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SEC Highlights Top Advisor Ad Violations

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The Securities and Exchange Commission’s exam division released Thursday a Risk Alert detailing advisors’ failures to comply with Rule 206(4)-1, also known as the Advertising Rule, under the Investment Advisers Act.

The agency’s Office of Compliance Inspections and Examinations states in the alert that the compliance issues were most frequently identified in deficiency letters recently sent to SEC-registered investment advisors and as part of an examination initiative that focused on advisors’ use of “accolades” in their marketing materials.

The most frequent deficiencies that OCIE staff identified in connection with failure to comply with the Advertising Rule were:

  • Misleading Performance Results. OCIE staff has observed ads in which advisors presented performance results without deducting advisory fees. Staff also observed advisor ads that compared results to a benchmark but did not include disclosures about the limitations inherent in such comparisons, including instances where, for example, an ad did not disclose that the advertised strategy materially differed from the composition of the benchmark to which it was compared;
  • Misleading One-on-One Presentations. Some ads contain misleading one-on-one presentations in which advisors advertised performance results (gross of fees) in certain one-on-one presentations, but did not include potentially relevant disclosures. Some one-on-one presentations (that are subject to the Advertising Rule) also did not disclose that the advertised performance results did not reflect the deduction of advisory fees and that client returns would be reduced by such fees and other expenses.
  • Misleading Claim of Compliance with Voluntary Performance Standards. Staff observed advisors that claimed that their advertised performance results complied with a certain voluntary performance standard, when it was not clear to staff that the performance results in fact adhered to the performance standard’s guidelines.
  • Cherry-Picked Profitable Stock Selections. Staff observed advisors that included only profitable stock selections or recommendations in presentations, client newsletters or on their websites, without meeting the conditions set forth in Subsection (a)(2) of the Advertising Rule.
  • Misleading Selection of Recommendations. Staff observed advisors that disclosed past specific investment recommendations that may have been misleading because they included only certain, and not all, recommendations, in order to illustrate a particular investment strategy, and they did not meet the conditions set forth in Subsection (a)(2) of the Advertising Rule. These advisors also did not satisfy the representations upon which Investment Management staff based certain no-action assurances as provided in the TCW Group and Franklin no-action letters.
  • Compliance Policies and Procedures. Advisors did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices. For instance, policies and procedures pertaining to: the process for reviewing and approving advertising materials prior to their publication or dissemination; when using composites, determining the parameters for which accounts were included or excluded from performance calculations; and confirming the accuracy of performance results in compliance with the Advertising Rule.

In response to OCIE staff’s observations, the alert states that advisors “elected to either remove misleading language from their advertisements, or to add disclosures designed to prevent the advertisements from being misleading.”

OCIE encouraged advisors to use the guidance provided in the alert to help them assess “the full scope of their advertisements and consider whether those advertisements are consistent with the Advertising Rule, the prohibitions of Section 206, and their fiduciary duties, and review the adequacy and effectiveness of their compliance programs.”

— Check out FINRA Issues Social Media Q&A on ThinkAdvisor.


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