The SEC staff issued a significant no-action letter to TCW Group, Inc. on November 7, 2008, expanding the information that a registered investment adviser may include in advertisements. Specifically, the no-action letter permits the adviser to use contribution analyses in advertisements to demonstrate the five best and worst performing positions in an investment strategy portfolio.

Prior to this letter, registered advisers were generally prohibited from soliciting prospective clients with advertisements containing past profitable recommendations. Section 206(4) of the Investment Advisers Act, and Rule 206(4)-1, generally proscribe such advertisements unless all past specific recommendations for at least one year are listed. The purpose of the restriction is to prevent advisers from “cherry-picking” profitable recommendations for advertisements, and thereby creating a fraudulent or deceptively misleading picture of the client’s account.

In the TCW Group, Inc. letter, the SEC staff indicated that, subject to certain conditions, it would not recommend enforcement action if the adviser used “Best Performers/Worst Performers” advertising charts. Taken as a whole, the conditions of the letter are designed to ensure that the adviser uses objective criteria for choosing portfolio positions in the charts and presents the positions in a balanced manner.