Let’s say that five years ago, you developed an investment strategy and built an algorithm to execute it. Since then, your robo-adviser has managed several client accounts using that algorithm. Much to your delight, the strategy weathered the ups and downs of the market and to date, has produced very favorable returns. Now, you want to share that track record with the world, or at least post it on your website, in order to attract new clients.

Before you do that, however, there are some things you need to know. First, remember how Josh discussed the “catch all” restriction of the advertising rule, which generally prohibits misleading disclosure? Well, one of the most common violations of that restriction can occur when an adviser advertises its track record without knowing how to do so properly. In fact, at one point, the SEC was so concerned that investors could draw inappropriate inferences from past performance information (like inferences about future results) that the agency prohibited the practice completely.

However, in 1986, the SEC backed away from that stance in a no-action letter issued to Clover Capital Management, Inc. In Clover, the SEC took the position that past performance could be included in advertising provided it disclosed all material facts necessary to avoid such inferences. For example, advertising including past performance must, among other things:

• Disclose the effect of material market or economic conditions on the results shown
• Show performance results net of advisory fees, commissions, and other expenses
• Disclose whether the results reflect reinvestment of dividends
• Include material facts relevant to any comparison of the results to an index

The SEC emphasized in Clover that whether an advertisement was misleading was a fact-based determination based on form and content, use, potential inferences arising from the advertisement’s total context, and the sophistication of the target audience. The SEC also highlighted that merely including the disclosure described in the letter would not guarantee that any particular advertisement would be acceptable.

So, if you’re thinking about touting your track record in an advertisement, here’s the good news – you can do it! But take the time to make sure the advertisement’s content and design, as well as the included disclosure, meet the SEC’s expectations. And, if you’re unsure, don’t be afraid to get a second opinion from counsel or other compliance professional.

Now, let’s say you don’t have a track record of managing money, but instead, you’ve created back-tested hypothetical performance that has indicated your algorithm would have fared well in the past. Can you include such hypothetical performance in advertising? For the answer to that question, we encourage you to return for our next post, in which Josh will discuss that very topic.

In the meantime, we also encourage you to check out the SEC’s exam priorities for 2020, where you’ll find that the SEC announced their continued focus on robo-advisers and in particular, marketing practices like the ones we’re discussing in this blog.

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