PETS: The Four Letters to Remember When Advertising In the Financial Markets

Photo by dmitriymoroz/iStock / Getty Images
Photo by dmitriymoroz/iStock / Getty Images

Many financial firms and investment managers want to advertise with social media but are confused about the regulations governing advertising for investment products and services – especially rules for social media.   On July 10, 2018, the Securities and Exchange Commission (SEC) reiterated their view that the Advertising Rule 206(4)-1 applies to social media with settlements against five firms for using testimonials to promote their firms or investment products.

This blog provides a summary of SEC advertising guidelines with a concentration on social media.  While it is not complete guide to advertising in the financial markets; it provides advertising violations that the SEC has been flagging and provides some “best practices” to stay out of the SEC’s crosshairs.

Various agencies issue rules or guidelines that regulate advertisements for investment products.  The biggest and most overreaching government entity is the SEC.  Other regulatory bodies, such as the Financial Industry Regulatory Authority (FINRA) or the Securities Investor Protection Corporation (SIPC), tend to enforce the SEC’s regulations or issue rules that comply with the spirit of SEC rules.

The SEC wants to prevent the "pump and dump" boiler room environment that was prevalent in the investment markets before 1933.  We are seeing the return of similar tactics in the Cryptocurrency sector.  Facebook, Google+, and Twitter have all banned advertisements from initial coin offerings (ICOs) or token launches because of "deception and fraud" associated with such advertising.

The SEC regulates advertising through Rule 206(4)-1 (the Advertising Rule) of the Investment Advisers Act of 1940 (the Advisers Act). The Advertising Rule was first adopted in 1962 and has been occasionally modified with guidance papers and other publications. 

The rule has come into focus again as promoters and entrepreneurs use Regulation Crowdfunding to raise capital.  As Julie DiMauro states in her March 18, 2018 article for Reuters, “The advisory landscape was different too (in 1962), with the commission focused mainly on retail investors, and not the most sophisticated products targeted to institutional and accredited investors.”

The SEC made the following statements regarding advertising in Regulation Crowdfunding (Reg CF): "an issuer may not advertise the terms for a Regulation Crowdfunding offering  except in a notice that directs investors to the intermediary's platform with the fact that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act, the name of the intermediary, and link directing the potential investor to the intermediary's platform."  In addition, the ad can include the terms of the offering such as the amount of securities offered, the nature of the securities, the price of the securities, and the closing date fore the offering period.  Finally, the ad for the Reg CF can include "factual information about the legal identity and business location of the issuer, the address, phone number, email address of a representative of the issuer with a brief description of the business of  the issuer."  Reg CF further states that "the issuer may communicate with investors and potential investors through communication channels provided on the intermediary's platform."  Finally, "An issuer is allowed to compensate others to promote its crowdfunding offerings through channels provided by an intermediary, but only if the issuer takes reasonable steps to ensure that the promoter clearly discloses the compensation with each communication."

According to Risk Alert Volume VI, Issue 6 (September 14, 2017), the Advertising Rule prohibits “an adviser, directly or indirectly, from publishing, circulating, or distributing any advertisement that contains any untrue statement of material fact, or that is otherwise false or misleading.”

Based on my 30 years of experience with investments and performance reporting, “misleading” is the operative word. Most firms run afoul with the SEC because of “misleading statements” as opposed to outright “false” advertising.  My read on the SEC’s definition of misleading is that any statement that does not have the precise wording required by the SEC is misleading. The SEC expects advisers to follow strict procedures and wording when reporting investment performance and substantial deviation from these procedures or phrasing is considered a violation of the Advertising Rule.

Most firms run afoul with the SEC because of “misleading statements” as opposed to outright “false” advertising.

According to the SEC, advertising includes the following activities:

1.       Any analysis, report, or publication concerning securities, or which is used in making any determination as to when to buy or sell any security, or which security to buy or sell,

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,

3.       Any other investment advisory service with regard to securities.

The Risk Alert specifically states that “Adviser statements made through electronic media, or other non-traditional styles of presentation may fall within the purview of the Advertising Rule.”

The Advertising Rule specifically prohibits four specific activities:

·        First, advertisements are prohibited from referring to any testimonial concerning “the adviser or any advice, analysis, report or other service rendered by the adviser.” 

·        Second, advisers are prohibited from advertising past recommendations that were or would have been profitable unless the advertisement sets out a list of all recommendations made by the adviser within the preceding period of not less than one year, and complies with other, specified conditions. 

·        Third, an advertisement cannot claim that “one graph, chart, formula, or device can determine whether to buy or sell a security.” 

·        Finally, no advertisements are allowed that offer purportedly free reports, analysis, or services unless the report, analysis, or other service will be provided without any obligation whatsoever.

Here are some of the most frequent advertising rule compliance issues identified by the SEC’s Office of Compliance Inspections and Examinations (OCIE).

Misleading Performance Results.

  • Investment advisers report investment performance numbers without deducting fees.
  • Performance results are compared to benchmarks that do not have similar investment characteristics and the advertisement did not reveal these differences.
  • Presentations used hypothetical back-tested performance information but did not reveal how the performance numbers were derived.

Claim of Compliance with Voluntary Performance Standards.  Advertisements claimed that performance numbers were calculated based on industry performance standards but were not compliant (the best sources of performance standards regulations are the Global Investment Performance Standards (GIPS) webpage: and the CFA:

Cherry-Picked Profitable Stock Selections.  OCIE has found examples where advisers only included profitable stock selections in their advertisements.

Misleading Selection of Recommendations.  OCIE observed that some firms had advertised the performance of a certain number of best performing holdings but did not publish an equal number of worst performing holdings.

Deficient Compliance Policies and Procedures.  Investment advisory firms must have procedures and policies in place to prevent deficient advertising practices.

Misleading Use of Third Party Rankings or Awards.  Examples included advisers advertising accolades that were received based on applications with false information or awards that had been earned several years prior to the advertisement

Testimonials.  Testimonials from clients are forbidden with no exceptions.  This includes client endorsements “published in firm websites, social media pages, reprints of third party articles, or pitch books.”  In a separate bulletin, the SEC ruled that an investment adviser’s “like” of a favorable comment on a media channel amounted to a testimonial.

Testimonials from clients are forbidden with no exceptions.  This includes client endorsements “published in firm websites, social media pages, reprints of third party articles, or pitch books.” 
— SEC Risk

In summary, be very cautious when advertising investment products and services.  Use the acronym PETS to stay of out of trouble:

Precise: Use precise language in advertisements to describe investment performance or other facts about your firm.  Learn the GIPS methodology and strictly adhere to the methodology when calculating investment performance.

Exaggerate: Do not exaggerate or use superlatives in your advertisements.  Imprecise wording will bring the SEC’s attention and generally lesser punishments, exaggerations that could be deemed as falsehoods will bring the full wrath and fury of the SEC.

Testimony:  Do not use testimony or endorsements in any form.

Symmetry: Present balanced reports of “winners and losers” in advertisements and presentations. Do not use testimonials to promote your investment firm or your past investment record.   

Follow these four simple principles and you should be able to advertise and still sleep at night.


Vernon H. Budinger, CFA and CAIA


Neural Profit Engines

(626) 664-9017