Securities Regulation Daily Wrap Up, TOP STORY—OCIE issues risk alert identifying advertising rule compliance issues, (Sept. 15, 2017)
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Friday, September 15, 2017

Securities Regulation Daily Wrap Up, TOP STORY—OCIE issues risk alert identifying advertising rule compliance issues, (Sept. 15, 2017)

By Joanne Cursinella, J.D.

The SEC’s Office of Compliance Inspections and Examinations has released a risk alert with a list of compliance issues concerning the advertising rule, Rule 206(4)-1, under the Investment Advisers Act. Problems were most often identified in deficiency letters sent to registered investment advisers and as part of the Touting Initiative, an examination of advisers’ language use in promotional material. The information is intended to help advisers in adopting and implementing effective compliance programs under the rule.

Most frequent compliance issues. The OCIE staff found six categories of compliance problems:

1.

Misleading Performance Results, which included presenting performance results without deducting advisory fees and comparing results to a benchmark without including disclosures about the limitations inherent in such comparisons;

2.

Misleading One-on-One Presentations, such as not disclosing that the advertised performance results did not reflect the deduction of advisory fees or that client returns would be reduced by such fees and other expenses;

3.

Misleading Claim of Compliance with Voluntary Performance Standards, including when advisers advertised performance results complied with a certain voluntary performance standard when it wasn’t clear to the staff that the performance results actually adhered to the performance standard’s guidelines;

4.

Cherry-Picked Profitable Stock Selections, such as when advisers only included profitable stock selections or recommendations in presentations, client newsletters, or on their websites, without meeting the conditions set forth in the rule;

5.

Misleading Selection of Recommendations, when, for example, the staff observed that advisers disclosed past specific investment recommendations that may have been misleading because they included only certain recommendations in order to illustrate a particular investment strategy; and

6.

Compliance Policies and Procedures, where advisers were found wanting in their policies and procedures pertaining to their processes and procedures for reviewing and approving advertising materials prior to their publication or dissemination in compliance with the rule.

Touting Initiative. The OCIE staff also found three categories of concern as a result of its Touting Initiative, which was established in 2016 to examine the adequacy of disclosures that advisers provide to their clients when touting awards, promoting ranking lists, and/or identifying professional designations (collectively, accolades):

1.

Misleading Use of Third Party Rankings or Awards. Advisers in this category published potentially misleading references to awards or rankings by third parties that failed to disclose relevant facts.

2.

Misleading Use of Professional Designations. This category included advisers’ references to professional designations that have lapsed or that did not explain the minimum qualifications required to attain the designations.

3.

Testimonials. Advisers in this group published client statements that may have been prohibited testimonials (such as client endorsements published in firm websites, social media pages, reprints of third party articles, or pitch books).

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