By Cory Roberson, Principal at FIN Compliance and FIN Lancer
On September 14,
2017, the SEC Office of Compliance Inspections and Examinations (OCIE) issued a
risk alert titled The Most Frequent Advertising Rule Compliance Issues as identified in OCIE examinations of investment
advisors.
Misleading Performance Results
Gross V.
Net of Fees. Examiners noted that
advisors presented performance results gross
of fees (without deduction of advisory fees). Generally, advisors cannot disclose gross fees without also including net fees information in a consistent
manner.
Staff observed that
firms failed to include proper Benchmark Disclosures that
outline the limitations inherent in relying on comparisons, such as if there
are material differences between the actual portfolio and benchmark holdings or
economic conditions.
OCIE noted that
advisors failed to disclose the methodology behind the results and other
material information (e.g. testing period, strategy, etc.) during the use of hypothetical and backtested performance results.
Advisors presented gross fees data without the use of prominent disclosures on
data (e.g. no deduction of advisory fees) during One-on-One Presentations.
Examiners noted that advisors
claimed compliance with performance standards,
but during the exam, advisory staff proved to be unfamiliar with such
standards.
Examiners noted that
some advisors included only profitable equities trades (“Cherry Picking”) in their recommendations and
promotional materials without prominently disclosing the limits of relying on
such data and disclosing a group of poor performing trades in an equally
prominent manner.
Examiners noted that
advisors failed to disclose a list of recommendations that illustrated all possible
outcomes for a particular investment strategy, such as misleading recommendations that only disclosed
winning trades.
Advertising No-Action Letters with best practices for
compliance:
TCW Group no action
letter (SEC recommendations): Firms should advertise to all parties (e.g. general
public and existing clients), the five (or more) best performing securities
holding and, in an equally prominent manner, the worst performers with a full
list of all required disclosures.
·
In a discrepancy letter, SEC staff noted that
TCW failed to consistently include a list of the worst performing holdings in
an equally prominent manner as its list of best performing holdings.
Franklin no action
letter (SEC recommendations): Firm
should advertise its past specific recommendations based on a consistent,
objective, and non-performance-based criterion, such as gathering a collection
of securities that represent a holistic viewpoint of the entire portfolio
(winners, losers, sectors, etc.) along with a full list of all required
disclosures.
·
In
this case study, OCIE examiners discovered that Franklin failed to disclose
that all specific recommendations did not represent a full picture of all
securities activity during the period discussed in the firms marketing
material.
Compliance Policies and Procedures
Overall, staff noted
that many advisers did not appear to have adequate procedures designed to
prevent advertising deficiencies.
Touting Initiative: A Special Look into marketing
materials
From a
2016 special examination from the SEC (Touting Initiative), examiners are now looking
into disclosures that explain and/or justify the use of professional awards,
advisor ranking lists, and/or the rise of professional designations in
advertising materials.
During the review,
the SEC noted the potential misleading use of Third
Party Rankings or Awards when advisors published such materials without
disclosing the methodology or facts behind the awarding of such accolades.
SEC staff noted firms
with a failure to disclose the relevant selection
criteria for the awards or rankings, when
advisors paid a fee to receive such accolades.
SEC observed that
some parties were using false or inaccurate Third-Party
Accolades.
When advisors use stale ranking or evaluation information, SEC
staff noted potentially misleading advertisements when such publications were
issued from several years prior, accolades are no longer applicable, and/or
publication no longer exists.
OCIE staff noted
deficiencies in the use of Professional Designations
when advisors failed to disclose when such professional credentials lapsed
or the minimum qualifications required to attain these marks in their Form ADV
Part 2B Brochure Supplements.
Staff noted that some
advisors included client endorsements (prohibited Testimonials) in their
marketing materials (e.g. firm websites, social media, reprints, newsletters,
or pitch materials).
Summary: Overall, both state
and SEC-registered firms should remove misleading language from its advertisements,
add disclosures designed to prevent violations to the firm’s advertising policy,
and maintain procedures for compliance.
Compliance and Business Management
FIN Compliance (FINCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, and FINLancer is a business management portal featuring: E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q3 2019). Access all services on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs. In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.
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