The Office of Compliance Inspections and Examinations of the Securities and Exchange Commission issued guidance setting forth the most frequent compliance issues it has recently identified in deficiency letters sent to investment advisers under its advertising rule (click here to access SEC Rule 275.206(4)–1). Under this rule, IAs generally are prohibited from using advertisements that contain any “untrue statement of a material fact” or are otherwise misleading or false. The rule also provides for various specific prohibitions. Advertising is broadly defined as any type of written communication intended for more than one person, as well as more traditional advertisements, which are to be used to make a determination to buy or sell a security or which security to buy or sell. According to OCIE, the most frequent compliance issues involved the use of misleading performance results, misleading one-on-one presentations (e.g., including performance results gross of fees), misleading claims of compliance with voluntary performance standards (e.g., those of the Global Investment Performance Standards), advertisements that contained cherry-picked profitable stock selections and misleading selection of past specific investment recommendations. OCIE also found advisers that did not always have compliance procedures reasonably designed to prevent advertising practices contrary to regulatory requirements, and sometimes used advertisements that referenced third-party rankings or awards in a misleading fashion (e.g., rankings that were no longer timely).
Compliance Weeds: For Commodity Futures Trading Commission registrants, National Futures Association Rule 2-29 provides detailed guidance regarding what constitutes acceptable communications with the public in connection with their trading or potential trading of futures and related options (click here to access NFA Rule 2-29). In general, communications cannot be deceptive or misleading, and may not use high-pressure sales tactics or be part of a high-pressure approach. In addition, NFA has published a separate brochure, “A Guide to NFA Compliance Rules 2-29 and 2-36,” to provide additional guidance (click here to access this brochure).