The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a risk alert concerning compliance issues with Rule 206(4)-1) of the Investment Advisers Act of 1940 (the “Advertising Rule”). The Advertising Rule is frequently a point of emphasis during OCIE examinations of investment advisers, as well as examinations by state-level agencies. The SEC outlined six frequently-encountered compliance issues for investment advisers as they relate to the Advertising Rule:
- Misleading Performance Results: OCIE identified two primary culprits of misleading performance results findings: improper performance reporting and inadequate disclosures. OCIE highlighted instances of improper performance reporting where advisers failed to deduct advisory fees from performance results. OCIE also identified inadequate disclosures where advisers failed to disclose (i) limitations of benchmark comparisons and (ii) material information in hypothetical and back-tested performance results.
- Misleading One-on-One Presentations: OCIE noted that some advisers failed to include material disclosures in one-on-one presentations to potential investors.
- Misleading Claims of Compliance with Voluntary Performance Standards: OCIE discussed misstating compliance with non-mandatory actions such as compliance with recognized performance standards or compliance with certain levels of cybersecurity. Advisers typically run into this issue when they use a non-customized compliance manual template.
- Cherry-Picked Profitable Selections: OCIE warned against the use of advertising past, specific recommendations of an adviser without publishing a list of all recommendations by the adviser over the last year or other disclosures as required by the Advertising Rule.
- Misleading Selection of Recommendations: OCIE noted advisers failed to properly disclose past specific investment recommendations associated with a particular investment strategy in compliance with the Advertising Rule and SEC no-action letters.
- Compliance Policies and Procedures: OCIE specifically addressed advisers that failed to have or implement policies and procedures for the review and approval of advertising materials prior to dissemination; determining the parameters of performance calculations; and confirming the accuracy of performance results in complying with the Advertising Rule.
The SEC also highlighted compliance issues regarding advisers touting awards, rankings, and/or professional designations in marketing materials. OCIE noted the following issues:
- Misleading Use of Third-Party Rankings or Awards: Advisers failed to disclose material information related to rankings and awards and/or simply provided false or misleading statement to the public. This included submitting false or misleading information in award applications; publishing stale or outdated ranking information; and/or failing to disclose material award selection criteria and/or the fact that the adviser paid a fee to distribute the results of the survey or award.
- Misleading Use of Professional Designation: Advisers made false or misleading disclosures in Form ADV Part 2B Brochure Supplements. Specifically, some advisers displayed outdated or unearned professional designations.
- Testimonials: Advisers published statements of clients on social media, firm websites, and social media in violation of the Advertising Rule on testimonial publication.
The SEC has long-focused on compliance with the Advertising Rule, and OCIE continues to examine and penalize advisers that do not follow its substantive and disclosure requirements. Advisers should have policies and procedures in place to review and approve all advertisements and statements made to current and prospective clients, whether by outside counsel or a compliance officer. Feel free to reach out to us if you have any questions about compliance with the Advertising Rule.