On September 14, 2017, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert in which it highlighted a number of compliance issues it had identified relating to the so-called Advertising Rule (Rule 206(4)-1 of the Investment Advisers Act of 1940 (“Advisers Act”)).

The Advertising Rule imposes four specific provisions that prohibit investment advisers from making certain references, representations, and statements in advertisements that are deemed to be fraudulent, deceptive, or manipulative (Advisers Act Rule 206(4)-1(a)(1)-(a)(4)). It further prohibits advertisements that contain untrue statements of material fact, or are otherwise false or misleading (Advisers Act Rule 206(4)-1(a)(5)).

Specifically, the Advertising Rule prohibits advertising that refers to any testimonial regarding an adviser’s advice, analysis, report, or service; advertising that refers to past recommendations that were or would have been profitable to any person, with limited exceptions; advertising, representing, through graphs, charts, formulas, or other devices, that a decision to buy or sell a security can be made on the sole basis of that representation; and advertising containing any statements that any report, analysis, or service will be provided free of charge, unless it will be furnished free and without any obligation. The Advertising Rule also expressly prohibits an adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of a material fact, or which is otherwise false or misleading.

In its Risk Alert, the OCIE outlined six of the most frequent compliance issues it had identified relating to the Advertising Rule:

• Misleading Performance Results, such as presenting performance results without deducting advisory fees, or comparing results to a benchmark without properly disclosing the limits of such comparisons.
• Misleading One-on-One Presentations, such as those omitting relevant disclosures or failing to disclose that performance results did not reflect the deduction of certain fees.
• Misleading Claims of Compliance with Voluntary Performance Standards, i.e., advisers claiming that their advertised performance results complied with certain voluntary performance standards, when it was not clear that that was the case.
• Cherry-Picked Profitable Stock Selections, such as an adviser including only profitable stock selections or recommendations in presentations, client newsletters or on their websites without complying with the rule that advertisements cannot refer to past specific recommendations of an adviser that were or would have been profitable to any person. (See Advisers Act Rule 206(4)-1(a)(2)).
• Misleading Selection of Recommendations, including additional instances of disclosures of past specific recommendations that did not comply with the requirements of Advisers Act Rule 206(4)-1(a)(2).
• Compliance Policies and Procedures that failed to comply with Advisers Act Rule 206(4)-7(a), which requires advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advertising Act, including deficient advertising practices.

The OCIE made clear that although its Risk Alert focused on these six compliance issues, this was not an exhaustive list of the deficiencies that can arise in the context of the Advertising Rule.

The SEC identified these compliance issues via its 2016 “Touting Initiative,” in which it conducted close to 70 examinations regarding advisers’ use of “accolades” in marketing materials. The OCIE initiated its Touting Initiative in response to what it deemed to be a regularity of advisers advertising certain accolades in marketing materials without also disclosing certain material facts about those accolades. The accolades included the touting of awards, promoting lists of rankings, and/or identifying personal designations in marketing materials. As part of its initiative, the OCIE observed what it found to be the misleading use of third-party rankings or awards, the misleading use of professional designations, and impermissible client testimonials or endorsements, including those published on social media. The information contained in the Risk Alert also reflected issues the OCIE had identified in deficiency letters resulting from more than 1,000 adviser examinations.

Just how many enforcement actions these adviser-related compliance issues will ultimately result in remains to be seen. However, in light of the SEC’s plans to continue to focus on investment adviser advertising practices, and as the OCIE’s Risk Alert specifically recommends, it is a good time for investment advisers to review all compliance programs and practices to ensure compliance with the Advertising Rule. As the SEC noted in the Risk Alert, “relevant advertising guidance and principles are often discussed in Commission opinions, court decisions, and Commission orders in settled enforcement proceedings and in no-action letters and guidance updates issued by the SEC’s Division of Investment Management (“IM”),” highlighting the importance of understanding the Advertising Rule and the risks and issues observed as part of the OCIE’s compliance review. This is especially important given the SEC’s recent demonstration that it is not afraid to use its enforcement powers to pursue fraud charges against investment advisers that run afoul of the Advertising Rule, either through administrative proceedings or civil actions filed in federal court.   See, e.g., here, here, and here.