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January 02, 2018 at 07:00 PM
It has become increasingly common for RIAs to receive awards, designations or rankings by third-party publications. RIAs often view the receipt of such awards, designations or rankings (collectively referred to as “awards”) as validation of a job well done.
It therefore makes sense that RIAs would advertise their receipt of awards to attract new client relationships and fortify existing client confidence in their abilities. However, the advertisement of such an award, even though it is granted by a third party, carries the obligation of internal analysis and the development of detailed and prominently displayed disclosures.
Section 206(4) of the Investment Advisers Act of 1940 (the Act) makes it unlawful for RIAs to engage in any activity that is fraudulent, deceptive or manipulative. Rule 206(4)-1(a) specifically prohibits an RIA from directly or indirectly publishing or distributing any advertisement that refers directly or indirectly to any testimonial of any kind concerning the RIA or any advice, analysis, report or other service rendered by the RIA; which contains any untrue statement of a material fact; or which is otherwise false and misleading.
The SEC staff typically deems an advertisement false or misleading if the advertisement implies or would lead a client or prospective client to infer something about the RIA or its clients’ experiences that is not true, and that the client or prospective client would not have inferred had all material facts been disclosed.
Therefore, an RIA’s advertisement containing direct or indirect references to awards could be deemed misleading if it does not significantly disclose the awards’ qualifications and limitations, because it could lead existing and prospective clients to infer something about the RIA that is not true. For example, if an RIA receives a “Best in Class” designation based solely upon submitting a scant application and a fee, then it could falsely lead an existing or prospective client to determine that the RIA has achieved a level of prominence that it simply has not.
Further Concerns
Advertisements containing direct or indirect references to awards also raise the concern that the RIA is advertising prohibited testimonials, because the awards may reflect the positive experiences of the RIA’s clients. However, in a series of no-action letters, the SEC staff has generally indicated that it would not seek enforcement related to the distribution of articles concerning an RIA’s receipt of an award where the articles are prepared by an unbiased third party, do not include an overt statement of a client’s experience or a client endorsement and contain certain prescribed disclosures.
