November 15, 2017
Insights - Blog


Recent guidance from the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) addressed compliance issues relating to Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”).[1]  The Advertising Rule prohibits an investment adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading.[2] 


In this guidance, OCIE staff highlighted several of the common Advertising Rule compliance deficiencies which it found in recent examinations.  Many of these deficiencies focused on performance advertising and awards and testimonials.


Performance Results:  Providing performance results in advertisements or one-on-one presentations, which (1) do not deduct advisory fees, (2) compare to a benchmark, but do not disclose limitations inherent in such comparisons, (3) contain hypothetical and back-tested performance results, but do not explain how these returns were derived, or (4) claim to comply with a certain voluntary performance standard when such compliance is not clear.


Cherry-Picked Profitable Stock Selections: Advertising only profitable stock selections or recommendations in presentations, client newsletters, or on their websites, without stating or offering to furnish a list of all recommendations made during the preceding year, together with the disclosures mandated under the Advertising Rule.[3]


Selection of Recommendations:  Disclosing only certain past investment recommendations, but not all, in order to illustrate a particular investment strategy, while not (1) stating or offering to furnish a list of all recommendations made during the preceding year and making the disclosures mandated under the Advertising Rule, or (2) making certain representations made in prior SEC Staff No-Action Letters.[4]  This includes (a) disclosing the best performing holdings, but not simultaneously including an equal number of the worst performing holdings, and (b) not disclosing that specific recommendations did not represent all securities purchased, sold, or recommended to clients during that period.


Compliance Policies and Procedures:  Maintaining policies and procedures that fail to (1) provide for a review and approval of advertising materials prior to publication, (2) when using composites, determine the parameters for which accounts were included or excluded from performance calculations, and (3) confirm the accuracy of performance results.


Use of Rankings, Awards, Designations or Testimonials:  Referencing awards, rankings, or designations conferred by third parties without disclosing certain material facts, including (1) accolades that were falsely obtained, (2) stale or non-current rankings, awards or evaluation  information, (3) failing to disclose selection criteria for the awards or rankings, or the payment of fees to participate in or distribute the results, or (4) referencing certain employee professional designations, including references to professional designations that have lapsed or do not explain the minimum qualifications required to attain such designations.  


Testimonials.  Publicizing client testimonials or endorsements, such as client endorsements published in firm websites, social media pages, reprints of third party articles, or pitch books, which violate the Advertising Rule.


To address these issues, advisers should review their advertising material and websites to confirm they are in compliance with this and prior SEC guidance.  Advisers should also review their compliance policies and procedures to ensure they address advertising and performance results.


This article has been prepared for general information purposes only and is not intended as legal advice, nor does it create an attorney-client relationship. These materials may be considered Attorney Advertising in some states.  If you should have questions regarding how these new rules may impact your firm, please contact Greg Gribben at 585-987-2875, or Steven Suozzi at 585-445-2753, or another member of the Firm’s Investment Management practice group.


[1] National Exam Program Risk Alert, September 14, 2017, Volume VI, Issue 6, available at

[2] Advisers Act Rule 206(4)-1(a)(5).

[3] Advisers Act Rule 206(4)-1(a)(2) (“(i) State the name of each such security recommended, the date and nature of such recommendations (e.g., buy, sell or hold), the market price at that time, the price to be acted upon, and the market price of each such security as of the most recent practicable date, and (ii) contain the following cautionary legend on the first page thereof in print or type as large as the largest print or type used in the body or text thereof: ‘it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list’”).

[4] See, The TCW Group, SEC No-Action Letter (Nov. 7, 2008), available at; Franklin Management, Inc., SEC No-Action Letter (Dec 10, 1998), at