The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert, based on deficiencies found by the OCIE’s examinations of investment advisers, that cites a number of advertising compliance issues relating to Rule 206(4)-1 of the Advisers Act of 1940.
Rule 206(4)-1 prohibits an adviser from “publishing, circulating or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false and misleading.”
The purpose of the Risk Alert is to encourage advisers to assess their supervisory, compliance and/or other risk management systems related to advertising activities, make any changes necessary to strengthen such systems and ensure that their advertisements are consistent with relevant advertising rules and fiduciary responsibilities.
The most frequent advertising deficiencies that the OCIE staff has identified include:
- Misleading Performance Results: Advisers presented performance results without deducting advisory fees, advertisements that compared results to a benchmark without disclosing the limitations of such comparisons and hypothetical and back-tested results without disclosing how these returns were derived and the limitations on their meaningfulness.
- Cherry-Picked Profitable Stock Selections: Advertisements that include only profitable stock selection and recommendations, and/or contain misleading selections of investment recommendations.
- Compliance Policies and Procedures: OCIE staff found advisers that did not have compliance policies and procedures reasonably designed to prevent deficient advertising practices.
Finally, the Risk Alert reports deficiencies under the Touting Initiative of 2016, which examined the adequacy of disclosures when advisers tout accolades conferred by third parties in their marketing materials. More specifically, OCIE was concerned with submission of false information by advisers in their applications to third parties, referencing stale rankings or evaluation information and not disclosing selection criteria used to derive the rankings or the payment of fees by advisers to third parties as a condition of being considered in a ranking or evaluation.
FINRA and the SEC have levied millions of dollars in fines over the past few years for failures in advertising, marketing and public communication compliance. This doesn’t include the reputational costs that were incurred.
To administer an effective process for supervising public communication and advertising, you must be able to ensure compliant recordkeeping, simplify oversight efforts, manage a high volume of submissions, and comply with FINRA Rule 2210.
Find out how the NRS Ad Review Module can help you meet those goals.