rogue-advisor

As a Registered Investment Advisor (RIA), you know how important it is to differentiate your firm from its competitors. You also know that advertising is a great way to convey those differences to the marketplace. However, if you get too aggressive with your promotions, you can also get into hot water with the Securities and Exchange Commission (SEC). A recent SEC notice provides a cautionary tale.

According to a National Exam Program Risk Alert from the SEC’s Office of Compliance Inspections and Examinations, some RIAs are violating the SEC’s Advertising Rule (Rule 206[4]-1 of the Investment Advisers Act of 1940). According to recent field examinations and results from its “Touting Initiative,” RIAs are publishing, circulating, and/or distributing ads with untrue or misleading statements. This finding applies to advisors using online, print, or broadcast advertising or sending out promotions directly to clients.

The SEC risk alert identified 10 common RIA advertising violations, including:

  • Misleading prospects and clients about a firm’s investment performance by not deducting advisory fees from investment gains. This deceptively inflates performance.
  • Comparing firm performance to an investment benchmark without disclosing any limitations that might apply to that comparison.
  • Referring to an index whose composition does not relate to the RIA’s advertised investment approach.
  • Highlighting gross investment performance in one-on-one sales presentations without disclosing that client gains were in fact lower because of fees.
  • Making misleading claims of compliance with voluntary performance standards.
  • Touting high-performing individual stocks or investment strategies without mentioning the stocks or strategies that fared less positively.
  • Failing to maintain compliance policies and procedures to prevent deficient advertising practices.
  • Using third-party rankings or awards in a deceptive manner (i.e., without disclosing material facts).
  • Mentioning professional designations in a firm’s Form ADV Part 2B (brochure supplements) that have lapsed and/or failing to explain the minimum qualifications required to attain those designations.
  • Publishing client testimonials on firm websites, social media pages, and in third-party articles or pitch books, all of which are violations of the SEC’s Advertising Rule.

If your firm has engaged in the above practices, now would be a good time to stop. Why? Because the last thing you need is an SEC black mark on your record or a client who thinks you lied and sues as a result. By competing fairly, your prospects will trust you more, your clients will be more satisfied and loyal, and you’ll have less need to use your E&O insurance in a legal dispute. Sounds like a winning strategy, right?

To review the SEC’s Advertising Rule, go here. To learn more about other ethics and compliance issues facing financial professionals, visit the EOforLess E&O HQ.

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