Advertising Tips for Registered Investment Advisors

What is an Advertisement?

The Securities and Exchange Commission (“SEC”) Rule 206(4)-1 defines “advertising” as “any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.”

Any written communication sent to, or oral presentation made to, a client or prospective client or any broadcast that could be viewed as promoting advisory products or services may be subject to regulations regarding advertising by investment advisers. A communication need not take the form of a mass mailing or a paid newspaper, radio or television ad to be considered an “advertisement” for regulatory purposes.  Items such as client mailings and form letters containing performance information may be subject to SEC advertising guidelines.

Specific Prohibited Practices to consider:

Use of the Term "RIA" - The SEC prohibits an adviser from representing or implying that it has been approved or endorsed by the Commission.  An adviser may indicate that it is registered as an adviser, however, an adviser may not use the initials "RIA" (the adviser must spell out “Registered Investment Adviser”) after the name of an individual as the use of these initials implies an educational or professional designation and is, therefore, considered to be misleading.

Testimonials or Endorsements. Any statement concerning a client’s experience with an adviser or an endorsement by a celebrity, client or anyone else is prohibited because such testimonials are deemed to be selective by definition. Publication of an offer to provide a testimonial is also prohibited.

Past Specific Recommendations. Selective use of past recommendations is prohibited. An advertisement may include the entire list of prior recommendations over period of at least one (1) year, if sufficient backup information is also provided, including:

• Name of each security recommended
• Date and nature (buy or sell) of recommendation
• Price of security when recommended
• Price at which recommendation was to be executed
• Market price on most recent practicable date
• Required Legend:  “It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.”

Graphs “Asset Allocators” and Other Securities Picking Devices. Any suggestion that such devices may be relied upon by an investor in making his investment decisions must be accompanied by a prominent disclosure regarding the limitations and difficulties regarding their use.

Free. The use of “Free” in an offer for any service or product is generally not permitted unless the products or service being offered is completely without conditions or obligations of any kind.

Performance Advertising. Registered advisers are not required to disclose their performance and the only specific rule applicable at this time is Rule 206(4)-1(a)(5) of the Investment Advisors Act of 1940. This Rule prohibits advertising “which contains any untrue statement of a material fact, or which is otherwise false or misleading.” However, the SEC has issued numerous interpretative and no action letters regarding advertisements containing performance. The staff’s letter to Clover includes guidance for publishing with model performance and standards the staff uses to determine whether the performance advertising is fair and not misleading.

Portability of Results. The SEC has stated that while the use of prior performance results by
a subsequent investment adviser may raise an issue under Rule 206(4)-1, the adviser's use of  a manager's prior performance results is not on its face misleading, provided:  (a) that no individual or entity, other than the manager, played a significant part in the performance of the accounts of the manager and (b) the results of the manager's accounts whose performance is advertised were not materially different from the performance of the manager's accounts that did not become accounts of the adviser.

Fees and Expenses. The SEC takes the position that all performance results should be presented net of actual advisory fees, brokerage commissions and other expenses that a client would have paid if the client had owned the portfolio. The one exception is custodial fees on the theory that the client usually selects and pays for these fees. The SEC has no objection if gross fees are actually presented under the following exceptions: “One on one” presentations to wealthy investors, pension funds and institutions may be made on a “gross” basis as long as the adviser does the following:

• Disclose that the results are not on a “net” basis.
• Disclose that the client’s return will be reduced by the fees and expenses.
• Reference Form ADV Part II and Schedule F for a description of the adviser’s fees and expenses.
• Provide a representative example (table, chart or narrative) showing the effect of compounded advisory fees over a period of years on a client’s portfolio. Furthermore, the SEC has said that for periods prior to May 27, 1990, the adviser  may use a “model fee” provided that:
  1. If the adviser offers more than one fee schedule for a given size account, the appropriate fee schedule is the one most often selected by clients.
  2. If the adviser includes performance from different size accounts, the appropriate fee for each period is the highest fee charged during the period to any account included in the performance portrayal.
  3. The following legend is included:

“Performance figures do not reflect the deduction for investment advisory fees actually charged the account. However performance results do reflect the deduction of model advisory fees.”

A few final considerations for your advertisements is to be certain your advertisements do not contain any promissory statements or guarantees; your disclosures are written in plain English and include composite disclosures (if applicable), index definitions and investment risks.  In these turbulent markets consider enhancing your disclosures as appropriate.

Regulatory Compliance can help you with your advertising questions and offers review services to our Compliance Partners. For help with your questions about investment advisor advertising, contact our Investment Advisor Department at 603-434-3594 ext. 122 or email Renee at rhall@regulatorycompliance.com.     

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