performance results were reflected “gross of fees” with no disclosure that returns would be reduced by such fees and expenses.
Advertisements that compared performance results to a benchmark without disclosure relative to significant differences between the advisor's strategy and the composition of the comparative benchmark.
Advertisements containing hypothetical and back-tested performance results, while omitting material information regarding performance results.
Advisors showing “gross of fee” performance results without including potentially relevant disclosure contained in earlier SEC No-Action guidance.
Advisors failing to disclose that advertised gross performance results did not reflect deduction of advisory fees and that client returns would be reduced by such fees and other expenses.
OCIE staff noted advisors claimed that their advertised performance results complied with voluntary performance standards, though it was unclear to the examiners whether such performance results conformed to the performance standard's requirements.
Some advertising mentioned only profitable stock selections or recommendations, without including unprofitable selections or complying with other conditions set forth in the Advertising Rule.
Other advisors attempted to rely on certain SEC No-Action Letter guidance, but failed to fully adhere to the conditions set forth in the respective letters. Other advertisements included objective, non-performance-based selections of past specific recommendations without disclosing important information regarding all securities recommended to clients to during the particular period.
The Risk Alert also addressed observations from the group's 2016 touting initiative. OCIE staff noted advisors publishing misleading marketing material regarding ranking, awards and other “accolades” without including important disclosure information, such as:
Marketing accolades obtained by submitting false or misleading information in the application process.
Marketing material that referred to stale ranking and evaluation information. Additionally, advisors displayed lapsed professional designations in Form ADV supplements.
Advertisements that failed to disclose relevant selection criteria for an award and failed to disclose that the advisor paid a fee to participate in or distribute survey results for the award.
Client statements that could be deemed as prohibited testimonials.
The Risk Alert did not contain any new guidance or requirements. OCIE encouraged advisors to use the information in assessing their own Advertising Rule compliance.
Advisors need to review their current Advertising Compliance Policy and Procedure and the manner in which these procedures are practically applied by their firms to ensure compliance with SEC rules and interpretive guidance. It is important to periodically evaluate the firm's policies and procedures to ensure continued compliance with regulatory changes and how the firm conducts advertising.