Stephen P. Wilkes, Esq. Livia Q. Aber, Esq.

1. Risk Alert on Advertising Rule • and • Performance Reporting Stephen P. Wilkes, Esq. Livia Q. Aber, Esq.

2. Agenda • Overview • Antifraud Rule • Advertising Rule • 9/14/17 Risk Alert – Advertising Rule • Performance Reporting • Model and Actual Performance • Portability • Backtested Performance • Recordkeeping Requirements • Global Investment Performance Standards (GIPS)

3. Overview

4. Overview – Anti-fraud Rule • Anti-fraud Rule - §206 of Investment Advisers Act (“Advisers Act”) • Unlawful to employ any device, scheme or artifice to deceive or manipulate any client or prospective client • Unlawful to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client. • Intent is not relevant. (SEC v Capital Gains Research) • Additional rulemaking power to define acts that are fraudulent or deceptive and to establish rules reasonably designed to prevent fraud.

5. Overview – Advertising Rule • Advisers Act Rule 206(4)-1– Advertising Rule • “Advertisement” is defined broadly • Any “notice, circular, letter or other written communication” to “more than one person”. Any “notice or announcement in any publication or by radio or television, which offers…any…investment advisory service with regard to securities.” • May include statements made though social media • Oral communications, tailored communications, certain investment company (mutual fund) communications are NOT advertisements

6. Overview – Advertising Rule(cont’d) • Guidance in the form of Commission opinions, court cases, enforcement proceedings, no-action letters, guidance updates • Four specific prohibitions and a “catch-all” provision • Specific prohibitions • Testimonials • Past Specific Recommendations • Graph, charts, formula • Statement to effect that something is “free”

7. Overview – Advertising Rule(cont’d) • “Catch-all” – Untrue statement of material fact, or which is otherwise false or misleading • Criteria for false/misleading • Client sophistication • Form/content • Implications and inferences

8. Risk Alert – Advertising Rule (Sept. 14, 2017)

9. Risk Alert – Advertising Rule (Sept. 14, 2017) • 6 compliance issues • Misleading performance results • Deduction for fees • Limits of the comparison to benchmark • Hypothetical and back-tested performance results must include explanation and other material info

10. Risk Alert – Advertising Rule (Sept. 14, 2017) • Misleading one-to-one presentations • Performance results did not include relevant disclosures • Performance results did not reflect deduction of advisory fees and client’s return would be reduced by such fees, expenses • Misleading claim of compliance with voluntary performance standards • Cherry-picked profitable stock selections

11. Risk Alert – Advertising Rule (Sept. 14, 2017) • Misleading selection of recommendations • Compliance policies and procedures lacking • Advertising materials must be reviewed and approved first • When using composites, policies and procedures needed to determine the accounts to be included in performance calculations • Confirming accuracy of performance results

12. Risk Alert – Advertising Rule (Sept. 14, 2017) • 3 observations from Touting Initiative • Third-party rankings or awards • Advertisement included a favorable ranking that had been obtained through misrepresentation • Marketing materials referenced stale rankings • Advertisements were misleading when they failed to (i) include selection criteria, (ii) identify party creating/conducting the raking or award, or (iii) disclose adviser paid to participate in survey. • Professional designations • Testimonials

13. Performance Reporting

14. Performance Reporting • Background • No prohibition per se in the Rules • Performance reporting guidelines established in Clover Capital Management no-action letter (1986) • SEC guidance has evolved over the years, from “inherently problematic” to “facts and circumstances.” (Clover)

15. Performance Reporting (cont’d) • Reporting of Model and Actual Performance – misleading practices • Failing to disclose effect of material market or economic conditions on results portrayed • Failing to meet “net of fees” requirement • Failing to disclose reinvestment of dividends and earnings • Discussing profit potential without similar discussion on possibility of loss • Comparing results to index without disclosure of relevant material facts • Disclosure of material conditions, objectives or investment strategies

16. Performance Reporting (cont’d) • Model Performance – misleading practices • Failing to disclose inherent limitations of the model • Failing to disclosure of material changes, if applicable, to conditions, objectives or investment strategies. • Failing to disclose, if applicable, of relevance of securities and services in the model compared to the investment adviser • Failing to disclose, if applicable, of actual investment results that are materially at variance from model • Actual Performance – misleading practice • Select group of investment adviser’s clients

17. Performance Reporting(cont’d) • Net of Fees Exception – “Gross of Fees” • Side by Side Gross and Net of Fees • Equally prominent, disclosures • Custodial Fees • One to One Presentation. Requires special written disclosures. • Model Advisory Fees Deduction • Wrap and non-wrap accounts • Multimanager Account • Show on net basis with regard all transaction costs and fees paid to adviser or affiliates

18. Performance Reporting • Portability • Performance of Manager at Prior Firm. “No other person” • Similar accounts • All accounts reported within advertisement • SEC compliant • Fully disclosed • Recordkeeping • Performance of Accounts Carried Over from Prior Firm. (Great Lakes Advisors, Inc. No-Action Letter) • Performance of JV Partner. (Taurus Advisory Group, Inc. No-Action Letter). • Continuing Role of Manager. (Horizon Asset Management LLC No-Action Letter).

19. Performance Reporting • Backtested Performance • Not per se or intrinsically misleading, but…….

20. Recordkeeping • Recordkeeping • Rule 204-2 • Working papers and all other records necessary to form the basis for or demonstrate the calculation of the performance or rate of return. • 5 year retention period. Also for the entire measure of reporting period. • Policies/Procedures.

21. Global Investment Performance Standards (GIPS) • Voluntary standards • SEC enforcement – verify claim of compliance. If conflict, SEC requirements should govern • Total return, accrual accounting • Time-weighted return • 10 year record

22. Important Information This presentation is intended for general informational purposes only, and it does not constitute legal, tax or investment advice from The Wagner Law Group. Financial advisors and other plan service providers should consult with their own legal counsel to understand the nature and scope of their responsibilities under the Advisers Act, ERISA and other applicable law.

23. Risk Alert on Advertising Rule • and • Performance Reporting Stephen P. Wilkes, Esq. Livia Q. Aber, Esq. A0205873