Fair, Balanced, and not Misleading: OCIE Issues RIA Advertising Risk Alert

Sep 28, 2017

Topics: Compliance |

In a time of sweeping regulatory change, marketing and advertising rules for SEC-registered investment advisers (“RIAs”) have remained relatively fixed. Why, then, does the area remain a pitfall for some advisers? To help advisers address this continuing concern, the Office of Compliance Inspections and Examinations (“OCIE”) has zeroed in on RIA compliance practices regarding advertising in their September 14th Risk Alert.

Following a targeted review of advisory marketing materials (with additional focus on advisers who include accolades and awards in their advertisements), OCIE reported common deficiencies related to Rule 206(4)-1 (the “Advertising Rule”). Misleading presentation of performance and portfolio holdings and the use of deceptive professional designations and awards were among the top issues found by the regulator.

The Advertising Rule prohibits the distribution of “any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading.” Advisers are, of course, aware of this; however, the gray areas surrounding “materiality”, and what a financially sophisticated audience is perceived to understand, continue to trip up advisers.

As the SEC’s focus on marketing is not likely to dwindle, advisers are encouraged to place special emphasis on the key areas outlined in the alert, and should consider forensic testing of their marketing materials now.

While not an exhaustive list, the SEC reminds advisers to remain diligent on the following subjects:

Performance: Check Those Boxes

Of all the requirements built into the Advertising Rule, those relating to the presentation of performance may be some of the more easily misunderstood. Check lists, peer reviews and compliance testing may help stem these easily avoidable deficiencies;

  • “Gross-only” returns are permitted in very limited circumstances and must be heavily disclosed.
  • The relevance of benchmarks used should be scrutinized closely. Consistently outsized outperformance may be a red flag for material differences between a portfolio and an index.
  • Hypothetical returns should include all material information regarding the calculations. It is not unusual to see a page’s worth of disclosure explaining the adviser’s methodology.
  • “One-on-One” presentations are not exempt from all required gross of fee disclosures and narratives explaining the effect of fees on client returns.
  • Claims or implications of compliance with global performance standards (GIPS) will be tested. There is no such thing as “GIPS-like” performance calculations.

Disclosure of Holdings: The Slipperiest of Slopes

Though easy to forget, disclosing an adviser’s profitable past specific recommendations (stock picks) is still an SEC prohibition unless certain precautions are taken. Advisers are reminded that pursuant to no-action guidance , they should only include their winners and losers and partial lists of holdings in marketing materials, IF:

  • The performance-based selection instructions spelled out in the TCW Group no-action letter are precisely followed (and those disclosures, proximity requirements, and presentation criteria are very explicitly stated);
  • The non-performance based methodology of the Franklin Management no-action letter is applied consistently (with a blinking reminder that the mere suggestion of a holding’s performance will void this exception); or
  • The adviser shows all buys and sells over, at least, a 12 month period, including pricing, dates and disclosures. This is the least popular option for obvious reasons.

If advisers feel that including a sample of their portfolio holdings is necessary in order to properly illustrate their strategies, they should seek to avoid reinterpreting the related no-action letters in place and in many cases seek guidance from outside experts. The goal is to ensure that there is no “cherry picking” involved when marketing stock picks.

Compliance Policies: Are they in Practice?

While advisers may have marketing compliance policies and procedures on their books, the SEC has found that they are not typically designed to prevent the reoccurrence of the related deficiencies. To that end, advisers should ensure that their compliance practices address the following concerns:

  • Data included in marketing materials should be accurate and consistent across the firm. Part of the marketing review process should include documented verification of all performance being reported.
  • Materials must be reviewed and approved by compliance, legal or other designated principals, prior to use. The documentation of this review must also be maintained.
  • Ideally, there should be a central repository for performance data and marketing materials which have been approved for use (with restricted access for adding new information).

Adviser Accolades: Useful or Stale?

The use of third-party awards and professional designations drew special attention from OCIE in 2016. After approximately 70 examinations, OCIE found a number of prohibited activities across advisory materials and, pointedly, within the social media space. Advisers must continue to be mindful of the following regarding rakings, rating, awards and professional designations:

  • Was there a payment required in order for the adviser or portfolio to participate in an award? Be sure to disclose this and any other selection or voting criteria that is relevant.
  • Information provided on award applications must be accurate and is subject to inspection.
  • The continued publishing of stale rankings/ratings is considered misleading. If there is more current yet less favorable data available, it should be included in materials.
  • Ensure that professional designations included on Form ADV supplements have not lapsed and include the minimum qualifications of the designation.
  • Testimonials or client endorsements, whether on social media pages or third-party reprints, remain prohibited.


In General: Beware of Creative Writing

Though not specifically highlighted in the alert, certain of the cease-and-desist actions taken against advisers who were included in the OCIE review sampling were charged with including unsubstantiated, superlative language in their marketing materials. The overall picture painted by advisory marketing materials must not cause an investor (regardless of his or her perceived financial acumen) to infer something about an adviser’s capabilities and performance that may be unwarranted. The subjectivity of this area is what may cause an adviser to test the limits of marketing language. It is also where the burden of proof is arguably the heaviest.

  • Reconsider the use of words such as “superior”, “unique”, “never”, and “always”. Test these statements when they are used and be prepared to demonstrate their accuracy to the regulators. Exaggerations and hyperbole should be avoided and language should be softened where possible
  • Advisers must ensure that statements relating to performance and capabilities are factual and can be substantiated.

Ultimately, the goal of any adviser should be to provide clients and potential investors with all information pertinent to their business so that informed investment decisions can be made. Proactive forensic testing of advisory marketing materials and their related policies and procedures for adherence to the Advertising Rule should therefore remain a core element of RIA compliance programs.