Enforcement Actions Related to Advertising / Marketing for Investment Advisors

May 30, 2012

Marketing materials can be very helpful in attracting business for an investment advisor, but investment advisors should be aware of the regulatory requirements that apply to the use of marketing materials. Common issues with investment advisory marketing materials include using marketing materials that include testimonials (which investment advisors are generally prohibited from using); publishing past recommendations (without following the restrictions and disclosure requirements for publishing past recommendations); using language that makes promises or guarantees; and making untrue or misleading statements.

In one recent enforcement action published by the U.S. Securities and Exchange Commission (“SEC”) related to marketing materials, an investment advisor solicited investors with marketing materials that cited a successful investment history based on actual performance in managed accounts, the use of proprietary qualitative pricing models developed to invest in Exchange Traded Funds (ETFs), and the experience and knowledge of a particular investment advisor representative in managing the investments.

The SEC found the marketing materials contained material misrepresentations.  The SEC concluded that the performance information that the investment advisor had represented as performance based upon actual trades was, in fact, performance that was based upon back-tested hypothetical trades. The SEC also found the investment advisor had misrepresented the use of qualitative pricing models to make investment decisions, had misrepresented the investments actually made by the investment advisor, and had misrepresented which individual was actually managing the investments.

In another recent SEC enforcement action, an investment advisor created marketing materials to attract investors at conferences. The investment advisor distributed a brochure that included a 10-year track record that represented 11% average returns.  The investment advisor had not been in existence for 10 years, so not only was the timeframe represented inaccurate and misleading but the investment advisor had also failed to maintain accurate records to support the claimed returns.  The marketing information included additional misrepresentations, including a statement that the investment advisor had grown assets under management in another fund to $300 million when the named fund never had assets under management. Also, the marketing brochure indicated that the investment advisor conducted “thorough” due diligence in selecting managers; however, the SEC found that the investment advisor’s due diligence was “virtually nonexistent.”

For more information and guidance regarding the use of marketing materials for your investment advisor, join RIA Compliance Consultants on Thursday, June 14, 2012 at 12:00pm, CDT, as we present the webinar “Approving Marketing Materials.” During the webinar our consultants will be discussing examples of marketing materials that included prohibited promises, guarantees, and untrue statements. The consultants will also provide best practice recommendations and sample disclosures. If you would like to sign up for this webinar, click Approving Marketing Materials. RIA Compliance Consultants can provide assistance with reviewing your investment advisor’s marketing materials.  If you are an existing client of RIA Compliance Consultants, contact your consultant for more information.  If you are a new client interested in assistance, click here to schedule a time for one of our consultants to contact you to discuss your needs.

Posted by Bryan Hill
Labels: Advertising, Enforcement, Marketing, SEC, Webinar