The SEC has released a Risk Alert on those compliance issues that were most frequently identified in deficiency letters recently sent to SEC-registered investment advisers. The Risk Alert is also based on findings from the SEC’s 2016 Touting Initiative, which examined the adequacy of disclosures that advisers provided to their clients when touting awards, promoting ranking lists, and/or identifying professional designations (“accolades”) in their marketing materials, and which was launched in response to the regularity with which the Staff had encountered advisers that advertised these accolades without disclosing material facts about them.
The Risk Alert consists of a list of compliance issues relating to Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act, and is intended (1) to highlight the risks and issues associated with Advertising Rule compliance, and (2) to assist advisers in adopting and implementing effective compliance programs.
The most frequent Advertising Rule compliance issues identified by the OCIE Staff are as follows:
- Misleading Performance Results – Staff observed advertisements that staff believe contain misleading performance results.
- Misleading One-on-One Presentations – Staff observed advertisements that staff believe contain misleading one-on-one presentations.
- Misleading Claim of Compliance with Voluntary Performance Standards – Staff observed advertisements that staff believe contain misleading claims of compliance with voluntary performance standards.
- Cherry-Picked Profitable Stock Selections – Staff observed advertisements that staff believe contain cherry-picked stock selections.
- Misleading Selection of Recommendations – Staff observed advertisements that staff believe contain misleading selections of investment recommendations.
- Compliance Policies and Procedures – Staff observed advisers that did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices; such as those that would address: the process for reviewing and approving advertising materials prior to their publication or dissemination; when using composites, determining the parameters for which accounts were included or excluded from performance calculations; and confirming the accuracy of performance results in compliance with the Advertising Rule.
The most frequent issues that were identified pursuant to the Touting Initiative are as follows:
- Misleading Use of Third Party Rankings or Awards – Staff observed advertisements containing the potentially misleading use of third party rankings or awards.
- Misleading Use of Professional Designations – Staff observed advertisements and disclosures made in advisers’ Form ADV Part 2B Brochure Supplements that contained potentially false or misleading references to employee professional designations, such as to professional designations that have lapsed or that did not explain the minimum qualifications required to attain such designations.
- Testimonials – Staff observed advisers that had published statements of clients attesting to their services or otherwise endorsing the adviser that may be prohibited testimonials, such as client endorsements published in firm websites, social media pages, reprints of third party articles, or pitch books.
The SEC’s stated objective in releasing this list (which is supplemented with examples of the deficient advertising) is to encourage advisers to: (1) assess the full scope of their advertisements and consider whether those advertisements are consistent with the Advertising Rule, the prohibitions of Section 206, and their fiduciary duties, and (2) to review the adequacy and effectiveness of their compliance programs.
Click here to access the Risk Alert: