Does your Investment Adviser Have Effective Procedures to Monitor and Approve Performance Advertisements?

January 25, 2010

Reading time : 3 minutes

Advertising continues to be one of the primary focus areas of the SEC during investment adviser examinations. More specifically, performance advertising is one of the more common deficiencies found during SEC examinations and one that needs effective compliance oversight. During examinations, the SEC is interested in whether investment advisers have effective policies and procedures to make sure that their claims about past investment performance, their advertisements, and other marketing materials, among other things, contain accurate information, are not misleading, are not promissory, and have been reviewed by compliance.

Unfortunately, SEC Rule 206(4)-1 (Advertisements by Investment Advisers) under the Investment Advisers Act of 1940 provides little guidance on performance advertising. Much of the SEC’s guidance is spelled out in no-action letters, with probably the most important one being Clover Capital Management, Inc., and enforcement actions. Investment advisers that regularly advertise performance need be familiar with the parameters outlined in Clover. The importance of Clover is heightened by the fact that the SEC staff, as a matter of policy, does not review specific advertisements except when conducting an examination of an investment adviser.

The following is a general summary of proper performance advertising compliance outlined by the SEC’s Division of Investment Management and Office of Compliance.

The SEC staff has said that, if you advertise your past investment performance record, you should disclose all material facts necessary to avoid any unwarranted inference. For example, SEC staff has indicated that it may view performance data to be misleading if it:

· does not disclose prominently that the results portrayed relate only to a select group of the adviser’s clients, the basis on which the selection was made, and the effect of this practice on the results portrayed, if material;

· does not disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser’s clients appreciated in value 25% without disclosing that the market generally appreciated 40% during the same period);

· does not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that accounts would have or actually paid;

· does not disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;

· suggests or makes claims about the potential for profit without also disclosing the possibility of loss;

· compares model or actual results to an index without disclosing all material facts relevant to the comparison (e.g., an advertisement that compares model results to an index without disclosing that the volatility of the index is materially different from that of the model portfolio); and

· does not disclose any material conditions, objectives, or investment strategies used to obtain the results portrayed (e.g., the model portfolio contains equity stocks that are managed with a view towards capital appreciation).

If your investment adviser utilizes performance advertising, you should attend our webinar, “Approving Performance Advertising,” on Wednesday, January 27, 2010 from 12:00 p.m. to 1:00 p.m. CST to learn more about developing strong compliance policies and procedures for preparing, approving and maintaining records related to performance advertising. During this webinar, our consultants will examine the SEC’s advertising rule, the SEC no-actions concerning performance advertising and related SEC enforcement actions. RIA Compliance Consultants will provide best practices and disclosures for investment advisers utilizing performance advertising.

Posted by Bryan Hill
Labels: Advertising, Webinar