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7 Tips to Avoid SEC Compliance Audits When Marketing

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The instincts of an advisor, or any person in the business world, is to tell his story to the world, as loudly and glowingly as possible. But like a dip in the lake in subarctic temparatures, the SEC imposes restrictions that serve to cool the ardor of an investment advisor seeking to make a case to prospective clients.

Since a cold shower beats the boiling cauldron of an SEC enforcement action, AdvisorOne asked veteran consultant Nancy Lininger how they might explain their services with savvy but sobriety. Lininger, owner of the consultancy The Consortium, has been helping investment advisors and broker-dealers steer clear of regulatory trouble for three decades. Herewith her seven rules of thumb for compliant marketing.

1. Don’t Make Unsubstantiated Comparisons

“Don’t say, “We’re the best in the region, the largest or the oldest.” Unless you can substantiate the claim, you shouldn’t use it,” Lininger warns.

Not unless you want a deficiency letter from the SEC.

“When the SEC comes in and audits you, they’ll pick apart your marketing brochure and hold you to the fire and say, ‘What documentation you have?’”

Deficiency letters are not the end of your career, Lininger adds. They do not go on any public record—they’re just between you and the SEC. But “when they come back for a second time for an audit, it may lead to enforcement.” You need to fix the deficiency and not be seen as a repeat offender. But prevention is the best medicine here: Avoid puffery.

2. Avoid Any Hint of a Guarantee

Don’t say, “We get our clients to meet their financial goals,” Lininger advises—again, unless you’re looking for the SEC to ding you on a deficiency letter.

“All you have to do is hedge the statement: “We assist our clients in reaching their goals.’ ‘Our goal is to work with our clients to retire in style.’”

Lininger warns advisors against hiring a non-compliance-savvy marketing consultant, whose instincts will be to state the advisor’s case in the strongest possible way. Only minimal tweaking is necessary to both make the case and avoid the offense of promissory language, she says.

3. Don’t Make Inferences of Past Performance Without Proper Disclosures

“If you refer to past performance, there’s a lot of disclaimers you have to have on your website and marketing material,” Lininger says. “Some advisors don’t want to go there.” Those who do should be prepared to fill up the page with disclosures, she says.

While she’ll work with clients who want to include returns data, Lininger says that generally smaller advisors avoid the issue while larger advisors with a national presence are more likely to feel they need to demonstrate performance.

4. No Endorsements or Inferences About Satisfied Customers

“Even using fictional characters like actors that look like real people will be prohibited under the testimonial rule,” Lininger says, emphasizing that this applies to investment advisors, not broker-dealers.

The compliance consultant, who would personally like to see this rule overturned, says the thinking of the SEC here is that advisors showing endorsements would be misleading prospects, since they might show only satisfied customers but would not be providing information from dissatisfied ones.

As to telling one client about a reference on a one-on-one basis, Lininger warns “Proceed with caution. In theory it should be OK. But if you solicit the endorsement, any published list of satisfied customers becomes an advertisement. If you truly offer it one on one, that’s maybe not advertising and can be done.”

Lininger cites conditions where you can put together a list of customer names as long as you abide by criteria in an SEC no-action letter. “It’s all facts and circumstances: I think you should be able to give referral names,” she says.

She adds that the rise of social media has created a whole slew of related concerns. “The “like” feature on Facebook and endorsements on LinkedIn—those can be prohibited testimonials. You might either have to disable that feature or take it down or provide disclaimers,” she says.

5. Don’t Imply the Government Endorses You

If your name is John Smith and you own Smith Advisory, Lininger cautions that you are an investment advisor representative of that RIA firm. You don’t want to say that you are a registered by the SEC. “They also don’t want you to use the name ‘registered investment advisor’ to imply that it’s the endorsement of the SEC or U.S. government.

“You also definitely don’t want to append it as a professional designation: ‘John Smith, RIA.’ That would be an improper use,” she adds.

6. Don’t Imply Your Services are Approved, Sponsored or Recommended by the SEC or any U.S. Government Agency

The SEC wants advisors to use their boilerplate language stating that your Form ADV has not been approved or verified by the SEC or state securities agencies, as well as other language stating that your mandatory registration implies nothing about your skills or training.

Lininger says she still sees advisors stating something like, “We have been approved by the SEC to act as an investment advisor.”

7. Make it Clear that Investing Is Risky

Lininger says you need to clearly communicate that there is no safe investment—not money markets, not AAA bonds. A savvy way to do this is to also state that not investing has its risks. For example, savings account interest rates don’t keep pace with the rate of inflation, or: “We allocate portfolios with high-risk and low-risk investments; however, all investments involve some degree of risk.”

Working with a marketing-savvy compliance expert, she says, can help you craft language that achieves a winning balance of appealing to prospects while maintaining an audit-proof brochure, website and client correspondence.


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