Rule 206(4)-1(a)(5)
Rule 206(4)-1(a)(5) prohibits advertising that is misleading. The Advisers Act does not expressly permit or prohibit peformance advertisements. It is the SEC's view that an advertisement containing performance information may be misleading in violation of Rule 206(4)-1(a)(5) depending on the facts and circumstances of the advertisement. The SEC has stated that if the particular advertisement implies, or a reader infers from it, something about the adviser's competence or future investment results that would not be true had the advertisement included all material facts, then the performance advertisement is misleading. Because of this vague standard, advisers advertising or otherwise disseminating their performance look to specific guidelines that have been established by the SEC in no-action letters.
Fortunately, the SEC has provided more specific guidance regarding specific types of performance advertisements. The required disclosure depends on the type of performance information, how it is presented and where it was achieved.
Actual Performance Results
Model Performance Results
One-on-One Presentations
Use of Performance Achieved at a Prior Firm
Gross v. Net Expenses
Performance shown in composites based on actual or model results must be shown on a "net" basis. This means that the expenses that the clients paid must be deducted. Such expenses include advisory fees, brokerage commissions, and other client expenses. See Clover Capital Management, Inc. (pub. avail. Oct. 28, 1986).
The SEC staff, however, has allowed a number of exceptions to the "net of expenses" rule, including:
- gross and net performance side by side: an adviser's advertisement may contain performance both gross and net of fees provided that the performance fees are presented in an equally prominent manner. See Association for Investment Management Research (pub. avail. Dec. 18, 1996).
- one-on-one presentations: gross performance figures may be presented in one-on-one presentations to high net worth prospective clients and consultants, provided certain conditions are met. See Investment Company Institute (pub. avail. Sept. 23, 1988).
- custodial fees: performance figures may be presented in an advertisement without reflecting custodial fees. See Investment Company Institute (pub. avail. Aug. 24, 1987);
- model fee exception: an adviser that advertises the performance of a composite for which it employs a particular strategy may deduct model fees equal to the highest fee of accounts for which it employs that strategy during the performance period. See J.P. Morgan Investment Management, Inc. (pub. avail. May 7, 1996); and
- multi-manager accounts: an adviser that manages only a portion of a client's account may advertise performance relating to only that portion of the account. In advertising that portion, the adviser may show performance net of transaction costs and all advisory fees paid to the adviser. See Association for Investment Management Research (pub. avail. Dec. 18, 1996).
Records
Rule 204(4)-2(a)(16) requires an adviser to maintain a copy of all accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance of any or all managed accounts in any advertisement or other communication that the adviser distributes to 10 or more persons. The retention of all account statements (if they reflect all client transactions) and all worksheets necessary to demonstrate the calculation of the performance of all managed accounts will satisfy the Rule.
AIMR Compliance
An investment adviser may claim that its performance composite meets the AIMR Performance Presentation Standards if the adviser satisfies all composite, calculation, presentation, and disclosure requirements of the AIMR-PPS standards. The SEC does not enforce the AIMR-PPS standards. However, an inaccurate claim of AIMR compliance constitutes a materially false and misleading statement in violation of Rule 206(4)-1(a)(5).
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