The SEC published new guidance on RIA advertising yesterday in a National Exam Program Risk Alert dated September 14, 2017 (  The Risk Alert is entitled “The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers.”  This is particularly important because the SEC is focusing on marketing materials in its latest exam cycle.  In the Risk Alert, the SEC highlights common errors made by advisers in their marketing and advertising materials.

As an initial matter, Advisers should be aware that for purposes of the Advertising Rule (Rule 206(4)-1), the SEC considers a broad range of marketing and client communications as advertising, including not only advertisements, but web sites, reports, social media, letters, pitch books and presentations.[1]  The Advertising Rule includes a number or limitations and prohibitions on the content of “advertising.” [2]

The SEC highlighted six problem areas:

  1. Misleading Performance Results. Common problems included not deducting advisory fees, failure to disclose limitations in benchmark comparisons, and failing to disclose how performance results were derived.
  2. Misleading One-on-One Presentations. The SEC found one-on-one presentations and pitch books contained material misstatements because they did not meet the advertising rule standards.
  3. Misleading Claim of Compliance with Voluntary Performance Standards. This usually has to do with an adviser advertising that it is GIPS compliant without actually meeting the standards.
  4. Cherry-Picked Profitable Stock Selections.
  5. Misleading Selection of Recommendations. Advisers disclosed past specific investment recommendations without meeting SEC requirements requiring disclosure of all or categories of recommendations during a particular period.
  6. Compliance Policies and Procedures. The SEC observed advisers that did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices. This included policies and procedures pertaining to:  the review of advertising materials, the review of composites; and the verification of the accuracy of performance results.

The SEC reported that one of the most frequent deficiencies is the prevalence of misleading performance results. This is always a major area of concern for the SEC and an area where a lot of advisers make mistakes.  Another area of concern was third party rankings and awards.  This includes obtaining awards by submitting misleading data, using awards that are several years old and no longer apply, and failing to disclose the selection criteria or the fees paid.

The final issue raised by the SEC was the misleading use of professional designations in situations where the designation lapsed or the employee no longer met the minimum qualifications.  We have seen this issue appear a number of times in both advertising and in ADVs.

The SEC and state examiners pay particular attention to an investment adviser’s marketing and advertising of its services and performance and they are often focal points of examinations and deficiency letters.  There are a number of other requirements and restrictions that are not discussed here.  This is a nuanced area of regulation and advisers need to work with their attorneys or compliance consultants to avoid a deficiency letter (or worse).

[1]Under the rule, “the term advertisement shall include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.

[2] 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.  There are also specific prohibitions on using testimonials or prior specific recommendations, without providing extensive disclosures of all recommendations of a period for not less than a year.

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