Download ST Advertising PPT - IA Traing Dallas 2010

Investment Adviser Training
Dallas, TX
August 8-11, 2010
The Basics of Investment
Adviser Advertising
By Steve Thomas – Chief Compliance Examiner
SD Division of Securities
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WHAT IS AN ADVERTISEMENT?
SEC Rule 206(4)-1(b) generally defines an
advertisement as covering, in addition to TV
and radio, any written communication –
including notices, circulars and letters –
addressed to more than one person.
Including any notice or other announcement
appearing in any publication that offers
investment advisory services with regard to
securities, as well as other specified
services.
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WHAT IS AN ADVERTISEMENT?
From NASAA Modules –
SEC Rule 206(4)-1(b) defines advertisements as 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
which is to be used in making any determination as to when to
buy or sell any security, or which security to buy or sell, 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.
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Advertising – Definition

Advertisements may include notices in publications
relating to analysis and reports, form letters,
electronic items and other standardized materials
that the adviser provides.
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Advisers are required to keep copies of
advertisements, pursuant to the books and records
rules for investment advisers. (3 or 5 years – first 2 years
easily accessible)
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Record Retention: The SEC rule only requires that
ads sent to 10 or more persons be kept, but the
NASAA model rule (Rule 203(a)-1) for adviser books
and records requires ads to two or more persons to
be kept in the file.
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Advertising – Definition (cont.)
Key Phrase:
“written communication addressed to more than one person”
The SEC and most state regulators have adopted a broad
interpretation of this phrase:
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An RIA’s quarterly client review letter that is customized
for each client could still be considered an
advertisement.
The copy and distribution of a newspaper article
concerning the adviser could also qualify
Bottom Line – You should broadly interpret this
phrase to mean “any written communication
DIRECTED to more than one person”
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SEC Rule 206(4)-1(a)
(Section 206 – Antifraud Provisions – Allows for Civil
Prosecutions by SEC and/or Criminal Prosecution by DOJ)
FIVE RESTRICTIONS
The rule bars advertisements that directly or indirectly:
 Refer to Testimonials.
 Refer to past investment recommendations unless
specific disclosures appear.
 Rely on a graph, chart, formula, or other device to
determine investment strategy unless the ad discloses
specific details and the limitations.
 State that certain adviser services are free, unless true.
 Contain any untrue statements of material fact or which
are otherwise false or misleading.
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Using Testimonials in Advertising
The first restriction –
BARS AN INVESTMENT ADVISER FROM USING
TESTIMONIALS OF ANY KIND!
The SEC and State Regulators have determined that
client testimonials are inherently misleading
because they highlight favorable client experiences
while ignoring unfavorable ones.
In addition, testimonials communicate that all clients
typically have a favorable experience, even though
this may not be true.
Finally, if testimonials were allowed, advisers might be
tempted to provide extraordinary services to a
select few clients with the goal of soliciting their
testimonials and endorsements in advertising.
**There are no provisions that would allow for any sort of testimonial –
EVEN IF DISCLOSURES ARE GIVEN.
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Performance Advertising
The second prohibition prevents an adviser from
advertising past, specific investment recommendations
that were or have been profitable, unless the ad fully
discloses all recommendations for at least the past
year.
These past year disclosures must include:
 the security recommended;
 the date, price and nature of the recommendations
(buy, sell, or hold);
 the price triggering the recommendation (and the
most recent price);
 a mandated cautionary legend. (past performance…)
This mandate to include ALL recommendations prevents
the adviser from cherry-picking only his best
recommendations!
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Performance Advertising
NASAA’s NEMO Modules have entire
sections on performance advertising.
The Performance Advertising Modules are
divided into 3 sections:
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1) Figures based on ACTUAL portfolios
2) Figures based on MODEL portfolios
3) Section 3 deals with specifics on how
the performance results were calculated.
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Use of Graphs, Charts, etc.
The third restriction prevents an adviser from using any
graph, chart, formula, or other device (timing, etc.) in
advertising that is designed to be used by a consumer to
determine when to make investment decisions unless it
prominently discloses the limitations and difficulties
involved.
A typical violation of this provision would be an advisor
advertising that a particular “market-timing formula” or
other “proprietary trading system” can dictate when and
what securities should be bought and sold to make a
profit – without disclosing the risks involved and that you
could also lose money.
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Advertising “FREE” Services
The fourth restriction prohibits an adviser from
advertising that any of the services it provides
are free of charge, unless the service truly is
free.
While this may seem obvious, a typical violation is
found when an adviser states that a particular
service is free – but only upon the purchase of
other adviser services.
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Untrue, False, or Misleading
Statements
The fifth, and most all encompassing,
restriction prohibits any advertising that
“contains any untrue statement of material
fact, or which is otherwise false or
misleading”.
This provision is limited only by the
imagination of the adviser who is seeking
to mislead or deceive. Sometimes these
statements are subtle – sometimes they
can be very “creative”.
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Untrue, False, or Misleading
Statements
Some Typical Examples:
 Overstating Amount of AUM
 Misrepresenting Educational Background or Work
Experience of Personnel
 Overstating Longevity of the Firm
 Non-Disclosure of How Investment Performance is
Calculated (Actual, Hypothetical, etc.)
 Non-Disclosure or Misrepresentation of the Time Frame
Involved on Quoted Investment Performance
 Inadequate, Inappropriately Displayed, or Missing Key
Disclosures
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Using “Registered Investment
Adviser” and “RIA” in Advertising

There is no rule requiring advisers to include
the phrase “Registered Investment Adviser”
on Letterhead, Stationary, or Business Cards.
However, there is a rule prohibiting the use
of these terms where the adviser is implying a
particular level of training, education,
expertise, or competence.
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Using “Registered Investment
Adviser” and “RIA” in Advertising

Using the initials “RIA” or “R.I.A.” after a
person’s name is improper and misleading:
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1) These initials have no meaning to the general
public;
2) These initials are not a professional designation
or degree;
3) The ENTITY, not the individual representative,
is the Registered Investment Adviser (This is true
even with sole-proprietorship registrants.)
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Advertising – Web Based
The NASAA Interpretive Order (1997) states that
neither an adviser (RIA) nor an investment
adviser representative (IAR) will be considered
to be doing business in a state solely because
it or he or she distributes information on
available products and services through the
Internet if certain conditions are observed.
These conditions include the following:
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Advertising – Web Based

1) The internet communication must contain
a legend or disclosure that clearly states:
The adviser (RIA) or IAR may only transact
business in a state where the RIA and/or IAR
is first registered, excluded, or exempt from
registration and that no follow-ups or
individualized responses that involve the
rendering of investment advice for
compensation will be allowed unless the RIA
and/or IAR is/are properly registered.
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Advertising – Web Based
 2)
All internet communications must be
monitored and contain some sort of
mechanism (technical limitations or
policies and procedures) for ensuring
that no individualized follow-ups are made
with prospective clients unless the adviser
and/or IAR is registered, exempt, or
excluded from registration.
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Advertising – Web Based

3) The internet communication must not include
any individualized investment advice for
compensation; it must be limited to
disseminating general information about
products and services.

4) If the internet communication comes from an
IAR, it must include a prominent disclosure of
the related adviser’s (RIA’s) identity, and the
adviser (RIA) remains responsible for reviewing
and approving the communication.
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Advertising – Social Networking
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Advertising – Social Networking
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WHERE TO LOOK:
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Google
Linked-In
Facebook (Look for Non-Restricted Pages)
My Space
YouTube
Twitter
Googleblog, Google Buzz
Bing
Yahoo! 360°plus
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Advertising – Social Networking
Wikipedia (http://en.wikipedia.org)
List of Social Networking Websites
Wikipedia note: This list is not exhaustive, and is limited
to notable, well-known sites.
192 Sites!!!
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Advertising –
Social Networking Sites
Just a Few Examples
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aSmallWorld – European jet set and social elite worldwide
Blip – Norwegian Community
Cake Financial – Investing
Classmates.com – School, college, work and the military
Eons.com – for baby boomers
FilmAffinity – Movies and TV Series
Fubar – dating, an “online bar” for 18 and older
Geni.com – Families, Genealogy
Hotlist – Geo-Social Aggregator rooted in the concept of
knowing where your friends are, were, and will be.
Meettheboss – Business and Finance community worldwide
MyChurch – Christian Churches
OneClimate – Not for Profit Social Networking on Climate
Change
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Advertising –
Social Networking Sites
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Open Diary – First Online Blogging Community – 1998
PartnerUp – Site for Entrepreneurs and Small Business
Qapacity – Business-Oriented Social Directory
ReverbNation.com – For Musicians and Bands
Ryze – Business
SocialVibe – Social Network for Charity
Something Awful – General, Humor Based
Vampirefreaks.com – Gothic and Industrial Subculture
Yelp,Inc. - Local Business Review and Talk
This was a list of sites (minus Fubar ) obtained during
an actual exam that an adviser had written down and
was considering as part of his new “advertising
campaign”.
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Advertising – Social Networking
Latest Developments – New Firms
Emerging to Monitor Social Networking
Sites and Usage
Socialware, Inc. – 2010 IAR Survey
Usage of Social Media Sites:

60% Currently Using Social Media (expected to grow
to 71% by end of year)
 1.8 – Average # of Sites Used
(LinkedIn is most popular site – used by 57% of
respondents)
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Advertising – Social Networking
Socialware, Inc. – 2010 IAR Survey
Impact of Using Social Media:
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100% Believe – Positive Impact
60% Believe – New Client Source
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Advertising – Social Networking
Socialware, Inc. – 2010 IAR Survey
Compliance Issues:
43% who are using social media either do not
have or are unsure of firm policies
 39% that are using social media sites for
business are prohibited from using them by
their firms
 40% believe the firm’s social media policies
are detrimental to their job performance
 66% do not archive social media data

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Advertising – Social Networking
Social Networking Is Here To Stay!!
All Jurisdictions Need to Develop
Examination Procedures to Monitor
RIA/IAR Activities on These Sites!
Consultant’s Quote on Social Media Usage –
“RIA’s therefore have a good deal of flexibility in
marketing on social media. They need only follow four
basic principles, in our view: Treat all social
networking as advertising, monitor frequently, keep
comprehensive records, and stay away from
testimonials.”
It’s our job to regulate and monitor these activies! 29
Great References and Resources!
Here are some great resources and
reference material for you to use in
determining if an RIA or IAR’s
advertisements are compliant:
 NASAA Nemo Modules
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Investment Adviser Exam Module
Instructions – (Pages 5&6 – Copies
Included in Binders)
Performance Advertising Sub-Module
(Includes 12 Pages of Performance
Adverstising Explanation and Instruction)
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Great References and Resources!
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Journal of Accountancy – Article by Brian
Carrol entitled “Investment Adviser Advertising
– For the unitiated, the SEC’s complex rules can
have unintended consequences.” (Copies of this
article have been provided.)
SEC Rule 206(4)-1(a)(5) and NASAA Model Rule
102(m)(13). Performance advertising is subject to
prohibitions on false or misleading advertisements.
The most comprehensive guidelines showing how
performance may be presented are in the SEC’s
no action letter to Clover Capital. (Clover
Capital Management, Inc. (October 1986)) –
(Copy in Binder)
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Great References and Resources!
Social Networking:
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FINRA Regulatory Notice 10-06 – Social Media
Web Sites – January 2010
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How SEC Regulations Apply to RIA’s Using
Social Media – One Page Summary
www.triplestopLLC.com
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Socialware.com – Several White Papers are
available for download. (Facebook, LinkedIn,
Twitter, etc.)
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Investment Adviser Training
Dallas, TX
August 8-11, 2010
The Basics of Investment
Adviser Advertising
By Steve Thomas – Chief Compliance Examiner
SD Division of Securities
33