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Investment Adviser Training Dallas, TX August 8-11, 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. WHAT IS AN ADVERTISEMENT?.

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Investment Adviser Training Dallas, TX August 8-11, 2010

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  1. Investment Adviser TrainingDallas, TXAugust 8-11, 2010 The Basics of Investment Adviser Advertising By Steve Thomas – Chief Compliance Examiner SD Division of Securities

  2. 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.

  3. WHAT IS AN ADVERTISEMENT? From NASAA Modules – SEC Rule 206(4)-1(b) defines advertisements as any notice, circular, letter or other written communicationaddressed 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.

  4. 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. • 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) • 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.

  5. 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: • 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”

  6. 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.

  7. 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.

  8. 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!

  9. Performance Advertising NASAA’s NEMO Modules have entire sections on performance advertising. The Performance Advertising Modules are divided into 3 sections: • 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.

  10. 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.

  11. 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.

  12. 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”.

  13. 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

  14. 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.

  15. 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: • 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.)

  16. 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:

  17. 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.

  18. 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.

  19. 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.

  20. Advertising – Social Networking

  21. Advertising – Social Networking • WHERE TO LOOK: • Google • Linked-In • Facebook (Look for Non-Restricted Pages) • My Space • YouTube • Twitter • Googleblog, Google Buzz • Bing • Yahoo! 360°plus

  22. 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!!!

  23. Advertising – Social Networking Sites Just a Few Examples • 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

  24. Advertising – Social Networking Sites • 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”.

  25. 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)

  26. Advertising – Social Networking Socialware, Inc. – 2010 IAR Survey Impact of Using Social Media: • 100% Believe – Positive Impact • 60% Believe – New Client Source

  27. 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

  28. 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 • 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)

  30. Great References and Resources! • 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)

  31. Great References and Resources! Social Networking: • FINRA Regulatory Notice 10-06 – Social Media Web Sites – January 2010 • How SEC Regulations Apply to RIA’s Using Social Media – One Page Summary www.triplestopLLC.com • Socialware.com – Several White Papers are available for download. (Facebook, LinkedIn, Twitter, etc.)

  32. Investment Adviser TrainingDallas, TXAugust 8-11, 2010 The Basics of Investment Adviser Advertising By Steve Thomas – Chief Compliance Examiner SD Division of Securities

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