SEC warns RIAs about exaggerating investment performance and other misleading advertising practices

The regulator's Office of Compliance Inspections and Examinations issued a risk alert Thursday about a number of potential violations of advertising rules

Sep 14, 2017 @ 5:41 pm

By Bruce Kelly

From touting misleading investment performance to making potentially false references to professional designations, some registered investment advisers are skirting compliance when it comes to industry advertising rules, according to the Securities and Exchange Commission.

The SEC's Office of Compliance Inspections and Examinations, or OCIE, which conducts RIA exams, issued a risk alert about the issue on Thursday.

The SEC's advertising rule prohibits an adviser, directly or indirectly, from publishing or circulating any advertisement that contains any untrue statement of material fact, or that is otherwise false and misleading, according to OCIE. Advertisements can encompass a broad array of statements in writing or on television and radio, including reports or graphs and charts about when to buy and sell securities

The SEC defines advertisement broadly; a good rule of thumb is to assume that any written materials sent to clients or potential clients are subject to the advertising rules, according to industry experts.

The risk alert on advertising is part of an exam initiative that focused on advisers' use of accolades in marketing materials.

OCIE identified a series of frequent advertising rule compliance issues.

One was touting performance. OCIE staff reported that they "observed advisers that presented performance results without deducting advisory fees," according to the risk alert.

"Staff also observed adviser advertisements that compared results to a benchmark but did not include disclosures about the limitations inherent is 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."

Some advisers also advertised performance results that were "gross of fees" in certain one-on-one presentations, according to OCIE. In other words, advisers touted returns that did not reflect the deduction of advisory fees, and client returns would be reduced by such fees and expenses.

Meanwhile, other advisers cherry-picked in their advertising and communications, including "only profitable stock selections or recommendations in presentations, client newsletters, or on their websites," which is not in compliance with industry rules, according to the risk alert.

Another area of concern in advertising was advisers misleading selection of recommendations.

OCIE staff observed advisers that disclosed past specific investment recommendations that could have been misleading "because they included only certain, and not all, recommendations, in order to illustrate a particular investment strategy," according to the risk alert.

Other advisers relied on the misleading use of third-party rankings and awards in advertising, according to OCIE, with references to awards or ranking by third parties with inadequate disclosures, according to OCIE.

The poor disclosure included: accolades that had been obtained by submitting potentially false or misleading information in the application for the award; publishing marketing materials that referenced stale or out-of-date information from several years prior; or not disclosing that the adviser paid a fee to participate in or distribute the results of the survey for the award.

OCIE also found that advisers made references in ads or communications to professional designations that had lapsed.

In response to OCIE's staff observations, advisers "elected to either remove misleading language from their advertisements, or to add disclosures designed to prevent the advertisements from being misleading," according to the risk alert.

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