Top 5 tips for investment performance advertising

Knowing the rules for advertising your investment performance is your key to staying out of trouble with the regulators.

Here are some of the tips I gathered from “Performance Advertising 101: Regulatory Do’s and Don’ts” presented on Sept. 23 at the CFA Institute’s GIPS conference by Rajan Chari of Deloitte & Touche, who focused on GIPS issues, and Steven W. Stone of Morgan, Lewis Bockius, who focused on SEC issues. 

1. Don’t think that you’re not subject to advertising rules because you’re not buying a newspaper or magazine ad. Advertising is broadly defined. It’s “basically, any written communication addressed to more than one person (or used more than once) that offers investment advisory services with regard to securities,” according to the speakers’ slides. Advertising includes client materials. It may also refer to anything that you distribute in unchanged form to 10 or more people. 

2. Make the necessary disclosures about performance. Consult with experts who are knowledgeable about your disclosure requirements. 

3. Tread carefully in performance advertising areas of particular concern to the SEC. For example, projecting returns may be viewed as promissory. Back testing is easily manipulated. To avoid the appearance of cherry picking, top stock picks must be balanced with worst stock picks. 

4. Keep a log of the people to whom you send advertising materials. I’ll bet that many people aren’t doing this. But it’s essential for making things right if you discover that inappropriate materials have been distributed. 

5. Take your audience’s sophistication into account when you choose the materials you send them. The regulators give you more leeway in materials aimed at sophisticated investors.

Despite the fact that “Performance Advertising 101: Regulatory Do’s and Don’ts” was presented at the CFA Institute’s GIPS conference, GIPS didn’t get much attention compared to the SEC.  That’s because investment managers always have to pay attention to SEC rules, whereas “GIPS advertising rules are only applicable if you choose to claim [GIPS] compliance in an advertisement.” You can read the GIPS Advertising Guidelines, on pages 33-37 of the Global Investment Performance Standards.

Happy advertising!

Sept. 27 addition from Rajan Chari
Thanks to the generosity of Rajan Chari, here are two links to give you more information on advertising standards.