Investment advisors are often encouraged to employ various marketing techniques to help expand their businesses. But be careful. Do you place the abbreviation “RIA” on your business card? Sounds innocuous enough if you are a registered investment advisor, but federal regulators beg to differ. The SEC takes the position that it is fraudulent for a registered investment advisor to use the abbreviation “R.I.A.” or “RIA,” since it suggests that the advisor has earned an educational degree or a merit-based professional designation. However, the SEC considers it perfectly acceptable for an advisor to spell out the term “Registered Investment Adviser” after his or her name, holding that the use of the full term does not have the same “misleading” implications. Advisors must keep this in mind when ordering business cards, letterhead, or marketing materials.
When advisors are planning marketing strategies, they should do so with the understanding that the Investment Advisers Act of 1940 has a number of provisions that apply in the marketing context to SEC-registered investment advisors. Many of these same provisions also apply to state-registered advisors. A general understanding of the statutory and regulatory provisions can help advisors structure their marketing initiatives to avoid unintentional violations.
It is worth noting that advisors’ marketing initiatives, like every other aspect of their activities, are subject to the Act’s general anti-fraud provisions. That means that the SEC has broad latitude to determine which marketing activities are appropriate and which may be misleading or inappropriate. In addition, the SEC holds advisors to a standard that is significantly higher than that for other businesses when considering these issues. The kind of puffing, exaggeration, or insinuation that is the norm in other industries can cause an advisor to be the subject of an SEC Enforcement action.
In addition to restrictions on the use of RIA, the SEC has other rules in this area, some of which are not so obvious. One relates to claims that a service or product is provided free of charge. Such a claim cannot be made unless there are no conditions or obligations connected with that service or product. Any condition or obligation, even if it is not economic or monetary, precludes the use of the term “free.” Similarly, advisors are prohibited by the anti-fraud provisions from claiming that a “graph, chart, formula, or device” can by itself determine what securities an investor should buy or sell. The SEC considers such a statement to be per se fraudulent. Furthermore, even if the statement relates to the ability of such a “device” to assist a person in making investment decisions, its limitations and the difficulties of its use must be prominently disclosed.
Apart from the anti-fraud provisions, the legal provisions that apply in the marketing context are based primarily on the SEC’s advertising rules. Advisors must always consider the applicability of the SEC’s advertising rules when marketing their services. The advertising rules have a very broad reach, and apply to many communications that might not normally be considered “advertising.” The rules obviously apply to communications through radio, television, and print media, but they also apply to any writing that is addressed to more than one person. As such, letters or e-mails sent to two or more persons, as well as all materials posted on a Web site, are subject to the prohibitions and restriction of the advertising rules.
As to the specific prohibitions of the SEC’s advertising rules, the first is a prohibition on the use of testimonials. An advisor cannot generally use past or present clients to endorse the advisor or refer to the performance the advisor achieved for those clients. Nonetheless, unbiased third-party reports are allowed, as is the use of partial client lists prepared in accordance with certain criteria and containing appropriate disclosures. Likewise, advisors cannot refer to specific prior profitable recommendations in advertisements. This rule prohibits “cherry picking” past profitable recommendations (i.e., picking the profitable recommendations and omitting those that resulted in losses) without comprehensive disclosure about all recommendations made by the advisor over an extended period of time. Nonetheless, an advisor can provide, in certain instances, comprehensive lists of recommendations over an extended period of time if they contain appropriate disclosures that would put the information on those lists into the proper context.