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Compliance Concepts

OCIE Issues Risk Alert on RIA Advertising

September 20, 2017

The SEC's Office of Compliance Inspections and Examinations (“OCIE”) provided a list of compliance issues relating to Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”). The cited compliance issues were most frequently identified in deficiency letters recently sent to RIAs and as part of an examination initiative that focused on advisers’ use of accolades in their marketing materials (“Touting Initiative”).  


Here are the most frequent deficiencies that OCIE staff has identified in connection with failure to comply with the Advertising Rule:


►   Misleading Performance Results.    OCIE staff observed advertisements that: (i) presented performance results without deducting advisory fees; (ii) compared results to a benchmark but did not include disclosures about the limitations inherent in such comparisons, including instances where, for example, an advertisement did not disclose that the advertised strategy materially differed from the composition of the benchmark to which it was compared; (iii) contained hypothetical and backtested performance results, but did not explain how these returns were derived and did not include other potentially material information regarding the performance results.


►   Misleading One-on-One Presentations.     OCIE staff observed advertisements that: (i) contained performance results (gross of fees) in certain one-on-one presentations, but did not include potentially relevant disclosures; (ii) did not disclose that the advertised performance results did not reflect the deduction of advisory fees and that client returns would be reduced by such fees and other expenses.


►   Misleading Claim of Compliance with Voluntary Performance Standards.   OCIE staff observed advisers that claimed their advertised performance results complied with a certain voluntary performance standard, when it was not clear to staff that the performance results in fact adhered to the performance standard’s guidelines.


►   Cherry-Picked Profitable Stock Selections.    OCIE staff observed advisers that included only profitable stock selections or recommendations in presentations, client newsletters, or on their websites, without meeting the conditions set forth in Subsection (a)(2) of the Advertising Rule 


►   Misleading Selection of Recommendations.    OCIE staff observed advisers that: (i) disclosed past specific investment recommendations that may have been misleading because they included only certain, and not all, recommendations, in order to illustrate a particular investment strategy, and they did not meet the conditions set forth in Subsection (a)(2) of the Advertising Rule; and, (ii) did not satisfy the representations upon which IM staff based certain no-action assurances as provided in the TCW Group and Franklin no-action letters


►   Compliance Policies and Procedures.    OCIE staff observed advisers that did not have, or did not implement policies and procedures pertaining to these issues: (i) the process for reviewing and approving advertising materials prior to their publication or dissemination; (ii) when using composites, determining the parameters for which accounts were included or excluded from performance calculations; and, (iii) confirming the accuracy of performance results in compliance with the Advertising Rule.