Most Frequent Advertising Rule Compliance Issues

It looks like the Securities and Exchange Commission has been taking a close look at advertising by investment advisers. The Office of Compliance Inspections and Examinations issued a risk alert on The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers.

I didn’t see any surprises in the alert.

  • Advisers presented performance results without deducting advisory fees.
  • 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.
  • Advertisements that contained hypothetical and backtested performance results, but did not explain how these returns were derived.
  • 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. (i.e. GIPS compliance)
  • Advertisements that staff believe contain cherry-picked stock selections
  • Disclosure of 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 as provided in the TCW Group and Franklin no-action letters.
  • 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high rankings in various publications, but those publications were issued several years prior, and the rankings were no longer applicable.
  • References to professional designations that have lapsed or that did not
    explain the minimum qualifications required to attain such designations.
  • Statements of clients attesting to their services or otherwise endorsing the adviser that may be prohibited testimonials.

The only tidbit of information is that OCIE conducted a “Touting Initiative” in 2016. The focus was to examine the adequacy of disclosures that advisers provided to their clients when touting awards, promoting ranking lists, or identifying professional designations  in their marketing materials.

OCIE launched the Touting Initiative because of the “regularity with which staff encounters advisers that advertise these accolades without disclosing material facts about them.”