The expression, “the truth will out,” appears to have originated with Shakespeare and is being used more frequently by commentators on news programs. The expression has come to mean that the facts of a situation will inevitably become known or discovered. If Registered Investment Advisers (“RIAs”) use false or misleading content in their advertisements, the truth will out when examiners conduct examinations of their firms.
Because when it comes to RIAs, Rule 206(4)-1 under the Investment Advisers Act of 1940, better known as the Advertising Rule, prohibits advertisements for SEC-registered Investment Advisers that are false or misleading in any way. Advertising regulations governing state-registered Investment Advisers are often modeled after Rule 206(4)-1 as well. As the very essence of a fiduciary duty for investment advisers starts with the principle to say (only) what you’ll really do… and then be prepared and capable of actually doing (and proving that you can do) what you said.
In this guest post, Les Abromovitz, an attorney with deep expertise and experience with the RIA Advertising Rule, discusses what RIAs should be doing and thinking about when it comes to marketing compliance. As a starting point, RIAs should avoid promissory language, guarantees, and statements that cannot be proven (i.e., only statements that can be supported with objective evidence should be used). In addition, RIAs should avoid marketing hype, which may be tempting to differentiate in an increasingly competitive environment… even though “hype” is inherently misleading. RIAs must also satisfy strict compliance requirements if they refer to past specific investment recommendations in an advertisement, and especially when they advertise their performance returns.
Unfortunately, though, even with good faith attempts to do things right, many Investment Advisers inadvertently use advertisements that are false or misleading as they attempt to woo clients. In many instances, advisers may have no idea that the content (or particular keywords) they are using would be deemed “misleading” by regulators. And although securities regulators are unlikely to bring a full-scale enforcement action against an RIA because of these innocent mistakes, they can give examiners a bad impression of the firm’s compliance program and suggest to examiners that they should dig deeper in reviewing the firm (to ensure that the misleading advertising smoke isn’t a sign of a bigger compliance fire to address). In addition, after completion of an examination, examiners take note of these errors, as well as other compliance mistakes, in a deficiency letter sent to the firm. The RIA must then respond to the letter and correct (or dispute) the examiners’ findings. If an RIA fails to address those deficiencies, the SEC might then bring an enforcement action against the firm.
To further address areas of potential examiner concern when reviewing RIAs, the SEC periodically publishes Risk Alerts to highlight compliance problems identified by its Office of Compliance Inspections and Examinations (“OCIE”). On September 14, 2017, OCIE released a Risk Alert, which identified the most frequent Advertising Rule compliance issues uncovered by examiners during their examinations. Advisers would be wise to familiarize themselves with the deficiencies identified by examiners and should make sure their compliance manuals and processes are designed to prevent the same mistakes.
Misleading Advertising Content Isn’t Always Obvious
When it comes to the RIA Advertising Rule 206(4)-1, false or misleading advertising content can range from obvious misstatements to seemingly innocuous errors.
For instance, it is clearly misleading when advisers lie about their experience or academic credentials. In May of 2017, the SEC brought an enforcement action alleging that an RIA and its owner made material misrepresentations in the firm’s Form ADV brochure supplements. The owner of the RIA falsely stated that she had earned a marketing degree from a university in Virginia. In fact, the owner attended that university but did not graduate. During that same timeframe, the RIA misrepresented in marketing materials that its owner held the Certified Financial Planner credential, but she did not. The owner was aware of these representations but did not correct them until SEC staff members contacted the firm.
In contrast, suppose an adviser advertises that he has a Ph.D. but never discloses that the degree is in an unrelated field. An examiner might question whether the advertisement is misleading (a potential infraction that could lead to an enforcement action) or is merely disingenuous (concerning and still likely something an examiner would request to be fixed in a deficiency letter).
Misleading words and phrases can show up not only in advertisements but also in an adviser’s Form ADV as well. For example, in a deficiency letter sent by the Philadelphia office of the SEC to one RIA, examiners chastised the firm for including superfluous and unsubstantiated words and statements in its advertisements and Form ADV Part 2A. The RIA claimed its investment strategies and expertise were superior to other firms. Obviously, it is impossible to prove that statement with objective evidence. The firm also claimed it had given outstanding advice for decades and had vast experience, and further advertised that they offered the highest level of expertise and possessed extraordinary resources (which again are hard words to substantiate). In addition, examiners criticized the RIA’s use of the word “unparalleled.”
Examiners will also take note of inconsistencies between an RIA’s Form ADV, and its other marketing materials. As an example, the bio used in marketing materials for an Investment Adviser Representative (“IAR”) should be consistent with the qualifications set forth in the IAR’s Form ADV Part 2B.
RIAs with a strong social media presence should be aware that examiners will scrutinize IARs’ social media posts, such as LinkedIn profiles, to be sure they are consistent with their brochure supplements as well. And since Form ADV now requires advisers to disclose all social media accounts used for business purposes, the examiners will know where to look.
It’s also notable that “misleading” content can be content that was perfectly acceptable when first published, but (unwittingly) becomes misleading as it ages. Which means RIAs should be implementing policies and procedures to ensure that their websites are kept current as well. For example, some RIAs choose to include their assets under management on their website. Assets under management figures can become stale and misleading over time, even if the RIA specifies the date on which they were calculated (if that date is no longer timely). Thus, references to assets under management should be updated promptly if they go up or down significantly (and generally at least quarterly to ensure timely information is shared).
Words Matter In RIAs’ Advertisements
Compared to advertisements for other products and services, most RIAs’ ads are relatively tame and understated. Nevertheless, a poor choice of words in an RIA’s advertisements can cause them to be deemed “misleading.”
For instance, an RIA’s advertising might explicitly or implicitly guarantee success or assure prospects that a particular strategy will work year in and year out when it won’t.
Alternatively, too many advisers describe their strategies, credentials, or background as “unique,” even though there is nothing all that unusual about their approach, academic achievements, or experience. And ironically, aside from the potential compliance problem with using this description, it is doubtful that the word “unique” will resonate with prospects anyway, especially if they are seeing just about every RIA describe itself in the same way, too.
To some degree, examiners’ reviews of advisers’ marketing materials are themselves subjective. Statements that leap out at one examiner may be overlooked by another during an examination. Nevertheless, over the years, I have read deficiency letters that criticized advisory firms for using the following (surprisingly common) statements in their RIA advertisements:
- We are the premier firm in our area;
- We provide an unprecedented level of service;
- We have an impeccable reputation in the industry;
- We offer cutting edge and/or state-of-the-art technology;
- We utilize world-class investments in our portfolios;
- We are the foremost authority in our field;
- We are nationally known, renowned and/or nationally-recognized;
- Our investment strategies are revolutionary;
- We offer best-in-class products and services; and
- We use best of breed investments.
For example, in one deficiency letter, the examination team stated that the description “best-in-class” was misleading and criticized the RIA’s use of the claim “high quality.” The examination team’s explanation was that these kinds of claims are subjective, and suggest characteristics about the firm’s capabilities that might be unwarranted or unsubstantiated.
Nuance can make the difference between a compliant and a noncompliant advertisement. One deficiency letter criticized an adviser for calling himself an “expert.” On the other hand, it is far less difficult to prove you possess expertise as opposed to calling yourself an expert. There is also a big difference between describing the firm’s advice as “groundbreaking” versus more simply stating that the RIA aims to provide valuable or insightful guidance.
Similarly, calling yourself a “pillar of the community” goes too far. There would be less compliance risk if an IAR simply advertises her long-standing ties to the community instead.
In most cases, examiners will simply take note of these dubious statements in their deficiency letters and request that the adviser make changes (rather than applying a fine or similar penalty for the infraction). However, these descriptions will create more serious compliance problems if all of the firm’s advertisements contain language that is over-the-top, and especially those that are deemed to be purposely deceptive. For example, an examiner is unlikely to take a benevolent attitude toward an IAR with a lengthy disciplinary record who claims to have an impeccable reputation.
Truth Be Told, Even Implied Testimonials Are Problematic
The Advertising Rule 206(4)-1 prohibits RIAs from using advertisements containing testimonials. Which means avoiding not only clear-cut testimonials but “implied” testimonials as well. As even if a statement is not technically a testimonial, and no names are attached to the quote, it can still be deemed potentially misleading. Essentially, examiners are concerned that an RIA is putting words in clients’ mouths when it advertises, “Our clients love us. You will too.” In one instance, SEC examiners cited an RIA’s advertisement that urged prospects to join its “roster of satisfied clients.”
This is concerning, as during the fifteen years I have been reviewing advisers’ marketing materials, numerous RIAs have similarly claimed that the firm is “admired,” “trusted,” or “beloved” by its clients. Which risks being deemed as misleading implied testimonials by examiners, and even if such statements are not implied testimonials, these descriptions may still be deemed misleading since they cannot be objectively substantiated.
Similarly, some RIAs create hypothetical case studies that are the equivalent of implied testimonials and may still be problematic. After all, in virtually every case study, the advice given by the adviser is always spot on and enables clients to reach their goals. These case studies always have a successful outcome. Which means, even with disclosures, case studies might be viewed as implied testimonials, or at least as misleading because they give the erroneous impression that clients always reach their investment goals. Ideally – at least from a compliance perspective – case studies should only give a general overview of the advice and strategies offered, and stop short of describing the inevitable successful outcome (and especially not discuss the hypothetical client’s delight with the recommendations).
And notably, while there have been rumors that the SEC will tweak the rule prohibiting testimonials, examiners are still currently sanctioning firms for serious violations. In fact, in a December 21, 2018 enforcement action against robo-adviser Wealthfront, the SEC’s sanctions were based in part on the firm’s improper retweeting of client testimonials. Similarly, on July 10, 2018, the SEC announced high-profile enforcement actions against two RIAs, three IARs, and a marketing consultant, who were accused of using social media and the Internet to violate the Testimonial Rule.
Marketing Hype And Content That Cannot Be Proven With Objective Evidence
Unlike advertisements for other goods and service, RIAs should refrain from using exaggerations and puffing.
Obviously, marketing hyperbole cannot be proven with objective evidence. And examiners take exception to the use of superlatives not just in describing the adviser’s investment services, but also an adviser’s credentials, strategy, personnel, or even its system. For instance, following a limited scope exam, one examiner requested that the RIA remove the words “elite” and “proven” from its website, as the superlatives were viewed as marketing hype.
Similarly, a phrase like “proven results” is nebulous. Does that phrase mean recent results, or does it refer to performance since the inception of the firm? Can the RIA substantiate the so-called “proven results” with its books and records?
Other examples of situations where examiners have raised concerns about an RIA’s marketing hype include: one RIA advertised that Wall Street came to the adviser for advice; another RIA compared the quality of its services to those provided by the Mayo Clinic; every now and then, RIAs will describe their financial seminar as the most valuable investment seminar ever or will assure attendees that they will leave with life-changing advice; and on more than one occasion, RIAs touted financial seminars as providing information that Wall Street does not want investors to know.
In addition, the scope of potentially unrealistic promises and deemed marketing hype is not constrained to just pure financial results. For instance, many RIAs use advertisements that boast, “Our clients sleep well at night.” No matter how wonderful their services are, there is no way to prove with objective evidence that an RIA’s clients sleep well at night or that they have peace of mind. RIAs using this language should beware of what happens when an examiner asks them to substantiate their marketing statement.
In fact, an RIA must be prepared to substantiate all of the firm’s advertising claims, should avoid any statements that are difficult or impossible to prove, and should stick with statements that can be properly supported. For example, an RIA cannot prove that the firm and its IARs are well-respected. By contrast, advisers can usually substantiate that they are well-educated, experienced, or knowledgeable.
Similarly, RIAs’ advertisements sometimes state that the firm has a “track record of success.” Advisers should always ask themselves how they will substantiate that statement to examiners. Will they need to (and be able to) provide performance results to the examiner from decades earlier? Are they unwittingly implying that their returns have always exceeded their benchmarks after advisory fees are deducted? Statements of this kind should be avoided because they are almost impossible to prove with objective evidence. At a minimum, to substantiate such statements, a firm may need to retain books and record for much longer than the usual five years.
Another increasingly problematic area are third-party rankings, which will likely be deemed misleading without proper disclosure. Furthermore, some rankings - especially those that are not based on any objective criteria - can be deemed misleading even if the advertisement contains full and robust disclosures. For instance, in many cities, organizations will sponsor “Best Financial Adviser” contests based solely on votes that people who often know nothing about the RIA’s services, which would raise concerns for an examiner if the RIA then advertised its “Best Financial Advisor” recognition.
Takeaways On Complying With The Rule 206(4)-1 Advertising Rules For RIAs
Quite frequently, the content of a firm’s website and its marketing materials are written by copywriters who know little about the Advertising Rule governing RIAs and may not be familiar with how problematic marketing hype can be for RIAs given our highly regulated industry. In addition, the fact that some copywriters may have “experience in the financial services industry” still does not mean that they have expertise relating to (compliant) RIA advertisements.
Arguably, though, advisers may be able to attract more clients by explaining in plain English what sets them apart from other firms than using hyperbolic language to describe their talents anyway (especially when so many other firms are straining to use the same near-hyperbolic language). For example, RIAs that claim superiority because they are fiduciaries have not set themselves apart from the thousands of other investment advisers that also owe a fiduciary duty. One RIA went so far as to generalize that members of their firm “care about their clients, [while] others do not.” Obviously, generalizations are noncompliant, in addition to likely being ineffective as a marketing tool. Advisers are better advised to work on their elevator pitch and create a succinct (and accurate and substantiated) explanation of why their RIA is the right choice for the prospect.
Websites, social media, and other advertisements often give prospects and examiners their first impression of an RIA. False or misleading advertisements are more likely to attract regulatory scrutiny and might lead to an examination. If that happens, members of an RIA are likely to say, “We have in fact seen better days,” as Shakespeare said in As You Like It.
Summary For Rule 206(4)-1 Advertising Compliance
RIAs that want to ensure proper advertising compliance with Rule 206(4)-1 should implement policies and procedures to ensure that their websites, social media, and other advertisements are reviewed regularly. During these reviews, the firm can determine if their content has become stale and misleading. When RIAs discover their advertisements are misleading for any reason, they should revise (or stop using) them immediately. Certain RIAs are reluctant to correct errors, because they believe it to be an admission of guilt. Examiners will look much more favorably upon firms that correct mistakes, large or small, as soon as they discover them than those that knowingly allow mistakes to remain even after discovery (or firms that aren’t taking the time to look and therefore can’t show they would even know if they were engaging in misleading advertising).
Similarly, firms should not hesitate to revise and improve their policies and procedures over time. In fact, making improvements shows regulators that a firm is committed to implementing and preserving a culture of compliance, which is viewed positively (even if the changes were to fix prior and now-acknowledged compliance weaknesses). And while disclosures help to ensure that content is not misleading, certain content like testimonials will not become compliant even by adding disclosures.
In the meantime, RIAs should review SEC guidance (e.g., the recent OCIE Risk Alert issued in September of 2017 on the most frequent Advertising Rule compliance issues), and strive to avoid the following content:
- Advertisements that are false or could be deemed misleading in any way;
- Express or even implied testimonials;
- Claims that are inconsistent with the RIA’s Form ADV or advisory agreements; and
- Advertisements containing generalizations, guarantees, promissory language, hyperbole, and statements that cannot be proven with objective evidence.
Or stated more simply: if you cannot prove it, don’t say it. And if you say it, you must be ready to prove that you are really doing/delivering it.