SEC Highlights Performance Advertising Deficiencies
In the first SEC ComplianceAlert issue, the United States Securities and Exchange Commission (SEC) cautioned registered investment advisors against inappropriate performance advertisements and inadequate policies regarding performance advertising. According to the ComplianceAlert article, the SEC discovered numerous deficiencies as a result of a risk-based sweep examination of several registered investment advisors.
The most common deficiency of registered investment advisors was the lack of sufficient disclosures necessary to prevent advertising from being misleading. The SEC provided the following as examples: firms failed to disclose they did not deduct investment advisory fees from the results, firms failed to disclose whether results reflected dividends, and registered investment advisor firms failed to disclose differences with the particular index used to benchmark performance claims. The SEC also noted firms had inadequate compliance policies and procedures designed to adequately control performance advertising. Another major concern of the SEC is a registered investment advisor firm’s inappropriate or inaccurate claim of compliance with the CFA Institute’s Global Investment Performance Standards (more commonly known as GIPS).
While the SEC does not require GIPS compliance, nor has it set specific standards to follow, RIA Compliance Consultants would remind registered investment advisor firms of the SEC’s guidance provided in its October 28, 1986 no-action letter to Clover Capital Management. This important no-action letter provides guidance about what's prohibited when advertising performance of a model portfolio and when advertising actual performance. The following are some key takeaways from Clover:
Model and Actual Results
- Fails to disclose the effect of material market or economic conditions on the results portrayed;
- Fails to reflect the deduction of advisory fees, brokerage commissions, and other expenses that a client would have paid;
- Fails to disclose whether and to what extent the results portrayed include the reinvestment of dividends and other earnings;
- Suggests potential profits without also disclosing the possibility of loss;
- Compares results to an index without disclosing all material factors relevant to the comparison;
- Fails to disclose any material conditions, objectives or investment strategies used to obtain the performance advertised;
Model Results
- Fails to disclose prominently the limitation inherent in model results;
- With respect to model performance results, fails to disclose, if applicable, material changes in the conditions, objectives or investment strategies of the model portfolio during the period portrayed and, if so, the effect thereof;
- With respect to model performance results, fails to disclose, if applicable, that some of the securities or strategies reflected in the model portfolio do not relate, or relate only partially, to the services currently offered by the adviser;
- With respect to model performance results, fails to disclose, if applicable, that the advisor’s clients actually had investment results that were materially different from those portrayed in the model;
Actual Results
- If actual performance results used in the advertising are only for a selected group of clients, fails to disclose the basis on which the selection was made and the effect of this practice on the results.
If your registered investment advisor firm has made performance advertising an integral part of its marketing campaign, have you made sure performance advertising is an integral part of the firm’s compliance manual? Registered investment advisors need to make sure all performance advertisements are consistent with the expectations set by the SEC. A well designed compliance policy with sufficient supervisory procedures is a must when trying to control and monitor performance advertising. If you would like to know how RIA Compliance Consultants can help your firm design reasonable policies and procedures for performance advertising, give us a call today.
Labels: Advertising
posted by bhill at 2:38 PM
Are 12b-1 Fees Paid to Registered Representatives in Violation of Investment Advisers Act of 1940?
Under the Investment Advisers Act, an investment adviser is defined as an entity or individual that provide advice about securities for compensation in any form and engages in the regular business of providing advice about securities. However, Section 202(a)(11)(c) of the Investment Advisers Act excludes from the definition of an investment adviser "...any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor...." It's on this basis that broker-dealers and their registered representatives avoid the numerous requirements of the Investment Advisers Act.
As noted by these securities commentators, many of the activities performed by registered representatives are purely investment advisory services that are not transactional related. In other words, the monitoring and providing of ongoing investment advice in exchange for a 12b-1 trail fee is not solely incidental to the business of a broker, which is the execution of securities transactions. Moreover, it was noted that these 12b-1 fees strongly resemble the recently struck down fee-based brokerage accounts. It's difficult for an objective bystander to review the justifications for the 12b-1 fee by its proponents and not conclude that there's a violation of the federal laws regulating investment advisers.
The time has come to level the playing field between broker-dealers and investment advisers. If a registered representative of a broker-dealer is providing ongoing advice about mutual funds for a quarterly, asset-based trail, then the SEC needs to start requiring such registered representative and his or her broker-dealer to meet the higher fiduciary obligations of a registered investment adviser.
Labels: SEC
posted by bhill at 7:43 PM
Nebraska Securities Bureau Requiring Approval of Professional Designations
Those professional designations already approved for use by registered investment advisers in Nebraska include the following: Certified Financial Planner (CFP); Chartered Financial Consultant (ChFC); Personal Financial Specialist (PFS); Chartered Financial Analyst (CFA); Chartered Investment Counselor (CIC); Chartered Life Underwriter (CLU); Life Underwriter Training Council Fellow (LUTCF); and Financial Services Specialist (FSS).
In the Omaha World-Herald article, Herstein noted that the Securities Bureau is currently reviewing a dozen other professional designations that have requested approval, but there are over fifty (50) other professional designations that have not yet applied for approval with Nebraska. Herstein also explained that once this professional designation review process is completed, a person (presumably an investment adviser representative or registered representative of a broker-dealer in Nebraska) could be fined or suspended for using professional designations that haven't been approved by the Nebraska Securities Bureau.
In light of these comments and the Nebraska Securities Bureau's recent regulatory investigations of the marketing of equity-indexed annuities to seniors and scrutiny of the professional designations used by insurance-only agents, investment adviser representatives registered in Nebraska need to be careful and utilize only approved professional designations.
For investment adviser representatives registered outside of Nebraska, it should be recognized that other state securities regulators are taking note of the Nebraska Securities Bureau's efforts to regulate the use of professional designations. In particular, the Massachusetts Securities Division is utilizing an approach similar to Nebraska.
Even if an investment adviser representative is registered in a state that hasn't adopted a rule or otherwise taken a public position regarding the use of professional designations, RIA Compliance Consultants recommends that such investment adviser representatives exercise extreme caution and only utilize a professional designation that has substantial educational requirements, experience standards, a code of ethics, and a continuing education requirement. It should be understood that a state securities regulator may attempt to argue that the use of certain professional designations, which are lacking of the above requirements, are misleading under the general anti-fraud provisions of the state securities act despite the lack of any specific rule regarding designations.
Labels: Advertising, Equity-Indexed Annuities
posted by bhill at 10:24 AM
Form ADV Released in Interactive PDF Format
Labels: Form ADV
posted by bhill at 10:06 PM
SEC Announces New ComplianceAlerts
According to the SEC’s press release announcing the new program, the SEC hopes “this broader sharing of recent examination findings can benefit compliance officers and help them to proactively fine-tune their compliance and supervisory controls.” The goal is to provide firms with an additional tool to determine whether they are in compliance with federal securities laws. By understanding what the SEC is looking for during a regulatory examination and what other registered investment advisor firms have been cited for, chief compliance officers can implement compliance and supervisory procedures aimed at avoiding the same mistakes others have made.
With the new ComplianceAlerts and the pre-existing CCOutreach Program, the SEC is making a concerted effort to interact and be proactive with chief compliance officers of registered investment advisors . The SEC’s willingness to share information with its firms is a sign of the commission’s goal of encouraging firms to be proactive with their compliance programs.
RIA Compliance Consultants supports this initiative by the SEC and believes registered investment advisors should take full advantage of the ComplianceAlerts. While not all topics discussed in the ComplianceAlerts will focus solely on advisory issues, registered investment advisors should be able to gain valuable knowledge and insight into SEC examination initiatives. Stay tuned to RIA Compliance Consultants as we follow the ComplianceAlerts and pass along valuable insights concerning registered investment advisor examinations.
Labels: SEC
posted by bhill at 2:55 PM
