THE AD RULE
Advertising is often a key focus of the SEC’s examinations, making it imperative for investment advisers to remain up to date on the requirements of marketing-related regulations. All written communication provided to more than one person and any notice that solicits investment advisory services is considered an advertisement. Rule 206(4)-1 of the Advisers Act (the “Ad Rule”) governs both the types of information and methods of presentation that can be utilized. The Ad Rule is intended to prevent fraudulent, deceptive, or manipulative activities by prohibiting the following:
- Past specific recommendations;
- Graphs, charts, formulas or devices indicating when to buy or sell securities;
- Free reports or unconditional services unless they are in fact free of charge or conditions;
- False or misleading statements;
- Cherry-picking favorable investments;
- Omitting material facts; and
- Discussing the possibility of profit without discussing the risk of loss.
Similar to the SEC’s Ad Rule is the CFA Institute’s Global Investment Performance Standards (“GIPS”), which establishes a broadly accepted guideline for calculating and marketing investment performance. If an adviser claims compliance with GIPS, it is required to inform all prospective clients of this fact and to provide a compliant presentation. In these presentations, advisers must factor in the following provisions:
- The consistency of input data used to calculate performance;
- The calculation methodology;
- The composite construction and returns; and
- The necessary disclosures.
ADOPTING POLICES AND PROCEDURES
It is imperative for firms to adopt and implement written policies and procedures tailored to the requirements of the Ad Rule and GIPS (if claiming GIPS compliance). Policies and procedures should describe the marketing practices of the firm, identify associated risks, and describe the compliance program’s processes for mitigating said risks. Furthermore, employees should undergo periodic training to ensure they are fully aware of the conditions that must be met when creating, approving, and distributing marketing pieces.
SERVICES PROVIDED BY FAIRVIEW
Fairview’s experience with a wide variety of investment advisory firms has fostered a robust understanding of the challenges around both investment advertising and GIPS-related advertising. This understanding, along with our monitoring of industry updates, allows us to effectively assist investment advisers with maintaining current policies and procedures. Fairview also enables clients to comply with the recordkeeping requirements by assisting with logging marketing pieces and retaining documentation of CCO approval. Please contact Fairview if you have any questions or concerns about your compliance program or if you would like to receive additional information regarding how Fairview can support your firm in meeting its compliance requirements.