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Examiners may ask “Says who?” about your advertisements

RIAs may run afoul of the SEC by using superlatives like "unparalleled" and "unique"

Tuesday, June 21, 2011 – 2:23 PM by Les Abromovitz
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Les Abromovitz: Avoid statements that expressly state or imply that you and your firm are in a class by yourself.

In a recent deficiency letter, the Chicago Regional Office of the Securities and Exchange Commission found fault with a registered investment adviser’s marketing materials, including the firm’s brochure and website. The letter pointed out that these marketing materials contained numerous unsubstantiated statements.

Unlike commercials or print ads for various products and services that make outlandish claims, RIA advertisements may only include statements that can be proven with objective evidence. From the regulator’s perspective, saying something is true doesn’t make it so.

According to the SEC’s deficiency letter, the RIA had made statements that were misleading and objectionable because they were not substantiated with empirical data or evidence. The letter also criticized the RIA for not providing the criteria used in making these determinations. Without substantiation, these statements were viewed by the SEC as violating Rule 206(4)-1(a)(5) under the Investment Advisers Act. That subsection prohibits the use of marketing content that is false or misleading in any way.

Words matter

As you try to differentiate yourself from other RIAs, you should avoid statements that expressly state or imply that you and your firm are in a class by yourself. Those kinds of statements are impossible to prove. This particular RIA was throwing around words and phrases such as “world class institutional resources,” “unparalleled,” “premier” and “unique.”

As I’ve pointed out in other postings, RIAs’ strategies, business model and approach are rarely unique. Nevertheless, each client’s needs and objectives may be described as unique.

Comparing your firm to other RIAs in marketing materials is also dangerous. For instance, stating that you possess expertise or skills that are not available elsewhere is almost impossible to prove. See: How far can RIAs go with advertisements?

A number of RIAs claim that their firm provides the best advice. Although providing the best advice can be your goal, there is no way to prove that point.

Steer clear of testimonials

Additionally, you can’t use your clients to substantiate your marketing pitch.

As RIAs attempt to substantiate their marketing pitch, they may violate a different subsection of Rule 206(4)-1 or similar state regulations. On occasion, an RIA will claim that “clients tell us how terrific our service is.” Even if you have letters substantiating that statement, the problem is that you’re violating Rule 206(4)-1(a)(1) which prohibits testimonials. The prohibition also extends to implied testimonials. See: Advertising practices that can raise the hackles of regulators

Some RIAs attempt to substantiate their advertisements with data or comments collected from their clients in a survey. Gleaning favorable comments from a client survey will usually be viewed as a testimonial, even when you don’t identify the person who said nice things about your firm. This marketing approach may also be misleading because RIAs invariably cherry-pick the good comments and omit the bad ones.

In addition, you should avoid stating why clients have engaged your firm. For instance, I’ve reviewed advertisements that say, “Clients come to us because of our ability to help them reach their goals.” There is no way to prove why clients chose your firm. Furthermore, you are making a generalization, which may be inherently misleading. In essence, you are writing your own testimonial.

Outdated information

Even when you substantiate statements made in your advertisements, a regulator may question the reliability of your data. Too many RIAs use stale statistics to show why their strategies work. It may be disingenuous or even misleading to use data, as well as economic studies, that were published before the latest financial meltdown. See: Outdated RIA websites risk compliance trouble not to mention credibility

When quoting academic papers and studies in marketing materials, you should avoid making statements indicating that all financial experts agree on this issue. Even if you are using a well-respected academic journal as your source, it is a bad idea to imply that no one disagrees with those conclusions.

Social media

Don’t forget that your Facebook profile, LinkedIn page and other forms of social media are subject to the advertising rule. Among other restrictions on the use of social media, you are not permitted to make unsubstantiated statements. Without substantiation, you might as well preface your advertisement with the phrase, “According to me.” See: Why compliance experts are apt to dislike Facebook

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.


Mentioned in this article:

NCS Regulatory Compliance
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Top Executive: Mark Alcaide, COO/Partner




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