The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert citing common investment adviser marketing and advertising compliance issues. OCIE, drawing on over 1000 examinations and its recent “Touting Initiative,” cited several deficiencies: (i) misleading performance results including failure to present performance net of fees, comparisons to inapplicable benchmarks, and hypothetical/back-tested performance, (ii) misleading claims about compliance with voluntary performance standards (i.e. CFA Institute), and (iii) cherry-picked performance and misleading presentations of past specific recommendations. The SEC also criticized advertising that cited third party awards or rankings without proper explanation. The SEC urges advisers to “assess the full scope of their advertisements and consider whether those advertisements are consistent with the Advertising Rule, the prohibitions of Section 206, and their fiduciary duties, and review the adequacy and effectiveness of their compliance programs.”
OUR TAKE: OCIE generally issues these types of Risk Alerts in advance of bringing enforcement actions. Although the SEC has not generally brought enforcement cases solely on the basis of misleading performance claims, this Risk Alert may signal a change in enforcement policy.