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OCIE Examination Identifies Most Frequent Advertising Rule Compliance Issues

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On September 14, 2017 the SEC’s Office of Compliance Inspections and Examinations (OCIE) identified several compliance issues relating to Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940. OCIE identified these issues primarily through deficiency letters submitted to SEC-registered investment advisers as part of the SEC’s Touting Initiative.¹ The Advertising Rule prohibits investment advisers from publishing, circulating, or distributing any advertisement containing untrue or misleading statements of material fact.² The term “Advertisements” under the Advertising Rule encompasses a range of statements, including notices, circulars, letters, television and radio announcements, and statements made through electronic media so long as the announcement addresses more than one person and offers information contained in Section 206(4)-1(b) of the Advertising Rule.

OCIE identified six main Advertising Rule compliance issues in its risk alert:

  1. presenting misleading performance results, such as presenting results without deducting advisory fees or comparing performance results to a benchmark without disclosing the inherent limitations of the comparison;
  2. containing misleading one-on-one presentations, for example providing performance results in one-on-one presentations without disclosing potentially relevant information or not indicating that the results presented do not reflect the client’s return after fee deductions;
  3. claiming the adviser is compliant with voluntary performance standards when it is not clear whether the adviser is actually adhering to them;
  4. “cherry picking” profitable stock selections for inclusion in materials without meeting Subsection (a)(2) of the Advertising Rule’s conditions;
  5. referencing past investment recommendations that only contain certain, not all, recommendations for purposes of illustrating a specific strategy; and
  6. not having, or not implementing, policies and procedures designed to prevent advertising practices violating the Advertising Rule.

Based on OCIE’s Touting Initiative in 2016, which examined the adequacy of accolades disclosures in marketing materials advisers provided to their clients, OCIE identified three additional adviser compliance issues. These include:

  1. advisers disclosing third-party rankings or awards without disclosing material facts about the award or ranking;
  2. references to misleading or potentially false employee professional designations in both advertisements and Form ADV Part 2B Brochure Supplements; and
  3. including client statements and endorsements regarding the adviser’s services that may be considered prohibited testimonials, for example reprinting third-party articles and client endorsements published on social media pages, pitch books, on firm websites.

OCIE’s complete risk alert is available at: https://www.sec.gov/ocie/Article/risk-alert-advertising.pdf

Related Blog: Form ADV Deadline is Rapidly Approaching. Are You Prepared?


¹ The SEC’s Touting Initiative was an examination initiative that focused on advisers’ use of accolades, such as awards, ranking lists, and/or professional designations, in their marketing materials and consisted of the OCIE conducting almost 70 examinations in 2016. The Securities and Exchange Commission, Office of Compliance Inspections and Examinations, The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers, at 1, 5 (Sept. 14, 2017).

² Advisers Act Rule 206(4)-1(a)(5).


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Smarsh

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