It took almost 60 years, but the SECs proposed changes bringing the Advertising Rule into the 21st century appear to be finding a welcome reception, albeit with some concerns, among those in the investment adviser community.
Any adviser considering the use of back-tested performance in its advertising would be wise to think twice. The SEC, which has made no secret in recent years of its concerns about this practice, may well look further into firms that employ it, as one advisory firm recently discovered.
The SEC for several years has made it clear that it does not like the use of hypothetical and/or back-tested performance results in advertising. A recent settlement not only shows that the agencys Division of Enforcement has not changed its view, but that it may file enforcement actions against advisers that blend back-tested performance results with actual results.
Theres talk of the SEC revising parts of the Advertising Rule, including its ban on testimonials. That day may come, perhaps sooner than later - but until it does, the agencys Division of Enforcement is making clear that violations of the Advertising Rule, in particular its testimonial ban, will be prosecuted.
Its beginning to look like the next 12 months may be a period of wish fulfillment for advisers, funds and attorneys who have long called for the SEC to reform some of its existing Advisers Act rules, the Advertising Rule and the Custody Rule among them.
Reform of Rule 206(4)-1, the Advertising Rule, has long been a goal of many in the investment advisory community. With the new SEC chair, Jay Clayton, now indicating that he too would like to see some long-term agency rules revisited, it is beginning to look like 2018 may be the year when the Advertising Rule is brought in line with the realities of todays business world.
Advisers now have even less of an excuse for violations of Rule 206(4)-1, the Advertising Rule, than they did before. With the Office of Compliance Inspections and Examinations issuance of a risk alert listing the most frequent Advertising Rule compliance issues identified during examinations, the agency is leaving little doubt as to what may constitute a violation.
Use of hypothetical and/or backtested performance results in marketing is a surefire way to draw attention from SEC staff. A new settlement with an advisory firm should serve as a potent reminder to anyone who may have forgotten.
Sometimes even the big players need to learn a lesson about disclosure. Morgan Stanley Smith Barney and Citigroup Global Markets found this out the hard way when they each settled charges from the SEC that they made false and misleading statements about a foreign exchange trading program they sold to investors.
The SEC has made no secret about its focus on how advisers and their sub-advisers represent investment performance. Recent agency settlements with advisory firms highlight the need for advisers to take necessary steps so they do not find themselves in the crosshairs.