OK, so remember last June when we discussed registering your firm? If you do, you may recall that the principal adviser registration document, Form ADV, is divided into two parts: Part 1 (a check-the-box form that is mostly for use by the regulator) and Part 2 (a narrative brochure that is the principal client disclosure document).

Well, for advisers registered with the SEC, as many robo-advisers are, there will soon be a new disclosure document to contend with. New Form CRS (client relationship summary) is designed to give investors easily digestible information about their relationship with their investment adviser. The form, which may not exceed two pages, provides information such as types of services offered, fees charged, conflicts of interest, and disciplinary history, covering many of the same topics that are discussed in detail in Form ADV Parts 1 and 2. Form CRS also includes sample questions or “conversation starters,” which clients can use to get additional information directly from their financial representatives.

Importantly, Form CRS is required only for advisers whose clients are “retail investors,” meaning natural persons seeking services primarily for personal or family purposes. This means that investment advisers that don’t serve retail investors need not worry about Form CRS. That said, because most robo-advisers have retail investor clients, most robo-advisers will need to complete, file and deliver the form.

When does this all start, you ask? Advisers currently registered with the SEC will need to file their initial Form CRS through IARD between May 1 and June 30 of this year. Importantly, you may not file the form prior to May 1, 2020. This means that for an adviser with a calendar fiscal-year end, the initial Form CRS must be filed as an other-than-annual amendment; it cannot be filed as part of the adviser’s annual Form ADV update due March 30, 2020.

Once you’ve filed Form CRS, you’ll need to start delivering the initial Form CRS no later than June 30, 2020 for new clients and July 30, 2020 for current clients. In addition, if any information in your Form CRS becomes materially inaccurate, you’ll need to file an amendment within 30 days and notify clients within 90 days.   Unlike Form ADV Parts 1 and 2, Form CRS does not have an annual filing requirement. Instead, once you’ve filed the form, you just need to make sure it stays accurate and notify clients if anything changes.

Speaking of notifying clients, let’s talk about how to actually deliver Form CRS. As a robo-adviser, chances are you will send Form CRS electronically. When you do, be sure to follow the form’s instructions, which require that the relationship summary be (i) presented prominently in the electronic medium, like a direct link or in the body of an email or message, and (ii) easily accessible. And of course, don’t forget to implement the tips we shared in our previous post on electronic communications.

Finally, just a brief word on recordkeeping. When they adopted Form CRS, the SEC also adopted corresponding amendments to Advisers Act Rule 204-2 (the recordkeeping rule). Those amendments, broadly speaking, require advisers to keep current and historical copies of Form CRS (including amendments) and records of the dates that the form is filed and delivered to clients.

Even though Form CRS need not be filed until June, we still recommend that advisers with retail investor clients take the time now to:

  • draft and finalize the initial Form CRS, consulting with counsel as necessary;
  • develop and update policies and procedures to ensure that on an ongoing basis, Form CRS is filed, delivered and updated appropriately; and
  • update recordkeeping portions of their compliance manual as needed to account for Form CRS.

That’s all for this time! Be sure to come back for our next post, where Josh will kick off a new chapter of our blog focused on compliance concerns related to the heart of your business – portfolio management and trading.

PerformanceIn our last post, Craig laid out the process of advertising a performance track record. That’s great, if you have a track record. What about a newly operational robo-adviser with no performance history? Your firm likely has spent considerable resources building and developing an investment strategy and corresponding algorithm. But without a client base, you can’t build a performance track record, and without a performance track record, it’s difficult to build a client base. Luckily, an option is available to advertise the hypothetical or “back-tested” performance of your strategy.

As a reminder, Rule 206(4)-1 (the “Advertising Rule”) generally prohibits misleading disclosure in advertising materials. The scope of this rule is broad and includes any disclosures made on your firm’s website. While the use of back-tested performance is not an automatic violation of the general prohibition, it certainly raises significant complications and the potential for scrutiny from regulators.

The SEC strongly disfavors the use of hypothetical performance. In fact, the SEC has sanctioned numerous advisers over the years for advertising misleading back-tested performance.   In those cases, the agency primarily focused on the lack of disclosure provided alongside the hypothetical performance. Before including any hypothetical performance in an advertisement, your firm must address a number of issues, including the fact that:

  • Hypothetical performance does not involve actual market conditions, especially real-world market risk;
  • Hypothetical performance inherently has the benefit of hindsight, thus making it difficult to determine what factors would have affected a manager’s decision-making process; and
  • The data shown in a particular set of hypothetical performance results may involve assumptions not indicative of the investment strategy displayed.

The SEC has not provided any guidance that specifically endorses the use of hypothetical performance. However, the SEC staff has repeatedly emphasized that the inclusion of abundant disclosure is the key to adverting hypothetical performance without misleading potential clients. Some of the best practices for advertising hypothetical performance include:

  • Clearly labeling all applicable performance as hypothetical and indicating that such performance was not subject to actual market conditions (note that disclaimers in small type are not sufficient to dispel otherwise misleading advertising);
  • Do not mix hypothetical and actual results in the same display;
  • Disclose all assumptions relied upon in creating the hypothetical performance;
  • Do not refer to hypothetical results as “past performance” as doing so may imply to the reader that such performance is actual in nature;
  • Maintain all records related to the production of the hypothetical performance displayed in the advertising; and
  • Develop written procedures related to the production and review of any hypothetical performance.

While all of these best practices are important, perhaps the most important is the development of a strong set of policies and procedures related to advertising of hypothetical performance. Thorough review of advertising is fundamental, for whether a particular advertisement, performance based or not, is considered misleading is a factual determination. Moreover, the inclusion of hypothetical performance in an advertisement always carries the potential to attract regulator scrutiny. Developing a robust compliance program to review all hypothetical performance advertising can alleviate these concerns and allow your firm to focus on growing its client base.

We hope that you’ve found our series on advertising useful. Check back next time, when we’ll shift our focus and Craig will discuss the new Form ADV Part 3. Thanks for reading!

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.

False TrueYou’re ready to advertise. You know the basics, you can handle the complexities of including past specific recommendations, and even understand how to appropriately include client testimonials. Let the advertising campaign commence! Well, not so fast. Even if you’ve successfully managed all of the potential pitfalls we’ve discussed so far, you must still contend with the “catch all” restriction, which prohibits any false or misleading disclosure in a robo-adviser’s advertising.

As a reminder, the primary rule governing robo-adviser advertising is Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Advertising Rule”). The Advertising Rule broadly prohibits any adviser advertising that includes “any untrue statement of a material fact, or which is otherwise false or misleading”. On its face, this prohibition appears relatively straightforward. However, there is a bit to unpack here.

First, the Advertising Rule broadly defines an “advertisement” to include any communication addressed to more than one person that offers any of the following services:

  1. Any analysis, report, or publication regarding securities;
  2. Any graph, chart, formula or other device for making securities decisions; or
  3. Any other investment advisory services with regard to securities.

Second, the question of whether an advertisement is false or misleading will depend on the particular facts and circumstances surrounding its use, including:

  1. The form and the content of the advertisement;
  2. The implications or inferences arising out of the advertisement in its total context; and
  3. The sophistication of the prospective client.

As you can see, the prohibition against false or misleading advertising is extensive, and regulators often take a broad interpretation of the prohibition when reviewing an adviser’s advertising and accompanying disclosure. For your robo-adviser firm, this prohibition may be most relevant to the disclosure contained on your website or client facing portal such as your app or other intake medium.

We recommend that, as a matter of best practice, you conduct a regular review of any client facing advertising materials, including your website, to screen for claims that cannot be substantiated. Some common examples of these may be statements describing your investment strategy as “one-of-a-kind”,  or claims that your services will help clients grow assets. While these examples may seem obvious, it is important to again note that whether something is false or misleading is a determination that needs to be made on a case-by-case basis. A good metric for determining whether a statement is appropriate is to look at it from the point of view of a retail investor.  Statements on your website, particularly regarding strategy or performance, may seem fine to you but may be viewed very differently by a regulator. In our next post, Craig will continue our advertising discussion by providing some guidance on including information on your strategy’s track record in your marketing campaign. Thanks for reading!

For businesses of all types, posting positive reviews can be one of the most powerful means of attracting new customers.  Before individuals hire a company for a job, they want to know that others before them have had a good experience, and companies that have failed to get a sufficient number of good reviews are often screened out.

But before you set up a page to post good reviews or invite your current clients to do the same, recall from our previous post that unlike other businesses, robo-advisers are subject to Advisers Act Rule 206(4)-1 (the “Advertising Rule”), which generally prohibits the use of testimonials in advertising.

So what do we mean by “testimonials”?  Basically, we’re talking about statements by former or present clients that endorse the adviser or refer to a favorable investment experience with the adviser.  In addition to statements, “likes” and other means of endorsing a firm on social media can be considered testimonials. From the SEC’s point of view, testimonials are problematic because they may create an inference that all the adviser’s clients typically experience the same favorable results as the individual providing the testimonial.

While the letter of the Advertising Rule prohibits the use of testimonials, the SEC does not prohibit the adviser from using all communications that include favorable comments and allows the use of testimonials in some circumstances.  For example, the SEC has stated through no-action letters and formal guidance that it would permit:

  • An adviser’s publication of an article by an unbiased third party regarding the adviser’s investment performance, unless it includes a statement of a client’s experience with or endorsement of the adviser;
  • An adviser’s use of a rating by an independent third party, derived from client satisfaction surveys, provided certain conditions are met;
  • The publishing of partial client lists, as long as the adviser did not use performance data to determine the makeup of the list and certain other disclosure is provided;
  • Publication of all the testimonials about an adviser from an independent social media site on the adviser’s own website (a site is generally “independent” if the adviser cannot influence its content);
  • The placement of an advertisement for an adviser on a third-party site, as long as (i) the site is independent, (ii) the advertisement is separated from any public comment section and (iii) advertising revenue does not influence which public commentary is included or excluded;
  • An advertisement that includes a reference to a social media site (such as “see us on Facebook or LinkedIn”), without including specific testimonials from the site;
  • Listing of “friends” or “contacts”, as long as they’re not identified as clients and the adviser does not imply that they have received favorable results from the adviser; or
  • A third-party created “fan” or “community” site where the public may comment, but advisers should be careful when driving user traffic to such sites or publishing content from such sites, especially when the site is not independent of the adviser.

As you can see, determining whether a particular statement will be prohibited under the Advertising Rule can be complicated, so we encourage you to seek counsel if you’re considering the use of testimonials in your marketing strategy.  And on top of all that, as Josh mentioned last time, the SEC has proposed updates to the Advertising Rule, which, if adopted, would specifically allow testimonials under certain circumstances.  We are continuing to monitor these changes and will be sure to update you when they are final.  We thank you for reading and encourage you to return for our next post, in which Josh will discuss the Advertising Rule’s general prohibition against advertising that contains false or misleading statements.

RecommendationsYou want to attract clients. You need to advertise to attract clients. You might think that a great way to attract new clients is to advertise how past recommendations or security selections have worked for current clients. You may want to explain on your website or app how your model works by giving examples of sample investments. This all seems too easy. Well, it’s not. As Craig began to explain in our last post, the rules governing investment adviser advertising are layered and can be confusing. In this post, we’ll tackle the dos and don’ts of past specific recommendations.

As a quick recap, Rule 206(4)-1 (the “Advertising Rule”) under the Investment Advisers Act of 1940 (the “Act”) is the principal rule that governs adviser advertising. While neither the Act nor the Advertising Rule define the phrase “past specific recommendation”, the SEC staff has interpreted its meaning very broadly to include individual stock discussions as well as lists of portfolio holdings without further discussion.

The Advertising Rule prohibits advertisements that refer directly or indirectly to the adviser’s past specific profitable recommendations unless the advertisement includes or offers to provide a list of all recommendations made by the adviser within at least the prior one-year period and includes the following:

  • The name of each security recommended;
  • The date and nature (buy or sell) of each recommendation;
  • The market price at that time;
  • The price at which the recommendation was to be acted upon (i.e., the time of the recommendation); and
  • The market price of each security as of the most recent practicable date.

Moreover, on the first page of any recommendation, the following cautionary legend, in typeface at least as large as the largest print used in the text, must also be included: “It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in the list”.

If you just read that requirement and thought, wow that’s burdensome, you’re not alone. Fortunately, there are situations in which past specific recommendations can be presented without the full disclosure requirements.

Additionally, advisers can use advertising that includes a limited number of past specific recommendations, so long as the advisers:

  • Use objective, non-performance based criteria (e.g. based on size of position) to select the specific securities listed;
  • Consistently use the same criteria to select the specific securities discussed;
  • Avoid discussing the amount of the profits or losses, realized or unrealized, of any of the specific securities; and
  • Maintain records regarding all recommendations and the selection criteria used to select the securities in the advertising.

Finally, advisers can use advertising that includes “Best Performers/Worst Performers” charts for a representative portfolio for a particular investment product. In order to include one of these charts, the SEC requires that:

  • The calculation and the weighing of positions be applied consistently during the appropriate measurement period;
  • The presentation of the information and number of holdings in the charts be consistent from measurement period to measurement period;
  • The charts show no fewer than 10 holdings (i.e., 5 best and 5 worst performers), with an equal number of positive and negative holdings;
  • The charts disclose how to obtain the formula and methodology for computing which positions are included in the charts;
  • The charts disclose how to obtain a list showing the contribution of each holding in the portfolio to the portfolio’s performance;
  • The charts be presented to reduce the chance a reader will be misled, such as by (i) presenting the best and the worst holdings on the same page with equal prominence and near required disclosure and portfolio performance information, (ii) including disclosure that the chart does not include all securities bought, sold or recommended to clients and (iii) including disclosure that past performance does not guarantee future results; and
  • The adviser maintains appropriate records consisting of (i) the calculation used to select securities included in the chart, (ii) a list showing the contribution of each holding to the portfolio’s overall performance during the relevant measurement period and (iii) all supporting data.

Even with these basics in mind, determining when a past specific recommendation can be included in an advertisement is a fact specific determination that can be tricky and is certainly an area where a legal or compliance professional can add value. To further complicate matters, on November 4, 2019, the SEC proposed a series of amendments to several rules governing investment advisers including the Advertising Rule. We will detail these proposed amendments, and their potential impact, including changes to how past specific recommendations can be presented in a future post. In our next post, we’ll continue to review advertising as Craig discusses the use of testimonials.

The investment advisory industry is extremely competitive. And while robo-advisory firms often are able to set themselves apart from the industry as a whole, attracting clients still remains a foundational aspect of their business.

Last time, Josh discussed building a strong referral base. This week, I want to kick off a series of posts on direct advertising and what to keep in mind when organizing your marketing efforts.

As you might imagine, due to the conflict inherent in communications designed to both inform and attract clients, the SEC has a particular interest in the content of investment adviser advertising. The SEC routinely scrutinizes marketing materials during examinations, and just a couple years ago, the agency published a risk alert highlighting specific areas in which they continue to find deficiencies. This means that for robo-advisers that conduct a significant portion of their operations and marketing online, installing tight controls around advertising should be a priority.

The principal rule governing the content of adviser advertising is Advisers Act Rule 206(4)-1 (the “Advertising Rule”), and as regulations go, the text of the rule is relatively short. But don’t mistake brevity for simplicity. Applying the Advertising Rule to the myriad of potential marketing methods is no easy task, and you have to take into consideration a number of SEC no-action letters and other guidance to get it right. Our goal over the next series of posts is to help you do just that.

Let’s start with the basics. Under the letter of the Advertising Rule, advertisements may not:

  1. Mention past specific recommendations that would have been profitable, unless the advertisement is accompanied by a list of all recommendations made by the adviser within the past year (or an offer to provide that list);
  2. Refer to testimonials about the adviser’s services;
  3. State that any graph, chart, formula or other device being offered can be used to make investment decisions;
  4. Indicate that a report or other service will be furnished for free unless it is or will actually be furnished for free without any additional obligation; or
  5. Contain an untrue statement of a material fact or otherwise be false or misleading.

Not too complicated, right? Only five prohibitions – how hard could it be? Well, you might be right if you’re just talking about prohibitions 3 and 4. The others, however, require some serious unpacking, and are, of course, the ones that come into play most frequently.

To start the unpacking process, in our next post, Josh will help us better understand the restrictions on past specific recommendations. Because one of the most effective ways advisers seek to advertise an offered strategy is by describing the securities used to execute that strategy, it’s critical that advisers understand how to do it properly. Stay tuned, and thanks for reading!

Solicitation ComplianceThe saying goes, referrals are the lifeblood of any business. Indeed, all business owners, robo-advisory firms included, strive to provide a level of value and service to their customers such that those customers in turn become advocates and solicitors of the business. Unfortunately, word of mouth referrals alone are not usually enough. Your firm may choose to engage third parties to solicit new clients. Traditionally, these third parties include the likes of broker-dealers, banks, accountants, and attorneys. While these third-party arrangements are important for any investment adviser, for robo-advisory firms, these arrangements may carry added significance. For example, your firm may engage in a cash referral program whereby existing clients are encouraged to refer new potential clients in exchange for waiving advisory fees, or simply depositing cash into the client’s account. Another example might involve an arrangement to have a link to your firm’s website appear on a third-party website. While these arrangements may be sound from a business standpoint, from a compliance perspective they can be problematic.

Unlike a traditional brick and mortar advisory firm, your firm likely doesn’t have direct client engagement. Moreover, your firm’s business model may rely on a higher volume of clients with lower individual account sizes.  Therefore, having a dedicated third-party solicitation network may be key to a healthy client pipeline.  However, before you rush to set up a referral program, you should consider what compliance steps are necessary.

If any of these third-party arrangements involve your firm paying for client solicitation, your firm must comply with both state and federal requirements. Individual state requirements related to solicitation agreements focus on licensing requirements. We previously covered this topic in our Individual Licensing Requirements Post, and highly encourage you to review it.

Federally, Rule 206(4)-3 (the “Solicitation Rule”) under the Investment Advisers Act of 1940 outlines specific disclosure and delivery requirements with respect to solicitation. Under the Solicitation Rule, an advisory firm can only pay a referral fee to a third party pursuant to a written agreement with that party. The agreement must describe the specific activities to be undertaken by the third party and the compensation to be received for those activities. The Solicitation Rule also requires that the third party, at the time of solicitation, provide to the potential client a copy of the adviser’s brochure along with a separate document that discloses the details of the solicitation arrangement. This separate disclosure document must be signed by the potential client and returned to the third party, and ultimately delivered to the adviser before the prospect can become a client. Your firm also has a duty under the Solicitation Rule to make a bona fide effort to ensure that the third-party solicitor has complied with these requirements.

While this process may seem onerous, you may find that the potential benefits of third-party solicitation far outweigh the compliance burdens.  As always, our recommendation is to involve a compliance professional early in the process.

Thank you for your continued interest in the blog! So far, we have received very positive feedback and hope that you continue to find our posts useful. We welcome any comments or questions you might have. Check back soon, as Craig’s next piece will cover advertising.

If you’re a robo-adviser, chances are you want to create a fully “digital” experience for clients that doesn’t involve sending paper documents. For example, you may want to email clients or communicate with them directly through your firm’s online platform. If you’re going to ditch the paper, the SEC expects you to follow its guidance on the use of electronic media before doing so.

That guidance is found in a series of SEC releases published in 1995, 1996 and 2000. The 1996 release, in particular, discusses how advisers may use electronic means to meet their legal obligations to deliver information to clients, such as Form ADV Part 2A (the firm brochure). In short, the SEC expects advisers to meet three requirements: notice, access, and informed client consent. Here’s what they mean by that.

Notice. Firms should consider the extent to which the proposed means of electronic communication provides timely and adequate notice to clients that information is available. The SEC reasoned that because delivery of paper documents puts the recipient on notice that new information is available, the chosen means of electronic communication should do the same. So, for example, posting a document on a website would not, by itself, be sufficient to meet the notice requirement. By contrast, it would be sufficient to (i) email the document directly to clients or (ii) post the document and send clients an email notifying them that the document is available and providing a URL for accessing the document.

Access. The use of a particular medium should not be so burdensome that intended recipients cannot effectively access the information provided. For example, a URL provided in an email notice of information availability should directly link users to the intended document. It should not link users to a generic webpage where users must continue to search to find the document. In addition, a client’s access to information delivered electronically should be similar to their experience with documents delivered in paper form. This means that they should be able to retain the information delivered (like the ability to print or download) or otherwise have ongoing access to the information.

Informed Consent. Before you send your first e-communication, be sure to get your client’s “informed” consent to electronic delivery. Generally, consent is informed when it is obtained after a client is told that:

  • the document to be provided will be available through a specific electronic medium and that medium is described;
  • there may be costs associated with the delivery;
  • the duration and scope of the consent (i.e. whether the scope is indefinite and whether the consent applies to more than one document); and
  • the client has the right to revoke consent at any time and receive all covered documents in paper format.

For robo-adviser firms who want to communicate electronically with clients, we recommend, as a best practice, obtaining the client’s informed consent as part of the onboarding process. For example, you may choose to have clients provide their consent in a pop-up window that appears before or after clients execute your advisory contract. And as you’ll recall from a previous post, obtaining the consent separately is preferable to burying the consent in a contract.

So, do advisers have to get informed consent before sending electronic communications? Technically, no. The SEC did provide an alternative – advisers need not get a client’s consent if they can obtain evidence that a client actually received the information, for example, by electronic mail return-receipt or confirmation of accessing, downloading, or printing. But this alternative has a downside that usually makes informed consent the better option. If advisers seek to rely on this method, they must revert to paper delivery for any client for which they cannot document receipt.

Thanks for reading! We hope you’ll come back for our next post by Josh Hinderliter, who will offer guidance for using paid solicitors to help you attract clients.

Early Stage DevelopmentSo, you’ve decided to launch a robo-advisory firm? Understandably, your first considerations are likely tied to the functionality of your product. Perhaps the final testing of your algorithm is complete, and your attention has turned to how clients will use your product. What will your client interface look like? How will client information be collected? And most important, how will the product be marketed and sold to potential clients? All these considerations, and many more, speak to the entrepreneurial nature of the business. And while obviously essential to the viability of your enterprise, these questions leave out a critical analysis; namely what is possible under the law? Given the highly regulated nature of the investment advisory industry, it is critical that business decisions be made with legal compliance in mind. We recommended, as a best practice, to involve a legal professional in your initial build-out process as soon as possible. Let’s explore a few examples of how the early involvement of a legal professional could save your firm time and resources.

Rule 204-2 under the Investment Advisers Act (the “Act”) sets out a multitude of books and records retention requirements for advisory firms. The Rule’s requirements cover financial records, client communications, and compliance policies, among many others. It is easy to imagine a firm just starting its business life-cycle not being aware of all of its record retention obligations, not having built procedures to capture and maintain the required records, or simply having something fall through the cracks as other concerns take priority.

It’s not just information coming into firms that poses early legal compliance concerns, but also the client facing information that a firm itself is producing. In particular, a firm should be conscious of its sales and marketing materials. Rule 206(4)-1 under the Act, commonly referred to as the “Advertising Rule”, defines client communications broadly, and implements strict prohibitions against communications that could be perceived to be false or misleading. As with the retention of records, a firm too eager to enter the marketplace without the proper compliance policies and procedures in place to control the content of marketing materials runs the risk of early and/or repeated violations, or even worse, the implementation of a compliance program with notable gaps. In either case, it’s clear that a firm’s investment in its compliance infrastructure early will pay dividends in the long run.

While we chose to highlight just two examples of potential early compliance concerns facing firms in this post, there are clearly many more than we have space to cover. Whether your firm is in its early stage of operations, or already up and running, we strongly recommend that you involve a compliance or legal professional in your business decision making process. Don’t let a regulator be the one to let you know about deficiencies in your compliance program.

We hope that you continue to find our blog helpful, and we appreciate all the feedback that we have received so far! If you have questions about this topic or any of the others we’ve touched on, please feel free to reach out. Craig will be back soon to discuss guidelines for communicating electronically with clients.