SEC Cautions Firms to Heed Advertising Regulations

The Office of Compliance Inspections and Examinations (“OCIE”) released a Risk Alert on the most common Advertising Rule compliance issues found during examinations of investment advisers. The Risk Alert also covered those findings specific to the 2016 Touting Initiative exams. The Touting Initiative involved the examination of 70 firms that advertised awards received, high industry rankings or other type of accolades.

Many advisory firms are challenged by Rule 206(4)-1 (the “Advertising Rule”) and find it difficult to follow. The Rule itself is very broad and the specifics of how to comply are found within multiple SEC no-action letters or Enforcement cases (many of which are quite old and difficult to find). Unless a firm has a good understanding of the various SEC no-action letters and Enforcement history of the Rule, it will likely run afoul of the Rule.

In summary, here are the top Advertising Rule violations found by the SEC:

  1. Misleading Performance Numbers
  2. Misleading One-on-One Presentations, See Investment Company Institute, SEC Staff No-Action Letter (Sept. 23, 1988)
  3. Misleading Claims of Performance Standards Compliance (GIPs), See, e.g., ZPR Investment Mgmt., Inc., Advisers Act Rel. No 4249 (Oct. 30, 2015) (SEC Opinion)
  4. Cherry Picking of Securities Shown (past specific recommendations), See TCW Group and Franklin, SEC no-action letters
  5. Inadequate written policies and procedures, especially regarding construction of composites

The Touting Initiative had its own set of findings, summarized below:

  1. Misleading Use of Rankings or Awards, See DALBAR, Inc., SEC Staff No-Action Letter (Mar. 24, 1998)
  2. Misleading Use of Professional Designations, See Instructions to Item 2 of Form ADV Part 2B Brochure Supplement (Educational Background and Business Experience), the designation qualifications must be described
  3. Use of Testimonials (not allowed under the Rule)

The Staff noted that this new guidance is to help advisers assess their advertisements and strengthen their compliance programs, consistent with their fiduciary duties.

View National Exam Program Risk Alert, “The Most Frequent Advertising Rule Compliance Issues Identified in OCIE Examinations of Investment Advisers,” September 14, 2017.