The SEC’s Office of Compliance Inspections and Examinations has issued a risk alert highlighting compliance issues with advisers’ communication of performance results, recommendations and accolades.
The alert draws on what the SEC says were most frequently identified in deficiency letters recently sent to SEC-registered investment advisers and identified as part of an examination initiative that focused on advisers’ use of accolades in their marketing materials.
The most frequent advertising rule compliance issues were:
Misleading Performance Results. The report cites instances where advertisements did not disclose that the advertised strategy differed materially from the composition of the benchmark to which it was compared, 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. The report also cited examples of advisers that presented performance results without deducting advisory fees.
Misleading Selection of Recommendations. The OCIE staff said that among other things, they had observed advertisements that staff believe contain misleading selections of investment recommendations, including situations where advisers which 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.
Compliance Policies and Procedures. The report says that OCIE staff observed advisers that did not appear to have compliance policies and procedures “reasonably designed to prevent deficient advertising practices,” specifically advisers that “did not have, or did not implement, policies and procedures pertaining to the following issues: 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.”
‘Missed’ Touting
In the second part of the report, the OCIE outlined its observations from its “touting initiative,” which it launched last year “…to examine the adequacy of disclosures that advisers provided to their clients when touting awards, promoting ranking lists, and/or identifying professional designations (collectively ‘accolades’) in their marketing materials.” Here the OCIE cited:
Misleading Use of Third Party Rankings or Awards. The report notes that OCIE staff “observed advisers that published potentially misleading advertisements containing references to awards or rankings conferred by third parties that failed to disclose facts, which staff believes were material under the circumstances, about such awards or rankings,” including accolades that were obtained by submitting potentially false or misleading information, marketing materials that referenced stale ranking or evaluation information, and potentially misleading advertisements that “did not disclose the relevant selection criteria for the awards or rankings, or who created and conducted the survey and the fact that advisers paid a fee to participate in or distribute the results of the survey.”
Misleading Use of Professional Designations. OCIE staff reportedly 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, for example, references to professional designations that have lapsed or that did not explain the minimum qualifications required to attain such designations.
Testimonials. OCIE staff likewise observed advisers that had published statements of clients attesting to their services or otherwise endorsing the adviser that may be prohibited testimonials (e.g., client endorsements published in firm websites, social media pages, reprints of third party articles, or pitch books).
The report concludes by noting that in response to OCIE staff’s observations, “advisers elected to either remove misleading language from their advertisements, or to add disclosures designed to prevent the advertisements from being misleading,” adding that the objective in providing this guidance is “to encourage advisers to 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 review the adequacy and effectiveness of their compliance programs.”
