SEC Warns RIAS to Think Twice
OCIE puts advisors on notice about widespread use of misleading claims and failures of disclosure.
The OCIE puts advisors on notice about widespread use of misleading claims and failures of disclosure.
ADVISORS NEED TO TAKE A HARD LOOK AT THEIR marketing materials to ensure that they are not making misleading statements that could run afoul of the SEC’S Advertising Rule, the commission is warning.
The SEC has been taking a close look at the statements and representations advisors make in their marketing programs. It has released a risk alert identifying a number of deficiencies the Office of Compliance Inspections and Examinations found in the course of more than 1,000 practice exams.
A HARD LOOK
Firms need to watch for these risk alerts as they amount to the commission putting down a marker on a certain policy area. The alerts could indicate that examiners will take a hard look at those issues when they visit a firm, compliance experts say.
“It should be taken seriously since many, if not most, communications by advisors to clients or prospective clients will be deemed to be advertising,” says Duane Thompson, senior policy analyst at Fi360, a fiduciary training firm.
“It really sounds like the SEC is saying investment fiduciaries need to step up their game given all of the slop that’s evidently out there, ” he says.
The commission says as much in its risk alert, cautioning advisors to “review their compliance programs and practices in light of the topics noted in this risk alert.”
What deficiencies did the SEC find?
Misleading performance results: The commission found that some firms’ promotional materials were painting a misleading picture about the possible returns for investors. Some firms touted performance results but neglected to subtract advisory fees. Others omitted crucial disclosures that provide context to measures like benchmark comparisons.
Misleading one-on-one presentations: In some circumstances, the commission offers a carve-out to the Advertising Rule in the form of oneon-one presentations, which are seen as customized promotional pitches for an individual audience, as opposed to a brochure or radio ad intended to go widely.
But the OCIE examiners found that advisors failed to make relevant disclosures in those pitches about fees and performance results.
Misleading claim of compliance with voluntary performance standards: The commission was unable to verify the claims of many firms that they adhere to voluntary industry codes of conduct such as the Global Investment Perfor-
mance Standards. In 2014, the SEC barred the principal of an RIA for fraud and negligent representations surrounding the firm’s claims of GIPS compliance.
Cherry-picked profitable stock selections: OCIE examiners found cases of firms only touting successful stock or product selections in materials such as their websites or client newsletters, likely amounting to a violation of the Advertising Rule.
Misleading selection of recommendations: Examiners found advisors who appeared to highlight certain prior investment recommendations that fared well, while neglecting to mention others, creating a rosy but incomplete picture of certain investment strategies.
Compliance policies and procedures: Perhaps not surprisingly, given the numerous deficiencies that examiners found, they also determined that many firms lacked adequate compliance programs to oversee firms’ advertising programs.
In particular, OCIE examiners cited firms for failing to sufficiently vet advertising materials and how they determined performance calculations. Firms were also cited for how they confirmed the accuracy of performance results to meet the standards of the Advertising Rule.
Misleading use of third-party rankings or awards: From a targeted 2016 exam sweep known as the Touting Initiative, where OCIE reviewed how firms were applying industry accolades, examiners found a litany of issues involving disclosures and misleading representations.
For instance, OCIE examiners found that some advisors appeared to have applied for industry accolades using false information, while other advisors advertised years-old industry rankings or promoted prohibited client testimonials.
Taken together, the issues highlighted by the risk alert suggest that advisors have a lot of work to do to get their advertising operations in order. Advisors should start with scrubbing their marketing materials to remove any of the potentially misleading claims that examiners will be looking for.
“I think this means, especially when it comes to investment performance, advisors need to be especially careful in making sure they are using the appropriate benchmarks and in terms of using social media,” Thompson says.
“Although the SEC has eased up slightly on client testimonials, the basic restrictions are still in place,” Thompson adds.
Advisors should start with scrubbing their marketing materials to remove any of the potentially misleading claims that examiners will be looking for.
“It really sounds like the SEC is saying investment fiduciaries need to step up their game given all of the slop that’s evidently out there,” says Duane Thompson of Fi360.