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Compliance on the Charles: Boston Regional Summit

June 14- | The Harvard Club of Boston

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Don’t Commit a Foul During One-on-One Presentations

Although basketball is a team sport, one-on-one games are great exercise. Typically, players call their own fouls. When it comes to one-on-one presentations, however, examiners may call a foul on investment advisers who mislead clients and prospects.

In its September 14, 2017 Risk Alert, the Office of Compliance Inspections and Examinations discussed the most frequent Advertising Rule compliance issues identified by examiners. Examiners found that Registered Investment Advisers (“RIAs”) were using misleading one-on-one presentations, which lacked disclosures showing how fees impacted the results. The Risk Alert can be found at https://www.sec.gov/ocie/Article/risk-alert-advertising.pdf.

One-on-one presentations fall within an exception to the Clover Capital no-action letter, which became available on October 28, 1986. In that no-action letter, SEC staff stated that the failure to deduct advisory fees from performance results may be misleading. Unlike advertisements that are subject to the guidance in the Clover Capital no-action letter, one-on-one presentations may show gross-of-fees returns if certain conditions are satisfied.

In the ICI II no-action letter, which was released on September 23, 1988, SEC staff said that RIAs may use gross-of-fees performance results in one-on-one presentations to wealthy individuals, pension funds, and other institutions. This no-action letter defines wealthy clients as those who possess sufficient assets to justify the cost of giving a one-on-one presentation.

Though RIAs may provide gross-of-fees performance results in one-on-one presentations with wealthy clients, there are mandatory disclosures that must accompany them. The advisory firm must disclose that:

  • Performance results were calculated without deducting advisory fees;
  • Advisory fees and other expenses will reduce a client’s return; and
  • Advisory fees are described in the RIA’s Form ADV, Part 2.

In these presentations, the RIA must also include a representative example, such as a table, chart, graph or narrative, which shows the impact of compounded advisory fees, over a period of years, on the value of a client’s portfolio.

Aside from failing to provide these disclosures, RIAs sometimes go out of bounds with their definition of a one-one presentation. For example, examiners may cry foul if an RIA uses the same or similar slide deck as part of its marketing efforts and treats it as a one-on-one presentation. Because it is being used repeatedly, it is no longer a one-on-one presentation. Any performance returns referred to in the presentation should be presented net-of-fees.

It is a best practice for advisers to present all performance returns net-of-fees, even if they intend to use them in a genuine one-on-one presentation. As Investment Adviser Representatives and support personnel prepare new presentations, they often harvest graphs and charts from other documents. Gross-of-fees returns might find their way into marketing materials that are clearly advertisements.

Before charging ahead with a one-on-one presentation, a firm’s Chief Compliance Officer should make sure that the content is not misleading and it includes all of the necessary disclosures. Just as a basketball player can be penalized for arguing with the referee, it’s a no-win situation for an adviser to argue with examiners over a one-on-one presentation.

Les Abromovitz