SEC Issues Risk Alert on the Most Frequently Identified Advertising Rule Compliance Issues

September 21, 2017

The staff of the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert on the most frequently identified compliance issues relating to Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940. In addition, the Risk Alert includes a summary of examination observations from OCIE’s “Touting Initiative,” which was launched in 2016 to examine the adequacy of disclosures that SEC-registered investment advisers (“advisers”) provide to their clients when touting awards, promoting ranking lists, and identifying professional designations.

Most Frequently Identified Advertising Rule Compliance Issues

  • Misleading Performance Results – OCIE staff observed advertisements that (i) presented performance results without the deduction of fees, (ii) compared results to a benchmark without disclosures regarding the limitations inherent in such comparisons, and (iii) presented hypothetical and back-tested performance results that did not disclose how these returns were derived and other material information.
  • Misleading One-on-One Presentations – OCIE staff observed advertisements that contained misleading one-on-one presentations, including performance results that were presented gross of fees without relevant disclosures.
  • Misleading Claim of Compliance with Voluntary Performance Standards – OCIE staff observed advisers that claimed that their advertised performance results complied with a certain voluntary performance standard, such as the Global Investment Performance Standard (GIPS), when it was not clear to the OCIE staff that this was the case.
  • Cherry-Picked Profitable Stock Selections – OCIE staff observed advisers including only profitable stock selections or recommendations in presentations, client newsletters, or on their websites, without meeting the conditions set forth in Subsection (a)(2) of the Advertising Rule.
  • Misleading Selection of Recommendations – OCIE staff observed the disclosure of past specific investment recommendations, rather than all recommendations, in order to illustrate a particular investment strategy, without meeting the conditions set forth in Subsection (a)(2) of the Advertising Rule or the representations relied upon in the TCW Group1 and Franklin2 no-action letters.
  • Compliance Policies and Procedures – OCIE staff observed advisers that did not adopt or implement policies and procedures reasonably designed to prevent deficient advertising practices, including policies and procedures related to the process for reviewing and approving advertising materials prior to their publication or dissemination, determining the parameters for which accounts were included or excluded from performance calculations when using composites, and confirming the accuracy of performance results in compliance with the Advertising Rule.

Examination Observations from Touting Initiative

  • Misleading Use of Third Party Rankings or Awards – OCIE staff observed advisers that published potentially misleading advertisements that contained references to awards or rankings conferred by third parties without disclosing certain material facts relating to the awards or rankings. For example, advisers advertised accolades obtained based on the submission of potentially false or misleading information in the application for such accolades, referenced stale awards or rankings thus potentially misrepresenting the adviser’s current status, and failed to disclose relevant selection criteria for the awards or rankings or the adviser’s payment of a fee to participate in or distribute the results of the survey forming the basis for the award or ranking.
  • Misleading Use of Professional Designations – OCIE staff observed advertisements and disclosures in advisers’ Form ADV Part 2B that contained potentially false or misleading references to employee professional designations, such as references to professional designations that have lapsed or references that failed to explain the minimum qualifications required to attain such designations.
  • Testimonials – OCIE staff observed client statements endorsing the adviser that may be prohibited testimonials in adviser websites, social media pages, reprints of third party articles, or pitch books.

S&K Observations

Advisers should carefully review their advertisements to identify any potential issues raised by the Risk Alert and more generally for compliance with the Advertising Rule and relevant SEC guidance, including applicable no-action letters. Advisers should also assess the adequacy and effectiveness of their compliance policies and procedures that are designed to prevent deficient advertising practices.


1 The TCW Group, SEC Staff No-Action Letter (Nov. 7, 2008).

2 Franklin Management, Inc., SEC Staff No-Action Letter (Dec. 10, 1998).