Advertising Issues for RIAs
The Office of Compliance Inspections and Examinations (“OCIE”) has provided a list of RIA related advertising issues that are most frequently identified in deficiency letters. The Advertising Rule prohibits an adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading (Advisers Act Rule 206(4)-1(a)(5)). The Advertising Rule also includes four specific prohibitions:
1. Prohibition on advertisements that refer, directly or indirectly, to any testimonial concerning the adviser or any advice, analysis, report or other service rendered by the adviser;
2. Prohibition on advertising past specific recommendations of the adviser that were or would have been profitable to any person;
3. Prohibition on advertisements claiming that any graph, chart, formula or other device can by itself determine whether to buy or sell a security); and
4. Prohibition on advertisements that offer purportedly free reports, analyses, or services.
Most Frequent Advertising Rule Compliance Issues
Misleading Performance Results.
OCIE staff has observed advisers that presented performance results without deducting advisory fees. Staff also observed adviser advertisements that compared results to a benchmark but did not include disclosures about the limitations inherent in such comparisons, including instances where, for example, an advertisement did not disclose that the advertised strategy materially differed from the composition of the benchmark to which it was compared. Additionally, staff observed adviser advertisements that contained hypothetical and back-tested performance results, but did not explain how these returns were derived and did not include other potentially material information regarding the performance results.
Misleading One-on-One Presentations.
OCIE staff has observed advertisements that staff believe contain misleading one-on-one presentations. For example, staff observed advisers that advertised performance results (gross of fees) in certain one-on-one presentations, but did not include potentially relevant disclosures. In addition, some one-on-one presentations (that are subject to the Advertising Rule) 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.
OCIE staff has observed advertisements that staff believe contain misleading claims of compliance with voluntary performance standards. For example, staff observed advisers 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.
OCIE staff has observed advertisements that staff believe contain cherry-picked stock selections. For example, staff observed advisers 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.
OCIE staff has observed advertisements that staff believe contain misleading selections of investment recommendations. For example, staff observed advisers 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. In addition, they did not satisfy the representations upon which IM staff based certain no-action assurances.
Compliance Policies and Procedures.
OCIE staff observed advisers that did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices. For example, the staff observed advisers that did not have, or did not implement, policies and procedures pertaining to the following issues: 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.
Misleading Use of Third Party Rankings or Awards.
OCIE staff observed advertisements containing the potentially misleading use of third party rankings or awards. Staff observed advisers that published potentially misleading advertisements containing references to awards or rankings conferred by third parties that failed to disclose facts, which staff believes were material under the circumstances, about such awards or rankings. For example:
• Advisers advertised accolades that had been obtained by submitting potentially false or misleading information in the applications for such accolades.
• Advisers published marketing materials that referenced stale ranking or evaluation information, thus potentially misrepresenting the adviser’s current status. For example, OCIE staff observed advertisements that referred to advisers receiving high rankings in various publications, but those publications were issued several years prior, and the rankings were no longer applicable.
• Advisers published potentially misleading advertisements that did not disclose the relevant selection criteria for the awards or rankings, or who created and conducted the survey and the fact that advisers paid a fee to participate in or distribute the results of the survey.
Misleading Use of Professional Designations.
OCIE staff observed advertisements and disclosures made in advisers’ Form ADV Part 2B Brochure Supplements that contained potentially false or misleading references to employee professional designations, such as, for example, references to professional designations that have lapsed or that did not explain the minimum qualifications required to attain such designations.
OCIE staff observed advisers that had published statements of clients attesting to their services or otherwise endorsing the adviser that may be prohibited testimonials (e.g., client endorsements published in firm websites, social media pages, reprints of third party articles, or pitch books).
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