SEC Warns RIAS to Think Twice

OCIE puts ad­vi­sors on no­tice about wide­spread use of mis­lead­ing claims and fail­ures of dis­clo­sure.

Financial Planning - - CONTENT - By Ken­neth Corbin

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.

REL­E­VANT DIS­CLO­SURES

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.

INCOMPLETE PIC­TURE

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.

‘AP­PRO­PRI­ATE BENCHMARKS’

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.

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