New SEC Compliance Alert Identifies Most Common Violations by Investment Advisers Who Advertise

01/02/2018 11:23 am ET

Which violations occur most when investment advisers decide to advertise their services to potential clients?

A September 14, 2017, risk alert from the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) identifies the top six infringements, according to Laura Anthony, founder of Legal and Compliance, LLC, a national corporate, securities and business transactions law firm in West Palm Beach, FL.

Most of the violations involve misleading information or claims, while the others include failure to report complete information, especially around such issues as investor fees and provision of a full and balanced picture of past performance, both good and bad, Ms. Anthony notes.

Writing in the Securities Law Blog, Ms. Anthony points out that the violations originate from the Investment Advisers Act of 1940, which prohibits investment advisers from directly or indirectly disseminating information that is untrue or misleading. The law applies specifically to advertising or claims that investors might rely on to decide when to buy or sell any security, or which one to buy or sell.

The most common violations identified in the OCIE are:

· Misleading performance results: An adviser provides misleading information about past performance (e.g., omits fees, relies on benchmarks or comparisons that are materially different, fails to provide information on how returns were derived).

· Misleading one-on-one presentations: An adviser fails to disclose all information when reporting results.

· Misleading claim of compliance: An adviser falsely claims to be voluntarily compliant with SEC standards.

· Cherry-picked profitable stock selections: An investor claims results that do not include a balanced picture of both profitable and unprofitable selections.

· Misleading selection of recommendations: An investor focuses inordinately on successful holdings or stock picks without divulging an equal number of poor performers.

· Inadequate advertising procedures: An investor does not have adequate processes and internal checks in place for reviewing, approving and confirming advertisements that meet all legal standards.

OCIE also provided a summary of “touting,” the practice by which investors promote their business acumen by mentioning awards, rankings or other types of third-party recognition. Such phraseology must be factual as to the date, selection criteria and creator of the information, and must indicate that the investor did not pay to be included or mentioned, Ms. Anthony notes.

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