Advertisement Restrictions Applicable to Investment Advisers in the Internet Age

Jul. 19, 2018

It is no secret that social media continues to provide useful platforms for business owners to advertise their services—and for consumers to vet service providers.  But not all professional services firms are treated equally under the law when it comes to what they can post online.  Registered investment advisers (RIAs), in particular, are subject to tight restrictions on what they can include in online advertisements.  Earlier this month, the SEC reminded RIAs of this fact by publishing five settlement orders involving RIAs that had unlawfully included client testimonials on their websites.

What does the law say?

Section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”) makes it unlawful for RIAs to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative.  Rule 206(4)-1, promulgated under the Advisers Act, identifies certain statements that, when published in an advertisement by an RIA, constitute a violation of Section 206(4).  In summary, federal law renders it unlawful for RIAs “directly or indirectly, to publish, circulate, or distribute any advertisement” that:

  • Includes testimonials concerning the adviser or any advice, analysis, report or other service of the adviser;
  • Refers to past specific recommendations that were or would have been profitable to a client (unless the adviser also includes the specific information about past recommendations required under the Rule);
  • Represents that any graph, chart, formula or other device being offered can, in and of itself, be used to determine which securities to buy or sell, without prominently disclosing the limitations with such a device; or
  • Contains any untrue statement of a material fact, or that is otherwise false or misleading.

Minnesota law, too, incorporates by reference the above restrictions. Specifically, pursuant to Minn. Rule 2876.5023 Subpart 1(N), a Minnesota-registered investment adviser is prohibited from engaging in fraudulent, deceptive, or manipulative conduct, which includes “publishing, circulating, or distributing any advertisement which does not comply with Rule 206(4)-1 under the Advisers Act.”

Examples of Prohibited Advertising

The SEC has found the following activities to violate Rule 206(4)-1:

What should RIAs do to avoid advertising violations?

First and foremost, RIAs should implement policies and procedures reasonably designed to prevent deficient advertising practices.  (Failure to do so, in and of itself, may be a securities law violation.)  For example, the firm should ensure that a supervisor or compliance officer reviews all advertising materials before they are published or posted online.  The firm should also retain records of such reviews consistent with applicable books and records requirements. 

Further, RIAs should be careful to “think outside the box” as to whether, when and to whom an advertisement may be deemed misleading.  Put yourself in the shoes of a client inexperienced with financial matters who visits your website or office, and consider what that client might find enticing about working with you or your firm.  Are you holding yourself out as an expert in any specific area or product?  Do you display data, awards or certifications highlighting your reputation or accomplishments?  If so, review those materials against Rule 206(4)-1, applicable state regulations—  and your own conscience— to feel assured that such representations are warranted and true.

Written By:
Brian Edstrom

Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having spent several years working for federal and state regulators in Washington D.C. and Saint Paul, MN before entering private practice. Brian assists clients in all aspects of working with securities regulators, whether it be to obtain a license or registration, prepare for an audit, or respond to an enforcement investigation.  Brian also regularly advises clients on their general business needs, particularly surrounding raising money through securities offerings.

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