Compliance Solutions for Investment Advisers

FAQs — Advertising

 

How does the SEC define advertising?

Rule 206(4)-1 under the Advisers Act (commonly referred to as the Advertising Rule) broadly defines “advertisement” to include any notice, circular, letter, or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, that offers any investment advisory service.

What types of communications does the SEC consider to constitute advertising?

The SEC has applied a broad view of what constitutes an advertisement, which generally includes materials designed to maintain existing clients or solicit new clients including form letters, presentation booklets, requests for proposals, a firm brochure, television and radio broadcasts, newspaper and magazine articles, and certain electronic communications such as internet and social medial postings.

What types of communications are typically not considered advertising?

Oral communications other than those in radio or television broadcasts, and written communications that do no more than respond to an unsolicited request by a client, prospective client or consultant for specific information about the adviser.

Is it considered advertising when an investment adviser sends out information about mutual funds to more than one client or potential client?

Documents that relate specifically to investment companies (e.g., prospectuses, advertisements or sales literature) will not be treated as materials designed to maintain existing clients or solicit new clients for the adviser.

Is it considered advertising when an investment adviser sends existing clients information about the performance of their accounts?

Written communications sent to existing advisory clients about the performance of their accounts are generally not considered advertisements.

Are there any prohibitions relating to the use and content of investment adviser advertisements?

The Advertising Rule sets forth four specific prohibitions and a general or “catch-all” prohibition relating to the use and content of investment adviser advertisements.

What is the “catch-all” prohibition relating to the use and content of investment adviser advertisements?

Rule 206(4)-1 under the Advisers Act prohibits SEC-registered investment advisers from using any advertisement that contains any untrue statement of material fact or that is otherwise misleading.

How does the SEC determine whether an advertisement is false or misleading?

Whether a specific advertisement is false or misleading depends on the particular facts relating to the advertisement and the statements contained in it, including the:

  • Form and content of the advertisement;
  • Investment adviser’s ability to perform what is advertised;
  • Implications or inferences arising from the context of the communication; and
  • Sophistication of the prospective clients.

What are the specific prohibitions relating to the use and content of investment adviser advertisements?

 The Advertising Rule specifically prohibits an investment adviser from publishing, circulating or distributing any advertisement that:

  • Uses or refers to testimonials;
  • Refers to past, specific recommendations made by the adviser that were profitable, unless the advertisement sets out a list of all recommendations made by the adviser within the preceding period of not less than one year, and complies with other, specified conditions;
  • Represents that any graph, chart, formula, or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions, unless the advertisement prominently discloses the limitations thereof and the difficulties regarding its use; and
  • Represents that any report, analysis, or other service will be provided without charge unless the report, analysis, or other service will be provided without any obligation whatsoever.

What is a testimonial?

A testimonial generally includes statements of an experience with, or endorsement of an investment adviser made by any former, existing or prospective client, and is not restricted to statements about the adviser’s performance.

If an advertisement contains a partial list of clients is that considered using a testimonial?

The SEC has stated in a No-Action Letter (Denver Investment Advisers, Inc., pub. avail. July 30, 1993) that an adviser can include a partial client list in its advertisements so long as: (i) the adviser did not use performance-based criteria in determining which clients to include in the list; (ii) each client list contained a disclaimer that it was not known whether the listed clients approved or disapproved of the adviser or the advisory services provided; and (iii) each client list included a statement disclosing the objective criteria used to determine which clients to include in the list.

Is a third-party rating considered a testimonial?

Third-party ratings that are based solely on performance do not constitute testimonials. However, a rating that solicits client views about their experience with an adviser is a testimonial.

Is an article reprint considered a testimonial?

An article drafted by an unbiased third-party that discusses an investment adviser’s performance is not a testimonial unless it includes a statement of a client’s experience or endorsement.

What are the requirements for advertising past specific recommendations?

Any advertisement that makes a direct or indirect reference to past specific recommendations that were or would have been profitable unless: (i) the advertisement sets out or offers to furnish free of charge a list of all recommendations made within the immediately preceding period of not less than one year; and (ii) the advertisement (or list if furnished separately) contains the following:

  • The name of each security recommended;
  • The date and nature of each recommendation;
  • The market price at that time;
  • The price at which the recommendation was to be acted upon;
  • The market price of each listed security as of the most recent practicable date; and
  • The following legend on the first page in print or type as large as the largest print or type used: “It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.”

What are the general guidelines for presenting performance?

The general guidelines for presenting performance were set forth in the Clover Capital Management, Inc. No-Action Letter (available Oct. 28, 1986). Pursuant to Clover, all advertisements presenting performance (both model and actual) must:

  • Disclose the effect of material market or economic conditions;
  • Reflect the deduction of investment advisory fees, brokerage or other commission and any other expenses that a client would have paid or actually paid;
  • Disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;
  • Disclose the possibility of loss if it suggests or make claims about the potential for profit;
  • Disclose all material facts relevant to any comparison to an index; and
  • Disclose any material conditions, objectives or investment strategies used to obtain the performance advertised.

Are there any additional guidelines for the presentation of model performance?

Yes.  In addition to the above general guidelines, any advertisement that presents model performance results must also:

  • Disclose prominently the limitations inherent in model results;
  • Disclose, if true, material changes in the conditions, objectives or investment strategies of the model portfolio during the period portrayed and the effect of those changes;
  • Disclose, if true, that any of the securities contained in, or the investment strategies followed with respect to, the model portfolio do not relate, or only partially relate, to the type of advisory services currently offered by the adviser; and
  • Disclose, if true, that the adviser’s clients had investment results materially different from the results portrayed in the model.

What types of practices would be considered misleading when presenting actual performance results?

It would be considered misleading if the advertisement failed to disclose (i) that the results relate only to a select group of the adviser’s client; (ii) the basis on which the selection was made; and (iii) the effect of this practice on the results portrayed (if material).

What advertising records does the SEC usually request prior to a regulatory examination?

The SEC’s core initial request may include all or some of the following records:

  • A copy of any promotional brochures, pamphlets or other materials routinely furnished to prospective clients.
  • A copy of any advertisements (e.g., newspaper or magazine ads, radio scripts, etc.) used to inform or solicit clients during the past 2 years.
  • A copy of any newspaper or magazine article reprints disseminated to clients or prospective clients during the examination period.
  • A copy of performance figures or charts used in general advertising or in one-on-one presentations.
  • A description of any benchmark index, including any internally constructed benchmark, to which performance has been compared; the name of the entity that sponsors, produces, and/or distributes such index and/or any component of an internally constructed benchmark; and whether or not the index is price weighted.
  • A list and description of all composites, which details each composites inception date, account minimum and investment objective.
  • A statement of the account inclusion criteria your firm employs in the construction of any composite performance results.
  • A spreadsheet detailing the accounts included in each composite, including, internal calculations indicating beginning and ending asset values for each quarterly, all capital addition as and withdrawals including the dates) and the quarterly performance return.
  • All custodial statements, including a statement that indicates the beginning asset value for the performance period.
  • A list of all composites that were terminated during the examination period.
  • A list of any composites that have been shown to clients whose composite construction criteria were changed on a retroactive basis; and, include the dates and reasons for the change.
  • All accounts not included in a composite.
  • Documentation that your firm is complying with GIPS, if applicable.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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