Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues. Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.
Last year, the SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert warning advisers to review their marketing and advertising practices. More recently, OCIE alerted advisers to widespread noncompliance with the solicitation rule. Meanwhile, the Enforcement Division has brought several actions alleging that adviser marketing practices violated applicable law. With this increased scrutiny, advisers should re-assess the following marketing practices to avoid material exam deficiencies or enforcement actions:
10 Adviser Marketing Practices to Avoid
- Hypothetical Back-Tested Performance. The SEC has consistently targeted the use of hypothetical, backtested performance, and the Enforcement Division has brought numerous cases.
- Gross Performance. Although firms can present gross performance in a few limited situations, most should firms should always present performance information net of fees.
- Misrepresenting Investment Strategy. Sales personnel should not make representations about investment products that are inconsistent with disclosure documents.
- Receiving Revenue Sharing. The SEC will heavily scrutinize undisclosed revenue sharing that incent advisers to sell certain products.
- Faulty GIPS Compliance. Claiming compliance with GIPS (CFA Institute) performance standards but failing to actually comply with those standards will draw the ire of the regulators.
- Cherry-Picking Performance. The SEC will challenge firms that only show good performance of certain past specific recommendations.
- Testimonials. Rule 206(4)-1(a)(1) specifically prohibits the use of testimonials. Yet, too-clever advisers keep trying to use them, resulting in enforcement actions.
- Lying about Credentials. Don’t present credentials that are inconsistent with your actual work experience in an effort to market greater expertise.
- Inflating AUM. Avoid using unverifiable assets under management totals in marketing materials or on Form ADV.
- Claiming Clean Compliance. When asked in an RFP to describe compliance deficiencies identified during exams, do not ignore the question or say “none” unless it’s true.