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Advertising Do’s and Don’ts

Are you comfortable with your advertising practices? If they’re not on your radar, you may want to reconsider. The Securities and Exchange Commission’s (the “SEC”) Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert [1], highlighting common errors made by advisers in their advertisements. These deficiencies were in violation of the Investment Advisers Act of 1940’s Rule 206(4)-1, or the “Advertising Rule.”[2]  Advisers should be familiar with this rule as it sets out guidelines and lots of prohibitions on advertisements. Not to mention that what constitutes an advertisement under the rule is broad – these can include a wide range of marketing and client communications, including not only advertisements but websites, reports, social media, letters, pitch books, and presentations.

Advertising Dos and Dont's

The deficiencies cited in the Risk Alert involved misleading performance advertising and can be summarized as follows:

  • Failing to deduct advisory fees and disclose limitations with benchmarks or how performance results were derived;
  • Falsely claiming advertised performance results complied with certain voluntary performance standards,
  • Cherry-picking by including only profitable stock selections or recommendations in presentations,
  • Disclosing only certain past specific investment recommendations that were misleading since they don’t include all recommendations (including unprofitable ones), to illustrate an investment strategy;
  • Missing compliance policies and procedures to prevent deficient advertising practices;
  • Misleading performance results and third-party rankings and awards; and
  • Using misleading professional designations in situations where the designation lapsed, or the employee no longer met the minimum qualifications.

If any of these practices sound familiar or if you’re not sure, then you need to act and do so before your next regulatory examination. Advertising practices are a treasure trove of deficiencies for examiners, so expect them in your next exam.

Hopefully, I have your attention, and you’re wondering what you should do?
While no adviser has 100% compliant advertising practices all advisers should be assessing these practices periodically with the following in mind:

  • Review advertising policies and procedures for compliance with the Advertising Rule and related no-action guidance;
  • Assess your advertising controls periodically for effectiveness and compliance;
  • Train your employees periodically to keep them informed; and
  • Check both written and electronic materials (including the information listed on websites and social media) for compliance.

To help you out further, make sure you know the common deficiencies. Using the Risk Alert as a checklist is a great start but also consider the guidance in this article. I am going to focus on the prohibited practice of cherry-picking.

In its simplest terms, when you “cherry-pick” you selectively choose the most favorable items from what is available. When an adviser cherry-picks in advertisements, he/she includes only profitable stock selections or recommendations, without including the unprofitable ones.  The SEC views this “selective disclosure” as deceptive and misleading and not surprisingly a violation of its Advertising Rule.

How do you avoid cherry-picking? Below are examples and where appropriate potential permissible measures.

Examples of Cherry-Picking in Advertisements

  • Past Recommendations – Using past recommendations in advertisements can be tricky and must be carefully navigated as noted below.
    • Don’t provide past specific recommendations related to transactions or advice that only include the most profitable ones while omitting the losing ones. Doing so typically conveys a misleading and incomplete account of overall performance.
    • Use past recommendations if you:
      • List all recommendations (profitable or not) made for the relevant period; or
      • Follow the guidance in SEC no-action letters [3] that when displaying best performing holdings along with an equal number of worst performers make sure to:
        • Display the best and worst recommendations equally (g., don’t use larger font for the best ones);
        • Include statements that:
          • The holdings identified do not represent all the securities purchased, sold, or recommended for advisory clients; and
          • Past performance does not guarantee future results;
        • Select them using objective consistently applied non-performance based selection criteria;
        • Do not discuss profits and losses of any selected securities; and
        • Keep records of the selection criteria used to make these determinations.

An important note, you can’t satisfy these requirements by offering to provide this information separately or later. (Access Tool: Click here to access a useful checklist to help you when preparing, publishing and promoting advertisements.)

  • Testimonials – Testimonials are another form of cherry-picking since advisers inappropriately use them to convey favorable, positive impressions in advertisements.
    • Don’t use any direct or indirect references to testimonials from existing or prospective clients about their experience with you or an endorsement of your services (or advice), such as:
      • Conducting a client survey soliciting only positive client views or endorsements;
      • Using a quote from a client that reflects a positive view of or experience with your firm;
      • Using photos of a celebrity or politician even if you don’t name the person;
      • Making a statement that you want to provide information on how great your recommendations are but rules prevent you from doing so;
      • Using hypotheticals that always end up benefitting the client; and
      • Offering freebies attached with any condition or obligation, directly or indirectly, such as a free lunch if the invitee attends a seminar promoting you or your firm’s track record.
    • Permissible ways to do this – NONE! Testimonials are prohibited with no exception.
  • Sample Reports – Reports are not advertisements unless you use reprints in an advertisement and if you do be mindful of what you can and cannot do.
    • Don’t show samples of reports with only the highest returns as a sample.
    • Present the sample reports in a fair and balanced manner highlighting both favorable and unfavorable results.

Conclusion

Proper and compliant advertising practices spare you not just possible enforcement actions but also help your firm more confidently promote its products and services to clients and prospects. Keep your advertising practices current and your employees informed. Consider using the Advertising Checklist to help you when preparing, publishing and promoting advertisements. Click the ACCESS TOOL button below to get the checklist.

Lastly, the Adherence LLC group is here to help you with your advertising questions and offers review services. For more information on how they can help, contact Adherence at http://www.adherencellc.com/contact/.

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