An official of the Securities and Exchange Commission described the most common advertising deficiencies found in recent investment adviser examinations. Examiners are seeing frequent deficiencies related to the presentation of composite performance results, said John Walsh, associate director of the SEC’s Office of Compliance Inspections and Examinations, addressing Financial Research Associates’ marketing and advertising compliance forum Wednesday in New York. Advertisements have ranked among the most common sources of advisers deficiencies for years, Walsh said. “We’re not afraid to write very strong deficiency letters,” he said.
Advisers should guard against composite performance results comprised of accounts with dissimilar strategies, Walsh said. There is also a risk that composite performance information is misleading if it includes a large number of fairly valued securities, he said. Walsh noted that advisers have also failed to provide disclosure if performance results include that of different portfolio managers or the advisers’ proprietary accounts. Examiners have found advisers falsely claiming compliance with global investment performance standards. GIPS compliance is not an SEC requirement but if advisers claim GIPS compliance, that claim must be accurate, he said.
Examiners also continue to see basic errors in performance numbers, many of which likely result from numbers being manually calculated, Walsh said. Errors often come to light when examiners compare the advisers’ performance results to those in the custodial records, he said.