August 13, 2013

The AdvisorAssist CCO Series: RIA Advertising

In its efforts to protect investors, the Securities and Exchange Commission (“SEC”) has instituted a number of guidelines and prohibitions related to RIA advertising. These regulations are contained in Rule 206(4)-1 of the Investment Advisers Act of 1940, as well as numerous “no-action” and interpretive letters under the Rule. (State advertising regulations are primarily derived from these SEC rules, but do differ from state to state.)With a thorough understanding of these rules (collectively referred to as the "Advertising Rule"), your RIA firm can confidently foster and promote your brand to prospects (and clients) while remaining comfortably within regulatory guidelines.

RIA Advertising In a Nutshell

What's an "advertisement"?
Rule 206(4)-1 (“The Advertising Rule”) of the Investment Advisers Act of 1940 defines an advertisement in the following manner:

An “advertisement” shall include 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.

For instance, mass emails to prospects or clients that involve topics other than operational matters are likely to be considered an advertisement.

Essentially, any communications that you use to solicit new clients or maintain existing clients that are not considered "one-on-one" is an advertisement. One-on-one communications are generally not considered advertising. To be considered one-on-one, the interaction must be “private and confidential in nature” and must be in a setting where participants have an opportunity to “discuss with the adviser the types of fees that the client might pay.”

The "Advertising Rule"
There are a number of specific prohibitions with respect to RIA advertising. These include:

Testimonials. Your firm is prohibited from using any direct or indirect references to testimonials with respect to statements of a former, existing or prospective client's experience or endorsement of your services (or advice). For example, you may not advertise using a quote from a client that reflects their positive experiences with your firm. (You can, of course use clients as references to speak with prospective clients--this is a one-on-one interaction and not considered advertising.)

Graphs, Charts and Formulas. You may not represent that a graph, chart or formula or other device which can, in and of itself, be used to make trading decisions or produce certain results without prominently disclosing any limitations or difficulties in their use.

"Free" Services. You may not use advertisements that contain any statement to the effect that any report, analysis or other service will be furnished for free or without charge, unless such report, analysis or other service actually is or will be furnished entirely for free and without any condition or obligation, directly or indirectly.

Past Specific Recommendations. Your RIA firm may not reference past specific security recommendations that include a reference to the profitability of that recommendation unless the advertisement includes all recommendations made during the previous year. If a past specific recommendation does not include references to performance, you may use them in advertising if they are selected based on an objective, non-performance based criteria, that same criteria is used in each period, and you maintain books and records that substantiate your complete list of recommendations and the criteria utilized to determine which of these are used in advertising.

Use of Articles from News Media. RIA regulators take the position that bona fide unbiased third-party reports generally are not prohibited. Your use and distribution of a bona fide news article written by an unbiased third-party is not subject to the requirements of the rule governing past recommendations when past specific recommendations happen to be referred to within the article. However, using such reprints is subject to Advisers Act Rule 206(4)-1(a)(5), which makes it a violation for you to use an advertisement that contains any untrue statement of a material fact or is otherwise misleading.

Performance-based Advertising. If your RIA firm uses performance results in advertising, you must adhere to the following guidelines and must make the following disclosures:
  • The effect of material market or economic conditions on results portrayed
  • Whether or not performance includes reinvestment of dividends and other earnings
  • The potential for loss (if the advisor is making any implication of a potential profit)
  • Any material factors that are relevant to any comparisons to an index or benchmark
  • Any material conditions, objectives, and investment strategies used to obtain the performance results
  • If the performance included in the advertisement relates only to a select group of accounts or clients (e.g., a representative account), the advisor must disclose the basis on which selection was made and the effect of this practice on results portrayed, if it is material.
  • Any other material factors that may have impacted performance

The use of performance results in advertising is false or misleading if it implies, or a reader would infer something about the advisor’s competence or about future performance results that would not be true had the advertisement included all material facts and disclosures.

If your firm uses model performance or backtested results in its advertising, there are specific practices and disclosures that must be used to ensure that these communications are not false or misleading.

The "Anti-fraud Provision"
In addition to the Advertising Rule, all investment advisors (including those that are exempt form registration) are subject to the “Anti-fraud Provision” of the Investment Advisers Act of 1940. This states that you may not use the mails or interstate commerce to “employ any device, scheme or artifice to deceive, or manipulate any client or prospective client” or to “engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”

Advisors are required to keep true, accurate and current records of “all accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return used in advertisements ”pertaining to performance that is used in advertising." Your firm must also maintain a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication circulated to 10 or more persons (other than persons connected with the advisor).

As part of your books and records responsibilities, your RIA firm must maintain a copy of all advertisements and recommendations that are sent to 10 or more recipients (other than persons connected with the advisor).

Through the Regulator's Eyes

When regulating advisor advertising, the SEC generally focuses on disclosures, rather than methodology. So while they may offer limited guidance on how to do certain things, they do expect that any relevant disclosures are made. The SEC and state regulators will not review or approve your advertisements prior to use. Rather, upon examination of your advertising books and records they will determine if they are consistent with the "advertising rule" and not false or misleading based on the circumstances surrounding their use.

The burden of determining what is false and misleading is placed on your firm and your CCO.

This includes avoiding the use of statements or projections that paint your firm in a positive light, without consideration the performance of underlying benchmarks, or when similar advice brought underperformance to clients. Regulators will construe legal definitions broadly so as to ensure that the balance of information is in the reader's favor and no persuasion can be found so as to suggest an element of fraud or deception.

Examiners inspecting your advertisements will request to see all communications made under your firm's name, including emails, documents sent through the postal mail system, TV commercials, and internet activity - including company website(s), online advertising, and social media presence. After making an inventory of your overall communication landscape, they will analyze the statements and images used to see if they are out of compliance with the rules noted above. There are many carefully-crafted exceptions and variances to the rules other than the overall requirement to be free of fraud and deception.

CCO Best Practices for RIA Advertising

  • Ensure you have a review process in place to analyze firm advertisements for compliance.
  • Check your advertisements for proper disclosures.
  • Coordinate a process with your IARs to check in for new advertisements and obtaining copies to maintain pursuant to Books and Records requirements.
  • Review seminar presentation content for appropriate regulatory disclosures and compliance.
  • Perform checks on your performance calculations to validate accuracy before use.
  • Understand your firm's social media presence and ensure you and your employees are not directly or indirectly interacting with the public in a way that would come up under the Advertising Rule.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Brian Lauzon


I read your blog frequently and I just thought I’d say keep up the amazing work!

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