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Just last month the Security and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert highlighting the most frequent advertising rule compliance issues covered in deficiency letters sent to SEC-registered investment advisors.

Focus was on advisers’ use of accolades in their marketing materials. The Rule prohibits advisers from directly or indirectly publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading. The OCIE targeted the following most frequent advertising compliance issues:

1) Misleading performance results

Among the issues uncovered, OCIE staff highlighted:

  • promotional materials touting inflated performance results because the advisor’s fees were included as part of the total; or
  • advertisements comparing an advisor’s results to a benchmark without disclosing that there was no relationship between the advisor’s strategy and the benchmark against which it was compared; and
  • adviser advertisements that contained hypothetical and back-tested performance results with no explanation of how these returns were derived or other material performance information.

2) Misleading one-on-one presentations

OCIE staff noted advisers advertising performance results (gross of fees) in their one-on-one presentations without including potentially relevant disclosures or noting that advisory fees were not deducted, nor other expenses that also would reduce client returns.

3) Misleading claims of compliance with voluntary performance standards

This addresses advertisements believed to contain misleading claims of “compliance” with voluntary performance standards, when, in fact, the OCIE staff cannot confirm that such is actually the case.

4) Cherry-picked profitable stock selections

Some advisors selectively promote only their successful or profitable stock picks and recommendations. The OCIE is eying firms that cherry-pick the stocks they promote in their in their client/prospect presentations, newsletters, or websites.

5) Misleading selection of recommendations

In these instances, advisors advertisements promoted only their firms’ best past performing portfolio holdings without also including an equal number of worst performers.

6) Compliance Policies and Procedures

Looking beyond advertising, the OCIE expects that advertisers should have compliance policies and procedures in place that are reasonably designed to prevent deficient advertising practices. This includes implementing policies and procedures pertaining to their processes for:

  • reviewing and approving advertising materials prior to publication or dissemination;
  • establishing parameters for determining which accounts are included or excluded in performance calculations; and
  • confirming the accuracy of performance results in compliance.

7) Mis-touting

Launched in 2016, the OCIE’s Touting Initiative is designed to ensure advisors make adequate disclosures when touting awards, rankings, and/or sharing accolades/professional designations in their marketing materials. Key missteps identified include:

  • Advertising accolades you’ve received/won by submitting false or misleading information in your award applications;
  • Including stale rankings or evaluations that potentially misrepresents your current status;
  • Not disclosing that one of the criteria for winning the award/ranking was that you paid a fee to participate or distribute the survey’s results — Oooh. That infamous “pay to play;”
  • Including references to lapsed professional designations; and
  • Publishing or referring to testimonials regarding an advisors advice, analysis, report or other rendered service.

Is your advertising compliant?

The OCIE staff say that once alerted, the advisers contacted elected to either remove misleading language from their ads or added requisite disclosures. But why wait until the OCIE contacts you and risk potential fines and exposures for noncompliance. Compliance is so much cheaper! Let’s talk (212-233-1155). Ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, including its cost-efficient and cost-effective Marketing Materials Module and our compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Be compliant!

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