ADVERTISING & SOCIAL MEDIA
"For the purposes of Rule 206(4)-1(b), the term 'advertisement' shall include any notice circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report or publication concerning securities or (2) any graph chart formula or other device to be used in making any determination as to when to buy or sell any security or which security to buy or sell, or (3) any other investment advisory service with regard to securities."
-See Securities and Exchange Commission
"Adoption of Rule 206(4)-1 Under the Investment Advisers Act of 1940"
Nov 2, 1961
ADVERTISING
An investment adviser is subject to the general anti-fraud provisions of Section 206 of the Investment Advisers Act, regardless of whether the adviser is exempt from registration with the SEC. Section 206 makes it unlawful for any investment adviser, whether registered or unregistered, to directly or indirectly engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative. Rule 206(4)-1 applies only to advisers that are registered or are required to be registered with the SEC and addresses four specific advertising practices: (1) testimonials, (2) past specific recommendations, (3) use of charts and formulas, and (4) free reports or services. The rule gives the SEC broad discretion in determining which business practices it deems to be false and misleading. Advertising, including performance advertising is principally regulated under the anti-fraud provision of Section 206 and enforced by the SEC through a series of "no-action" and interpretive letters under the rule. Compliance with the rule can be highly subjective. Without well articulated guidelines and a strict internal review process, advertisement disclosures risk being changed arbitrarily, resulting in inconsistent disclosures across the firm's platform and exposing the firm to the risk of enforcement action under Section 206. Accordingly, it is critical that the firm establish and adhere to specific communication protocols relative to performance, the use of rating agencies, investment strategy, firm governance and other disclosures, and comply with the recordkeeping requirements under the rule, including maintaining work papers that support return calculations, and copies of all advertisements and communications that the firm has circulated. Private fund advisers that engage in general solicitation of private offerings must also consider evidence of compliance with the "accredited investor" test of new Rule 506(c) under Regulation D of the Securities Act of 1933. The SEC will likely ask a registered adviser to produce each pitch book, DDQ, private fund offering memorandum, and any firm profile provided to existing clients or used to solicit new clients and will review the same for any discrepancies, however nuanced, in the firm's disclosures. The SEC will likely ask the firm to explain its approval process for marketing materials, use of social media, performance calculations, and compliance with the regulatory requirements under the rule, including third-party content common with social media use. A well crafted advertising "playbook" is the firm's first defense against a deficiency or enforcement action.
SOCIAL MEDIA
In March, 2014 the SEC issued additional guidance regarding investment advisers' use of public commentary on social media and on their own websites. The guidance recognizes the increased use of the internet and social media by advisers and their service providers for research and due diligence, and is intended to assist advisers on the application of the rule's prohibition on the use of testimonials. While the term "testimonial" is not defined under Rule 206(4)-1, the SEC has consistently interpreted that term to mean a "statement of a client's experience with, or endorsement of, an investment adviser." Applying this interpretation, a "like" on Facebook or other social media site may constitute a testimonial. The guidance can be summarized to require that three conditions must be met: (1) the social media site must be independent of the adviser. For example, and adviser or its associates may not author or submit any content to the site; (2) there must be no material connection between the adviser and the social media site. In other words, the adviser may not compensate an associate or client for authoring or submitting a commentary to a social media site; and (3) an adviser must publish all comments, good and bad, and is prohibited from cherry-picking or giving prominence to only the positive commentary. The SEC will likely inquire on how the adviser monitors the use of social media. An adviser's written policies and procedures should clearly articulate what is permitted and prohibited, and must communicate the same to all its associates through training or other means.