Regulations and Requirements - Advertising and Solicitation

The Investment advisors Act of 1940 defines advertising as any letter, notice, circular or other written communication addressed to more than one person, as well as any notice in a publication or by radio or TV that contains:

  • Graphs, charts, formulas or other devices used to determine how to choose a security or when to buy or sell a security.
  • Information that offers analysis, reports or publications concerning securities or when to buy or sell a security.
  • Any other investment advisory service that relates to securities.

Advertising Standards
IA advertising is not permitted to:
  • Refer (directly or indirectly) to testimonials about the advisor.
  • Refer to past specific recommendations that were profitable. However, an IA may advertise a list of ALL recommendations made within the immediate past year (or longer), as long as all pertinent information is included (date of recommendations, market price at time of buy, sell and current), along with a disclaimer on the first page stating: "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.""
  • Advertise that any report, analysis or other service is free of charge if that is not completely true. There must be no obligation or condition of any kind.
  • Represent that a graph, chart, formula or other device can (by itself) be used to determine which securities to buy or sell without disclosing the limitations in doing so.

Performance Advertising
The SEC has clarified in a guidance statement (the Clover Capital letter) that advertising of actual performance data will be prohibited if the advertising:
  • Includes results that don't reflect the impact of brokerage commissions, advisory fees, and other client-paid expenses.
  • Fails to disclose the effect that market or economic conditions had on the results.
  • Fails to disclose whether or not the results shown reflect reinvestment of dividends and capital gains.
  • Makes claims about the future potential for profit without also mentioning the possibility of loss.
  • Fails to disclose (if applicable) that performance results related only to a select group of the IA's clients.
  • Compares results to an index without disclosing all material facts relevant to the comparison.
  • Fails to disclose any material conditions, objectives or investment strategies used to obtain the results.

Restrictions on Fees
There are few specific restrictions on fees within either the Investment advisors Act of 1940 or the Uniform Securities Act. The advisory fee must not be "unreasonable," which means that it generally should be in line with what other advisors charge. Under the Uniform Securities Act, the following types of fee arrangements are permitted:
  • Fees based on a percentage of assets under management.
  • Flat annual dollar amount for services agreed upon.
  • Brokerage fees on trades made for clients.
  • Wrap fees that include all services (asset management and transactional fees) into a single annual fee.

As mentioned above, performance-based fees are generally prohibited. Only two types of clients may be charged such a fee:
  • Registered investment companies (mutual funds);
  • An individual with an account value in excess of $1 million (Uniform Securities Act); or
  • An individual with an account value in excess of $750,000 AND a net worth of at least $1,500,000 (Investment advisor Act).

In these cases, a performance-based fee known as a "fulcrum fee" is permitted. A fulcrum fee provides for a base fee to be paid to the advisor, with additional fees permitted for performance above a specific benchmark. However, this is allowed only if the base fee would be reduced equally for inferior performance beneath the benchmark.
State Securities and Insurance Laws
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