Performance Advertising For RIA Firms

RIA Performance Advertising

RIA firms tend to stay away from using performance numbers in their advertisements even though performance numbers can be used. The main issue with using performance data is that it gives the regulators more opportunities to find fault, fine and suspend your firm as they can point to “untrue statements of a material fact” and/or “is false or misleading information”. Facts and circumstances can be used by regulators to determine if the information contained in the ad may be considered false or misleading. The SEC will typically look at 3 main areas to determine if the ad is false or misleading.

  1. The context of the information being used.

  2. The possible implications that may arise.

  3. The clients/prospects ability to comprehend the information effectively.

Investment Advisers Act of 1940

When looking at the Investment Advisers act of 1940’s Advertisement section (Rule 206(4)-1), you will notice that performance advertising is not addressed. The Securities and Exchange Commission (SEC) has declared that investment advisers that use performance numbers and/or models in advertising need to make sure that the information being used in the advertisement is accurate, up to date and not false or misleading. Because of the lack of information that is available in the Act, The SEC has issued a series of letters that dig into what it believes to be inappropriate advertising practices. Here are is a list of some of the most relevant takeaways from these letters:

  • Must disclose the market and the economic conditions in an accurate context.
  • Must disclose the handling of all distributions earnings, to include reinvestments and other factors that would affect performance numbers. i.e. warrants
  • Must disclose the potential for losses as well as gains.
  • Must disclose the relationship and all material facts of the performance numbers being used to the index or model it is being compared to.
  • Must disclose the material conditions, objectives, or investment strategies used to obtain the results being reported.
  • Must disclose the actual results, which includes all relative & material facts, such as, money in, money out, fees, commissions, and any other expenses that would have been paid.

If you would like assistance with performance advertising and other regulatory guidance you can contact Aurora Compliance Solutions to learn about the benefits of having a compliance company like Aurora in your corner. Also, if you need help with performance reporting procedures or reviewing performance advertising materials Aurora’s experienced RIA compliance consultants are here to help; Contact Us and schedule a time to speak with someone from our RIA compliance team.