Trust is essential to the investment management process. But all too often companies make unforced errors in their advertising that undermine the credibility they work so hard to build.
That credibility is especially critical for alternative asset managers like hedge funds, private equity, real estate, and tangible assets where competition to build and maintain client relationships is fierce and trust is harder to win and easier to lose. . According to “Survey on the Next Generation of Trust,”For example, confidence in hedge funds was 59% and in other alternative investment managers only 60% among institutional investors. In contrast, institutional investors’ confidence in the main managers was 72%.
So what can alternative asset managers do?
First, they need to understand the SEC’s requirements under the Publicity Rule and associated non-action letters.
Last year, the SEC The Office of Compliance Inspections and Examinations (OCIE) identified the most frequent problem of compliance with the Advertising Standard found during SEC examinations. These were misleading statements about performance results, misleading personal presentations, and misleading statements of compliance with voluntary reporting standards. In recent months, SEC Announced Five Settlements Related to Advertising Rule Violations, all of which involved the misuse of testimonials on social media, and fined another company $ 1.9 million for misleading advertising. The company’s compliance staff was unaware that the marketing material included hypothetical and proven returns rather than actual results. Without the necessary disclosures, the SEC found the marketing misleading.
To avoid making similar mistakes, alternative asset managers should follow these 10 common sense rules when it comes to marketing and compliance.
- Write and periodically review internal compliance policies and procedures and communicate them to all employees. Conduct staff training at least once a year to keep employees up-to-date on changes in rules and regulations.
- Pay attention to SEC regulations, including specific rules announced through letters of no action and compliance cases that can illustrate pitfalls to be aware of. Sign up to receive alerts from consultants and law firms and Risk alerts directly from the SEC.
- Inform potential clients of the fund’s objectives, risks, charges and expenses. The prospect should disclose all this in a simple and detailed way.
- Check all written and electronic materials, including social media and websites, for compliance before posting. Not all compliance rules are intuitive, so you should have a robust review process in place.
- Document reviews to satisfy record and bookkeeping requirements. If marketing materials include statements of performance, the internal statements and worksheets supporting those statements of performance must be retained for at least five years from the last publication or dissemination of the performance.
- Never promise or guarantee future performance in any written, verbal or electronic communication.
- Never claim that posted performance results meet voluntary performance standards without verification.
- Never use misleading performance results, third party rankings, or awards in marketing materials. That always means deducting advisory fees, disclosing the limitations of the benchmark used, and explaining whether the performance results are hypothetical, proven, or actual. In many cases, the same results, rankings or awards may be included as long as they are accompanied by appropriate disclosures.
- Never carefully choose profitable stock picks or recommendations in person-to-person presentations.
- Never use testimonials or sample reports as endorsement of services or advice.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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