DISCLOSURES CAN REMEDY COMPLIANCE PROBLEMS

If you read the monthly newsletters published by National Compliance Services, Inc. (“NCS”), you probably know how important disclosures are. We’re not just talking about the disclosures in your Form ADV. Communications with clients and prospective clients may require disclosures to ensure that they are not false or misleading. In addition, it is quite likely that you will need to provide disclosures in conjunction with advertisements, presentations, newsletters, and websites.

Disclosures help to ensure that a communication is thorough, complete, and not misleading. Communicating with clients using social media is especially dangerous, because these messages are not typically accompanied by appropriate disclosures.

Advertisements by SEC-registered investment advisers must comply with Rule 206(4)-1 under the Investment Advisers Act. This rule prohibits ads that are false or misleading in any way. Adding the right disclosures to those advertisements may help registered investment advisers (“RIAs”) avoid an uncomfortable situation where examiners believe an ad is misleading.

Investment adviser representatives (“IARs”) often resist using disclosures. They feel that disclosures undercut the message being conveyed. In fact, thorough and robust disclosures send the message to securities regulators that you are satisfying your fiduciary obligations to clients and prospective clients.

In case you think you’re being over-regulated, please indulge me while I list the disclosures on my Denny’s free breakfast coupon:

• One coupon per check, per visit.
• Second entree must be of equal or greater value.
• Not valid with any other coupons or promotional offers.
• Coupon has no cash value.
• No change returned.
• Taxes and gratuity not included.
• Beverages not included.
• Valid at participating restaurants only.
• Selection and prices may vary.
• Only original coupon accepted.
• Photocopied and internet-printed or purchased coupons are not valid.
• No substitutions.

Amazingly, Denny’s was able to print all of those disclosures on one coupon in type that even I can read. If Denny’s feels it needs to offer all of those disclaimers to ensure that customers won’t be misled, RIAs and IARs shouldn’t take umbrage about having to use disclosures in their communications and advertisements. After all, clients turn over hundreds of thousands of dollars, even millions, not just $5.99 for a Grand Slam Breakfast.

Unfortunately, disclosures will not prevent every RIA compliance problem. For example, RIAs sometimes attempt to advertise performance results without showing the impact of advisory fees on those returns. The Clover Capital no-action letter stands for the proposition that investment performance results in RIA advertisements must be presented on a net-of-fees basis after deducting all investment advisory fees, brokerage or other commissions, and any other expenses the client actually paid or would have paid. A disclosure does not make the ad compliant, and an RIA may not bury this information in a footnote.

Another situation where disclosures won’t help is an RIA advertisement that contains a client testimonial. You may not include that testimonial in your ad, even if you disclose that it is just one person’s opinion and doesn’t necessarily reflect the experience of other clients.

In most cases, however, detailed disclosures will help to convince securities examiners that you are meeting your fiduciary obligations to clients and prospective clients. As an example, in your Form ADV, you owe a duty to provide thorough written disclosures of potential or actual conflicts of interest.

Though compliance isn’t much fun, ignoring it can jeopardize your career. You might find yourself having breakfast at Denny’s, looking at the job ads.

Les Abromovitz, an attorney, can be reached at NCS by calling 561-330-7645, Ext. 213, or by e-mailing him at labromovitz@ncsonline.com. Les is the author of GROWING WITHIN THE LINES: THE INVESTMENT ADVISER’S ADVERTISING AND MARKETING COMPLIANCE GUIDE (NationalUnderwriterStore.com; 800-543-0874; Amazon.com).