One excuse the SEC doesn't listen to: I was just following the crowd

During any given week, I have to tell a handful of advisers that their website or marketing materials violate one of the SEC’s rules. A few advisers tell me that I must be mistaken, because other firms are using the same marketing approach. Although my interpretation of the rules may be wrong or overly conservative, I am unlikely to be persuaded by the fact that some other adviser is engaging in non-compliant activities.

On the Internet, you will see many instances in which registered investment advisers (RIAs) violate SEC rules. As an example, RIAs sometimes refer to third party rankings and ratings without making the necessary disclosures or explaining the criteria that led to this recognition. The rating might also be found on the RIA’s brochures and press releases, as well as every e-mail that is sent out to clients and prospective clients.

How to use a third-party ranking

Third-party ratings from organizations and publications are essentially meaningless if there is no disclosure of the criteria on which they are based. In many instances, advisers advertise ratings in marketing materials and on websites with no indication as to when they received this recognition. In a few cases, the ranking is from years earlier, and a key person is no longer with the firm.

The adviser often fails to mention that the firm has not been recognized more recently by that same publication or rating service. Without full disclosure of the factors used in formulating that ranking, potential clients may be misled. It should be disclosed in advertisements referring to this rating that not all investment advisers participated in the process. Otherwise, potential clients might believe that every adviser in the country was evaluated.

RIAs should also avoid mimicking how other firms present performance results. You will occasionally see websites where the adviser presents performance results without deducting advisory fees. This is a clear violation of the SEC’s guidance in the Clover Capital no-action letter.

On too many occasions, RIAs will want to copycat an advertisement they saw on the Internet or heard on the radio without realizing there is a slight problem: The company sponsoring the advertisement is not an RIA. After a bit of research, I will find out that the firm running the advertisement is a broker or insurance agent, not an RIA. As we know, the rules for brokers and insurance agents are much different than those that apply to RIAs and investment adviser representatives.

When some clients say 'you’re dead to me’

In some instances, RIAs forget there is a rule restricting references to past specific recommendations without offering to provide all recommendations made during the past year. Rule 206(4)-1(a)(2) under the Investment Advisers Act makes it unlawful for RIAs to advertise using references to past specific recommendations which were profitable to anyone, unless the ad sets forth or offers to furnish a list of all recommendations made during the immediately-preceding period of not less than one year. The reason behind the rule is that advisers might be inclined to mention all of their brilliant recommendations, while forgetting those stock picks that caused clients to call to say, “You’re dead to me.”

Instead of copying other firms’ compliance mistakes, you might want to break new ground in your marketing materials and advertisements. Try to avoid the overused words and phrases that you see on hundreds of advisory websites and in other advertisements, such as unique, state-of-the-art, and best-of-breed. Ironically, as RIAs attempt to differentiate their services from other firms, they describe themselves with the same language that can be found on other advisers’ websites. Nevertheless, before you break new ground in your marketing materials, check first with your compliance department to ensure that you aren’t breaking any rules.

Les Abromovitz is a senior consultant with National Compliance Services, Inc. Les, an attorney, is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (Available on Amazon.com or through NationalUnderwriterStore.com). He can be reached at 561-330-7645, Ext. 213, or at LAbromovitz@ncsonline.com.