Advertising Rules – Enforcement Actions and the Impact of Reg BI

In this episode, Part 2 of 2, Oyster Associate Director Bill Reilly and Senior Consultant Michelle Craft discuss relevant SEC enforcement actions around Advertising, and the impact Reg BI will have on Advertising policies and procedures, especially the use of titles.

Transcript

Molly Bryson: 0:04

Welcome back everyone to the second of our two-part podcast series talking about the SEC proposed advertising rule changes. I’m Molly Bryson, and today with me are Bill Reilly and Michelle Craft . We’ll discuss the pertinent SEC enforcement actions and how Reg BI will impact advertising and marketing practices. Bill’s been with Oyster for seven years. Prior to that, Bill was a state of Florida regulator for 30 years. He has deep experience with broker-dealer and investment advisor compliance programs, and frequently acts as an expert witness. Michelle Craft has been with Oyster for eight years, and in the financial services industry for 24 years. She has held various roles from Registration Analyst to Chief Compliance Officer for regional and national broker dealers as well as investment advisors. So let’s get started. Bill, could you start us off?

Bill Reilly: 0:51

Yes, I’d be glad to. What I did in researching for this presentation, is I went ahead and looked for the last couple of years at SEC enforcement actions and came up with three that I thought were noteworthy of speaking about. The first of the cases I’m going to talk about our robo advisors, and the reason that I chose those is, number one, robo advisors is a type of advisor that has been looked at substantially over the last couple of years by the Commission. The violations that were found for these robo advisors are also going to be found in your more standard type of investment advisor. But the first case I want to talk about is that the SEC found that a robo advisor with over $11 billion in assets under management made false statements about tax loss harvesting strategy, offered to clients. What the firm did was, it disclosed to clients employing it’s tax loss harvesting strategy, and the strategy was the selling of securities at a loss to offset capital gains tax liabilities. And, the firm would monitor all client accounts for any transactions that might trigger a wash sale. And of course, a wash sale occurs when it’s security is sold at a loss, but the same security is also purchased within 30 days before or after the sale. The losses from the wash sales are not recognized for tax purposes. But what the SEC found was that the investment advisor, it’s system failed to monitor for wash sales over a period of more than three years, during the time of this three years, while sales occurred in at least 31% of accounts enrolled in the firm’s tax loss harvesting strategy. The firm said it was going to offer a service and it never held it’s part of the bargain. The SEC also found that the investment advisor improperly retweeted client testimonials without necessary disclosures, paid bloggers for client referrals without the required disclosure and documentation to comply with the Solicitors Rule, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws. As a result of these issues, the SEC f ined the investment advisor $250,000 for violating the anti-fraud advertising compliance and some other provisions of the Investment Advisers Act of 1940. This case that I just talked about, and the case I’m going to talk about, w ere actions brought in 2018. In the second case, the SEC found that the investment advisor , which had approximately $81 million in assets under management, made a series of misleading statements about it’s investment performance. What the commission found was that from 2016 until mid-2017, the investment advisor posted on it s w ebsite and social media comparisons of the investment performance of the investment advisor with those of two other robo advisors, or c ompetitors. By doing this, the SEC stated that the performance comparisons were misleading because the ad visor i ncluded less than 4% of his clients’ accounts, and those 4% had higher-than-average returns; the investment advisor compared this wi th r ates of return that were not based on a competitor’s actual tr ading m odels. The SEC also found that the advisor failed to maintain required documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws. They also found that the advisor violated the anti-fraud advertising compliance and books and records provision of the Adviser’s Act. These are somewhat fairly common types of violations that we find on the in the advisor area. The last case I want to talk about is an action brought by the Commission against 13 investment advisors. Now, this action was brought in 2016, but I still think it’s very appropriate, based upon the number of advisors named and some of the violations. In this case, the SEC brought action against 13 investment advisory firms, found they violated securities laws by spreading the false claims made by an investment management firm about its flagship product. As a result of an investment sweep, the Commission found the 13 firms accepted and negligently relied upon claims by the registered investment advisor, that one of its strategies for investing in exchange traded funds had outperformed the S&P Index for several years. The firms repeated many of the investment advisors’ claims, while recommending the investment to their own clients. This is the important part of the action: recommending the investment to their own clients without obtaining sufficient documentation to substantiate information being advertised. And basically, through this enforcement process, the a dvisor admitted i n an SEC enforcement case that what was purportedly it’s real historical track record was only b ack t ested performance that turned out to be substantially inflated. As a result of this, I thought that there was a quote that was provided by the commission relating to this activity. Let me go ahead and read the quote

“When an investment advisor echos another firm’s performance claims in its own advertisements, it must verify the information first, rather than merely accept it as fact. These advisors negligently pass many of the investment advisors’ claims onto their own clients, who were consequently relying on false and misleading information when making investment decisions. I think the point to be gained here is that you cannot take information provided to you – you must actually take the steps to verify to the best of your ability, and confirm data that you are publishing and providing to your own clients.

Molly Bryson: 7:03

In addition to the proposed Advertising Rule changes, the June 30th, 2020 Reg BI implementation date is looming. CCOs and marketing and compliance teams will be extremely busy reviewing the potentially thousands of marketing and advertising pieces which may be produced against these new requirements. M ichelle, what will the Reg BI implementation mean for f irms with regard to advertising?

Michelle Craft: 7:26

So, when we think about the Reg BI impact to firms, we see that there’s going to be potentially a larger impact to our broker-dealer firms. And specifically, as we talk about advertising here today, the titles that are being used by registered representatives of broker-dealers. So it’s important to note that if an individual is referring to themselves as a Financial Advisor currently, and they are only registered with a broker-dealer, they do not maintain any kind of license with a registered investment advisor. They are going to be prohibited from using the word “Advisor” in their title. So, no longer can they be referred to as a Financial Advisor. And there’s probably, I would say, 80% or more of the individuals in the industry using that term even if they are only broker-dealer registered. So that’s going to require firms to take a look at their approved titles that can be used by individuals , and potentially come up with new titles. There’s nothing in the rule that states that you can only call yourself a registered representative if you are solely broker-dealer licensed. But, the rule is really intended to target the clients’ understanding of the services that they’re being provided. So if you’re calling yourself a Financial Advisor, there’s an assumption that you could be providing those services as a registered investment advisor, or a representative of an investment advisory firm. Again, people are going to need to start taking a look at business cards, stationary, email signatures. If your firm website has bio bio pages where you’ve listed an individual and their title, that could potentially need to be updated. A social media page where you’re listing your name and title; or any flyer, brochure, seminar material. Basically, any kind of advertising or communication that’s personalized to the representative themselves, if it includes the words Financial Advisor and they are solely registered with a FINRA firm as a registered representative, they cannot represent themselves as a Financial Advisor. Now I will mention that if you’re a dually registered individuals, so you are registered with FINRA as well as being registered with a registered investment advisory firm, then you can still use the Financial Advisor title. Similarly, if you are registered solely with a registered investment advisory firm , you can still use the title Financial Advisor. Dually registered firms and or individuals, and solely registered investment advisor representatives, can still use Financial Advisor. If you are broker-dealer l icensed only – so Series 7 licensed only as an agent through FINRA, you may no longer use the Financial Advisor title. They may choose to use “wealth advisor” o r “financial consultant.” There’s a variety of different titles that those individuals can still use. Certainly there’s registered representative, which is the term that’s typically used as reference from a regulatory standpoint to delineate the difference between a broker-dealer representative and an IA representative. But it’s up to firms to make a decision as to what titles they will allow moving forward. We recommend that once you’ve determined what titles would be allowed for individuals that are solely-registered within with a broker-dealer , communicate that information to your supervisory principals, to those individuals that are reviewing materials to look for instances where individuals are still using Financial Advisor. And remember, this role does go into effect in June of 2020. So f or firms that have mass a mounts of advertising materials (I have worked myself with firms that have issued 4,000 pieces of advertising in a year), it m ay b e a piece of advertising that is then approved, but then it’s tailored to fit the individual that’s issuing the material. You need to clearly make sure that you’ve communicated with your associates t he changes in titles. Make sure that your supervisors are looking for it so it doesn’t sneak through. Update your policies and procedures to make sure that you have specifically addressed what titles can be used depending on the types of registrations held. So, I see that as one of the biggest impacts from an advertising perspective, as it relates to the Reg BI rule, which again goes into effect in June of 2020.

Molly Bryson: 13:22

Okay, thanks Michelle and Bill. There’ll be a lot for folks to do in the upcoming months and, of course, Oyster is ready to help. Oysters experts can assess your f irm’s marketing and advertising materials against the Reg BI requirements and the proposed rule changes. Our team is also well-prepared to assist with other aspects of your Reg BI implementation. If you have any questions about anything we’ve discussed today, or if you have a topic you’d like to hear in future Oysters Stew podcasts, please feel free to call us at (804) 965-5400 or visit our website at www.oysterllc.com.

About The Authors

Bill Reilly is a respected financial services professional with over 35 years of consulting and regulatory experience. Bill leverages his industry expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers, investment advisers and law firms providing legal representation through both proactive and reactive regulatory processes and compliance issues.

Molly Bryson brings over 25 years of experience in the financial services industry to her business development role. Prior to joining Oyster, Molly was a Senior Vice President-Director of Client Services with First Clearing Correspondent Services, an affiliate of Wells Fargo & Company. In that role, she managed a team of relationship managers serving as advocates dedicated to the highest level of operational process and service satisfaction for various correspondent firms across the country. In addition, she has held leadership positions with various types of financial companies including banks, mutual fund companies, brokerage operations and brokerage services. Molly’s experience also includes detailed process analysis and design, identifying service and process trends, providing workable solutions, managing conflict resolution, project management and training.

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