SEC to crack down on misleading marketing materials

Compliance with the Advertising Rule is likely to be the Securities and Exchange Commission’s next big target after an investigation uncovered several consistent shortcomings in marketing materials.

In a risk alert issued on Monday, the agency said its recent “touting initiative” found fund managers frequently included misleading performance results, misleading claims about compliance with voluntary performance standards and cherry-picked performance and misleading presentations of past specific recommendations.

The SEC also criticized advertising that cited third party awards or rankings without proper explanation.

In terms of performance results, the agency observed advertisements that staff believed contain misleading performance results. Some, for example, did not deduct fees while others that were benchmarked but did not include disclosure of the limitations of such comparisons.

“Additionally staff observed advertisements that contained hypothetical and back-tested performance results, but did not explain how these returns were derived and did not include other potentially material information regarding performance results,” the risk alert said.

Examiners were also shown one-on-one presentations that did not include potentially relevant disclosures, or a disclaimer that the results did not reflect the deduction of advisory fees that would reduce client returns.
Some advisors claimed that their performance standards complied with voluntary standards when “it was not clear to staff that the performance results in fact adhered to the performance standards guidelines.”

The agency found advisors did not appear to have compliance policies and procedures reasonably designed to prevent deficient advertising practices.

“Staff observed advisors did not have, or did not implement policies and procedures pertaining to the process for reviewing and approving advertising materials, determining the parameters for which accounts were included or excluded from performance calculations, and confirming the accuracy of performance results in compliance with the Advertising Rule,” the risk alert said.

The firms examined as part of the initiative removed misleading language, or added disclaimers to prevent them from being so.

“The Office of Compliance Inspections and Examinations objective in providing this guidance is to encourage advisors to assess the full scope of their advertisements and consider whether they are consistent with the Advertising Rule, and to review the adequacy and effectiveness of their compliance programs,” the alert said.