Guidance for Advertising and Marketing

March 07, 2012

Advertising by investment advisors can generate significant risk exposure depending upon the advertising materials and circumstances.

Securities regulators broadly define both a written publication (such as a website, blog, newsletter or marketing brochure) as well as oral communications (such as an announcement made on radio or television) as an advertisement. Under Rule 206(4)-1 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), the U.S. Securities and Exchange Commission (“SEC”) has defined the term advertisement to include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.

A guiding principal for your investment advisor’s advertising can be found in Rule 206(4)-1, which prohibits an investment advisor from using advertising that includes any untrue, false or misleading statements of material fact. Some basic regulatory guidelines are the following:

General Guidelines for Advertising and Marketing:

  • Do not forget your fiduciary duty as an investment adviser;
  • Make no guarantees or promises;
  • Do not mislead – include all material facts when needed;
  • Support and prove everything stated;
  • Do not misstate facts such as number of clients, types of services provided, assets under management, level of expertise, etc.; and
  • Do not use testimonials.

You can be certain that during an examination of your investment advisor, the SEC or state securities regulator will thoroughly review advertising materials utilized by your investment advisor during the inspection period. In particular, the following are specifically prohibited by the SEC and state securities regulators: testimonials; the use of past specific recommendations that were profitable, unless the adviser includes a list of all recommendations made during the past year; a representation that any graph, chart, or formula can in and of itself be used to determine which securities to buy or sell; and advertisements stating that any report, analysis, or service is free, unless it really is free.

As a result, your investment advisor needs to have detailed advertising review policies and procedures memorialized within its compliance program. Further, your investment advisor is highly encouraged to establish a pre-approval process for all advertising, including marketing materials. When conducting an investment advisor’s annual compliance program assessment, the chief compliance officer needs to be sure to analyze and test the sufficiency of making compliance procedures.

If you need guidance on the performance advertising rules and other marketing rules and regulations, RIA Compliance Consultants will be conducting a webinar, Performance Advertising for Investment Advisers, on Thursday, March 15, 2012, at 12:00 CST. This webinar satisfies one hour continuing education requirements for CFP designees. Additionally, if you need help implementing performance reporting procedures or reviewing performance advertising materials RIA Compliance Consultants would be happy to assist you; click here to schedule a time to speak with one of our compliance consultants.

Posted by Bryan Hill
Labels: Advertising, Compliance Program, Performance Advertising