Through a risk alert issued September 14, 2017, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) provided a list of the most frequent compliance issues relating to Rule 206(4)- 1 under the Investment Advisers Act of 1940 (the Advertising Rule) identified in connection with an examination initiative OCIE conducted in 2016 that focused on the use by investment advisers of accolades in marketing materials. The Advertising Rule generally prohibits an investment adviser, directly or indirectly, from publishing, circulating or distributing any advertisement that contains an untrue statement of material fact or that is otherwise false or misleading. The Advertising Rule broadly defines “advertising” to include any type of written communication addressed to more than one person, as well as any notice or announcement by radio or television, to be used in making a determination to buy or sell a security.
According to OCIE, the most frequent compliance issues relating to the Advertising Rule involved: (1) the presentation of misleading performance results, including the presentation of performance results without deducting advisory fees, the failure to disclose material limitations in benchmark comparisons and the use of hypothetical and back-tested performance results without sufficiently disclosing how the results were derived; (2) misleading oneon-one presentations subject to the Advertising Rule, particularly relating to the presentation of performance results without deducting advisory fees; (3) misleading claims that materials comply with voluntary performance standards such as the Global Investment Performance Standards (GIPS®); (4) the use of materials containing “cherry-picked” trades, such as materials referring only to profitable stock recommendations; (5) misleading references to third-party rankings and awards, including circumstances in which the ranking or award is stale or the materials fail to note the relevant selection criteria; and (6) misleading uses of professional designations and client testimonials. OCIE also observed investment advisers that did not appear to have adequate compliance policies and procedures in place reasonably designed to prevent deficient advertising practices, particularly with respect to the process of reviewing and approving advertising materials before distribution, confirming the accuracy of performance results and, when using composite performance results, determining the parameters for including and excluding accounts.
OCIE’s risk alert is available at: https://www.sec.gov/ocie/Article/risk-alert-advertising.pdf