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.