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.

Accordingly, before advertising the receipt of any awards such as on an RIA firm’s website, on email signature lines or in client communications, we strongly encourage RIAs to draft and adhere to policies and procedures tailored to SEC guidance and no-action letters.

Those policies and procedures would not only require a management person (typically the chief compliance officer) to consider various factors before determining to advertise an award, but also require significant and prominently displayed disclosures to accompany the award advertisement.

The disclosures themselves should be customized to the metrics of the particular award, so that the RIA is fully disclosing all pertinent information regarding the award’s qualifications, related circumstances and corresponding limitations (e.g., it is limited to participating advisors, etc.).

Award Notes

It should always be made clear that no such award should be construed by clients or prospective clients as a guarantee that they will experience a certain level of results if the RIA is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of the RIA by any of its clients.

Please attend to this area of aggressive SEC scrutiny and consider working with a law firm experienced in drafting these disclosures and underlying policies and procedures.