What Investment Advisers Need to Know About the SEC’s New Risk Alert

Last week, the Securities and Exchange Commission’s (“SEC”)  Office of Compliance Inspections & Examinations issued a new Risk Alert titled, "The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers" which was generated as a result of a recent exam initiative (“Touting Initiative”).  The Risk Alert focuses on certain deficiencies issued to advisers  during the Touting Initiative regarding non-compliance with Rule 206(4)-1 of the Investment Advisers Act (“Advertising Rule”).

Below are important compliance takeaways for some of the most common deficiency areas that were found by examiners.

Misleading Performance Results

  • Performance results in marketing materials must reflect the deduction of advisory fees.
  • When comparing strategies to benchmarks, disclosures on the inherent limitations in those comparisons must be included.
  • Hypothetical and back-tested performance results must contain disclosures that outline, among other things, all relevant material information about the results, including but not limited to an explanation of how the returns were derived.

SEC Risk Alert One on One Presentations

Misleading One-on-One Presentations

  • All one-on-one presentations showing gross of fee only performance need to include all potentially relevant disclosures outlined in applicable SEC guidance, including the fact that the deduction of advisory fees will reduce the client’s returns.

Misleading Claim of Compliance with Voluntary Performance Standards

  • Firms claiming compliance to voluntary performance standards (e.g., Global Investment Performance Standards (GIPS)) must ensure they are complying with all required standards.

Cherry-Picked Profitable Stock Selections and Recommendations

  • Marketing and advertising that present only a partial list of securities cannot cherry pick only profitable holdings, and must adhere to SEC No-Action Letters and regulatory guidance.

compliance policies and procedures

Compliance Policies and Procedures

  • Must have written policies and procedures reasonably designed to prevent deficient advertising practices. These should include, among other things, a process for compliance review and approval of advertising and marketing materials prior to their dissemination.

Misleading Use of Third Party Rankings or Awards

  • Must disclose all facts related to third party rankings, ratings, or awards used in marketing and advertising, including selection criteria, who created the ranking or award, and whether the firm paid a fee to participate. Also, firms cannot publish only favorable rankings, ratings or awards.

Misleading Use of Professional Designations

  • If a professional designation, title, or certification has lapsed, it can no longer be referenced in marketing or advertising materials.
  • When using a professional designation, the minimum qualifications required to attain such designation need to be included.

Testimonials

  • Using testimonials (i.e., statements attesting to or endorsing the firm’s services) in marketing or advertising materials, including websites, social media, article reprints, and/or presentations are prohibited under Rule 206(4)-1.

Our team are thought leaders in this area. CEO, Michelle Jacko, has authored numerous articles on this subject area, including Today’s Social Media Challenges, and Investment Adviser Performance Marketing and Advertising – What You Need to Know. 

Please call us today to learn more about how Core Compliance can help. Our consultants have extensive experience and are well versed in the area of marketing and advertising compliance for investment advisers. 

We provide compliance solutions that are customized to our client’s needs. We also specialize in a number of other compliance areas, which you can learn more about here.

For more information, please contact us at (619) 278-0020, or email info@corecls.com.

Thank you.