SEC Issues Risk Alert for Advertising Rule Compliance Violations by RIA Firms

On September 14, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert focused on violations of the advertising rule of the Investment Advisers Act, observed in recent exams of RIA firms. This Risk Alert is a must read for compliance and advertising review personnel at RIA firms, and is a call to make sure that the firm’s internal policies and procedures regarding advertising compliance are appropriate for the firm.

The Risk Alert reports on the most frequent compliance issues relating to the advertising rule that OCIE staff has identified in the SEC’s exams of RIA firms. Leading the list is misleading performance results. Here, the SEC staff reports that results have been misleading by failing to deduct advisory fees from returns, comparing returns to a benchmark even though an investment strategy may have materially differed than the benchmark, as well as improper use of back-tested or hypothetical returns that did not detail how the returns were determined and lacked disclosure of other material information, among other things.

OCIE also identified other problem areas including: misleading one-on-one presentations, misleading claims of compliance with certain voluntary standards, and cherry-picking of profitable stock selections. Other items were also identified as problematic, along with OCIE’s observation that some firms did not seem to have adequate policies and procedures in place to achieve compliance with the advertising rule. Finally, OCIE also provided a summary of observations from their Touting Initiative, aimed at the adequacy of disclosures when an adviser touts awards, professional designations, etc. in marketing materials.

RIA firms should expect that the SEC staff will continue to focus their attention on compliance with the advertising rule in future exams of RIA firms.

The Risk Alert is available here on the SEC’s website.