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Wednesday, February 21, 2018

SEC Advertising Compliance - Most Frequent Issues for 2018

By Cory Roberson, Principal at RIA Review and RIA Consults

On September 14, 2017, the SEC Office of Compliance Inspections and Examinations (OCIE) issued a risk alert titled The Most Frequent Advertising Rule Compliance Issues as identified in OCIE examinations of investment advisors.

Most Common Issues: 

Misleading Performance Results

Gross V. Net of Fees.  Examiners noted that advisors presented performance results gross of fees (without deduction of advisory fees).  Generally, advisors cannot disclose gross fees without also including net fees information in a consistent manner.
Staff observed that firms failed to include proper Benchmark Disclosures that outline the limitations inherent in relying on comparisons, such as if there are material differences between the actual portfolio and benchmark holdings or economic conditions.
OCIE noted that advisors failed to disclose the methodology behind the results and other material information (e.g. testing period, strategy, etc.) during the use of hypothetical and backtested performance results
Advisors presented gross fees data without the use of prominent disclosures on data (e.g. no deduction of advisory fees) during One-on-One Presentations
Examiners noted that advisors claimed compliance with performance standards, but during the exam, advisory staff proved to be unfamiliar with such standards.
Examiners noted that some advisors included only profitable equities trades (“Cherry Picking”) in their recommendations and promotional materials without prominently disclosing the limits of relying on such data and disclosing a group of poor performing trades in an equally prominent manner.
Examiners noted that advisors failed to disclose a list of recommendations that illustrated all possible outcomes for a particular investment strategy, such as misleading recommendations that only disclosed winning trades.
Advertising No-Action Letters with best practices for compliance:
TCW Group no action letter (SEC recommendations): Firms should advertise to all parties (e.g. general public and existing clients), the five (or more) best performing securities holding and, in an equally prominent manner, the worst performers with a full list of all required disclosures.
·         In a discrepancy letter, SEC staff noted that TCW failed to consistently include a list of the worst performing holdings in an equally prominent manner as its list of best performing holdings.  
Franklin no action letter (SEC recommendations):  Firm should advertise its past specific recommendations based on a consistent, objective, and non-performance-based criterion, such as gathering a collection of securities that represent a holistic viewpoint of the entire portfolio (winners, losers, sectors, etc.) along with a full list of all required disclosures.
·         In this case study, OCIE examiners discovered that Franklin failed to disclose that all specific recommendations did not represent a full picture of all securities activity during the period discussed in the firms marketing material.   
Compliance Policies and Procedures
Overall, staff noted that many advisers did not appear to have adequate procedures designed to prevent advertising deficiencies.
Touting Initiative: A Special Look into marketing materials
From a 2016 special examination from the SEC (Touting Initiative), examiners are now looking into disclosures that explain and/or justify the use of professional awards, advisor ranking lists, and/or the rise of professional designations in advertising materials.

During the review, the SEC noted the potential misleading use of Third Party Rankings or Awards when advisors published such materials without disclosing the methodology or facts behind the awarding of such accolades.
SEC staff noted firms with a failure to disclose the relevant selection criteria for the awards or rankings, when advisors paid a fee to receive such accolades.
SEC observed that some parties were using false or inaccurate Third-Party Accolades.
When advisors use stale ranking or evaluation information, SEC staff noted potentially misleading advertisements when such publications were issued from several years prior, accolades are no longer applicable, and/or publication no longer exists.
OCIE staff noted deficiencies in the use of Professional Designations when advisors failed to disclose when such professional credentials lapsed or the minimum qualifications required to attain these marks in their Form ADV Part 2B Brochure Supplements.
Staff noted that some advisors included client endorsements (prohibited Testimonials) in their marketing materials (e.g. firm websites, social media, reprints, newsletters, or pitch materials).
Summary:  Overall, both state and SEC-registered firms should remove misleading language from its advertisements, add disclosures designed to prevent violations to the firm’s advertising policy, and maintain procedures for compliance.

Our Mission: “Serving the Investment Community to Make a Social Impact

Investment Advisor/Compliance/Broker Dealer
Cory Roberson is Principal of RIA Review, a compliance and document management portal - 130+ users and growing.  

He is also Principal of RIA Consults -Roberson Consults Group), a consulting firm providing compliance, operations, and business development services for registered investment advisors and next-gen fintech entrepreneurs -  To date, RIA Consults worked with more than 160 SEC & State advisors clients across the US (including a few in Europe).  Our integration division, RegConsults helps to mitigate compliance issues for other Fintech businesses.  

RegTech Products, a compliance tech notifications portal featuring RIA and other regulatory Products (SaaS/IaaS -beta) –

Fin Community is a member rewards and business listing network featuring providers in the FinTech, RegTech, Crypto and Blockchain communities (website coming soon).

As a social entrepreneur, through his mission-driven arm SoCap Missions (, he provides business support group sessions and has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.

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