General
Advisers must exercise extreme caution when advertising. Every year the SEC sanctions advisers for making misleading advertisements or otherwise violating the advertising rules in the Advisers Act. Such rules define "advertisement," prohibit certain types of advertisements, and strictly regulate performance advertisments.
Definition of Advertisement
A criticial first step is to determine whether a written communication meets the definition of advertisement. "Advertisement" is defined in - (Rule 206(4)-1(b)). Oral communications are not advertisements. However, fradulent or misleading prohibitions are prohibited. (Section 206)
Prohibited Advertisements
The next critical step is to determine if it is a prohibited advertisement, especially whether it might be false or misleading in some context. The following types of advertisements are prohibited:
Past Performance
Advisers must carefully review the advertisement rules and SEC staff interpretative positions before advertising past performance and engaging in backtesting.
Records
An adviser must maintain:
- copies of all written communications, including advertisements, sent to clients and prospective clients relating to its investment recommendations, handling of customer funds or securities, and client transactions. If an advertisement is sent to more than 10 persons, the adviser does not have to maintain the name and address of each recipient. However, an adviser must maintain any list it makes that contains a list of recipients of an advertisement (sometimes called a distribution list) (Rule 204-2(a)(7));
- a copy of each advertisement, notice, circular, newspaper article, investment letter, or other communication that it sends to 10 or more persons. Please note that if the letter or commuincation contains an investment recommendation, the adviser must maintain a copy of the communication as well as a document that supports or states the basis of the recommendation (Rule 204-2(a)(11)); and
- all working papers and other records necessary to form the basis for or demonstrate the calculation of the performance or rate of return of a composite or managed accounts in an advertisement or other communication sent to 10 or more persons. (Rule 204-2(a)(16))
Advertisements and other communications required to be maintained by Rule 204-2(a)(7) must be kept for five years from the end of the fiscal year during which the last entry was made on such records. Advertisements and other communications required to be maintained by Rules 204-2(a)(11) and (16) must be kept for five years from the end of the fiscal year during which the investment adviser last published or distributed the advertisement or other communication. (Rule 204-2(a)(16))
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