Marketing & Advertising Pitfalls: What’s an Investment Adviser to Do?

In September 2017, we provided a summary of the SEC’s Advertising Risk Alert noting that the most common deficiencies cited were all related to misleading performance advertising. Now we will look more broadly at the marketing and advertising challenges advisers face and offer guidance on how to avoid common marketing and advertising pitfalls, namely the use of testimonials and endorsements, social media, and performance advertising.

Rule 206(4)-1 (the “Testimonial Rule”) explicitly prohibits testimonials and endorsements of any kind. The SEC consistently interprets testimonials to include any statement expressing a client’s experience with an advisor or endorsement of an adviser. Testimonials imply that the experience of the client providing the testimonial is typical of the experience other persons might have working with that adviser. Such expressions are therefore considered to be misleading. Advisors to private equity funds must be mindful of the fact that the SEC has determined that favorable statements made by portfolio companies about an advisor are also testimonials prohibited by the Testimonial Rule. Care should be taken to review your firm’s website, reprints of third-party articles, press releases, pitch books, and social media pages. These are the typical places where you may find inadvertent testimonials. To avoid the testimonial pitfall, we recommend a thorough review of all marketing and advertisement material at least annually.

Specifically, advisers need to be extremely careful with inadvertent use of testimonials and endorsements in social media. In an SEC alert on the matter, the SEC has said that “social media plug-ins, such as the “like” button, could be interpreted as a testimonial”. Some advisers include articles about the advisor written by another company or service on their social media site, which could be considered an endorsement and, therefore prohibited under Rule 206(4)-1. The SEC has provided very little guidance to clarify social media endorsements. Many advisors have turned off the endorsement feature on their sites to avoid the testimonial issue or have taken a very conservative approach. Some firms have prohibited the use of social media by their employees for business purposes. Wherever your firm draws the line on the use of social media by the firm and its employees, be sure to document it in your policies and procedures manual. Periodic testing of these policies and procedures is a good way to ensure compliance.

Testimonials and endorsements are not the only pitfalls. Another advertising and marketing pitfall is misleading statements on performance. For most advisers, the use of performance material is an important part of their advertising and marketing strategy. Common performance advertising and marketing mistakes include:

  1. failing to provide the source of statistical information;
  2. failure to include a full description of each index mentioned;
  3. inadequate disclosure about the material differences between a benchmark used for performance comparison and the firm’s investment strategy;
  4. disclosure fails to mention whether the performance results include the reinvestment of dividends and other earnings; and
  5. excluding a statement that past performance is not a guarantee of future performance.

Other pitfalls include showing only gross-of-fee performance outside of a one-on-one presentation. While showing gross-of-fee only performance is permitted under the Global Investment Performance Standards (GIPS), the SEC only allows gross-of-fee use in one-on-one in person presentations as outlined in the SEC’s No Action Letter to the Investment Company Institute.

Important factors to consider with performance material are the accuracy and timeliness of the data and appropriate disclosures. Performance material must not be false, misleading, or contain any untrue statement. This includes clearly labeling hypothetical performance and not linking hypothetical returns to actual performance returns. Disclosures should state that hypothetical performance has inherent conflicts and limitations including the fact that it is not based on actual trading, the material economic and market factors that might have had an impact on the manager’s decision-making, the inception date for “since inception” performance, and provide disclosures referenced within a presentation.

The most common way to avoid advertising and marketing pitfalls is through appropriate disclosures, appropriately documented policies and procedures, and accurate recordkeeping. A solid marketing program for investment advisers involves written policies and procedures and accurate recordkeeping of support for the marketing material issued.


For a review of your Social Media Policy, marketing materials, and policies and procedures, or help with all other compliance-related matters, contact ICSGroup. We’re here to help.