Advertising Compliance
An Open Letter To SEC Chair Mary Jo White: Please Modernize The RIA Testimonial Rule So That Consumers Could Rely On The Web To Connect Them With The Best Advisors edit
Saturday, November 09, 2013 16:18

Tags: client communications | client feedback | content marketing | investment advisors | registered investment advisors | regulation | sec | Social Media

Dear Mary Jo:

The Securities and Exchange Commission needs to modernize – or at the very least provide greater clarity -- about its rule prohibiting RIAs and IA reps from using anything approaching a testimonial in their advertising. I know you're pretty busy but please read through what I am saying because I have a good point.
The current rules on social media use by RIAs are stifling competition and preventing the best advisors from helping more consumers. I’m not a libertarian and I’m not invested in any political party’s agenda. But I do know about social media, financial advisors, and RIA compliance and I’m telling you that what you’re doing is bad for consumers and advisors.
Social media can connect consumers with the best investment advisors at a lower cost if the testimonial rule were updated to allow advisors to use “Likes,” star ratings, Google reviews, and LinkedIn endorsements and recommendations in their marketing materials and Form ADV.

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Admittedly, there is a risk that, given the freedom to use crowd-sourced data in advertisiing, some RIAs might try to rig the system by engaging in deceptive Internet marketing practices to increase their Likes, star ratings and Linked recommendations and endorsements. But an advisor can use a phone to commit fraud and the SEC does not ban the use of the telephone by advisors. In fact, it doesn’t even require you to keep a record—much less a recording—of all client phone calls!
Regs supporting the Investment Advisers Act of 1940 have historically changed to accomodate new media and communication systems over the past seven decades, enabling advisors to communicate and advertise using fax machines, email, and websites. Social media is just another medium for communication. If advisor is hellbent on defrauding people, the mode of communication is not the cause.  
And if you’re really worried about an advisor gaming the system by generating fake reviews, recommendations or star ratings from non-existent people or tricking people into liking them, simply impose stiff penalties—like a lifetime ban from the investment advice business.
The SEC has been incredibly opaque about RIA use of social media and it's hurting consumers as well as the good, honest, hard-working professionals who would benefit most from increased transparency.
Fixing all this is pretty easy. Start by getting the agency to answer some very basic questions:
1.       Can RIAs and IA reps make a “Facebook” fan page for an RIA or IA rep?
2.       Can an RIA and IA Rep advertise how many fans or likes are accumulated?
3.       Can an RIA and IA rep make a fan page on Facebook for an idea or solution (i.e., an RIA or IA rep might post a fan page for Miami Beach Index Fund Investors, a charity event, or for Retirement Income Portfolio Solutions)?
4.       Can RIAs and IA reps show endorsements and recommendations on their LinkedIn profile page?
5.       Can RIAs advertise their Google Reviews and ratings on their websites and elsewhere? (Why not? Since they do not control what other people say about them, why no allow them to use crowd-sourced data in ads and Form ADV?)
6.       Are there some boilerplate disclosures you would like RIAs and IA reps to use when signing people up as connections or on their social media pages?
With great respect for your work and reputation, I ask you to consider helping the SEC get out of the way and allowing the transparency of the Web to connect the best advisors with consumers at better prices. 



FINRA Contemplating Making it Harder for Advisors to Expunge Arbitrations from Their Records edit
Monday, August 05, 2013 07:44

Last week, while speaking at a legal conference, Linda Feinberg, president of FINRA's dispute resolution department, indicated that FINRA is now reviewiing the current rules for registered representatives to get arbitration actions expunged from their Form U-4s.  Lawyers who represent customers in FINRA arbitration cases have been complaining that it is currently too easy for brokers to have cases removed.  A new rule proposal on the subject is expected as soon as next April.

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Currently, for a registered representative to get a settled arbitration case expunged from their records, they (or their lawyer) must convince the FINRA arbitration Panel assigned to the case to recommend expungement, and then seek a court order confirming the expungement.  Because of the two-step procedure, lawyers representing registered representatives often include clauses in settlement agreements requiring the customer who brought the arbitration action not to oppose the broker's request that the Panel recommend expungement--making it much more likely that the Panel will look favorably on the request.   However, members of the Plaintiffs' bar are objecting to this practice, which they claim makes it possible for brokers who engaged in bad conduct to have it erased.


FINRA's review will be examining whether there should be a change in the standards for granting an expungement, and what types of information and documents arbitrators should be considering at expungement hearings.  This review already follows on the heels of changes FINRA made in 2008 to the expungement rules that made it more difficult for registered representatives to get expungement by requiring arbitrators to make specific findings of fact--such as determining that the investor's claims were false--before recommending expungement.


FINRA is also making progress on submitting a plan to the SEC for creating a streamlined expungement process for brokers when their firms are named in a case, but they are not personally identified. 



RIA Brochure Delivery Rule: Do I Really Have To Deliver This "Thing" To Clients If I Made No Material Changes Since Last Year? edit
Thursday, May 02, 2013 12:43
A Registered Investment Adviser’s ADV Part 2A--also called a "brochure"--is one of ithe most critical documents an an advisory firm creates. It's your public disclosure form, the document everyone you work or hope to work with with must see.
As securities attorneys, we spend many hours interpreting the SEC’s instructions and tailoring brochures to each RIA's business--your people, products, style, and operations.
Here are some insights into the process of creating this important disclosure document, including one that forever quashes the notion that you are not required to deliver your brochure to clients annaully if you have made no material changes to your broichure since you last sent it to a client.

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After about an hour into a meeting an attorney, advisors have a tendency to start calling their brochure, “this
thing.” It's understandable.  Almost all of the 18 or 19 Items covered in the brochure leave something up to interpretation. It becomes a "thing" with a life of its own.


Meanwhile, minute details take time and attention to draft, like what constitutes soft dollars, a description of the material risks involved with investing, and disclosures about separate account managers, subadvisory relationships, or unaffiliated wrap programs. 


At some point during the process, many advisors seem to  step back ask two questions:

  1. Is anyone actually going to read this thing?
  2. What am I supposed to do with this thing
The first question is relatively simple.  While you would hope that every investment advisory client read your brochure cover to cover, that is not a reality.
However, it is safe to assume that any regulator charged with auditing an investment advisory will read “this thing” in its entirety.  Accordingly, it is imperative for this (if no other reason) that the brochure is thorough, clear, and accurate.
The second question is also relatively simple, but with a slight twist. Under SEC Rule 204-3, codified at 17 CFR 275.204-3(b)(2), a registered investment advisor is required to deliver a brochure to a client or prospective client before or at the time of entering into an investment advisory agreement.  Moving forward, a registered investment advisor is required to:
(2)    Deliver to each client, annually within 120 days after the end of your fiscal year and without charge, if there are material changes in your brochure since your last annual updating amendment:
(i)  A current brochure; or
(ii)  the summary of material changes to the brochure as required by Item 2 of Form ADV, Part 2A that offers to provide your current brochure without charge. (Emphasis added.)
This leads to the logical conclusion: an investment advisory firm is not required to deliver a brochure to each of its existing clients unless there has been a material change. However, the instructions for Form ADV Part 2A indicate otherwise:
Each year you must (i) deliver, within 120 days of the end of your fiscal year, to each client a free updated brochure that either includes a summary of material changes or is accompanied by a summary of material changes, or (ii) deliver to each client a summary of material changes that includes an offer to provide a copy of the updated brochure and information on how a client may obtain the brochure. See SEC rule 204-3(b) and similar state rules.
The term “unless there has been a material change” is demonstrably absent from the instructions. 
In light of the above conflict and the SEC’s stated justification for imposing what is commonly called the “Brochure Delivery Rule,” it is clear that RIAs must deliver (or offer to deliver) an updated brochure to its existing clients within 120 days of fiscal year end-–even if there have been no material changes.
Securities Lawyers Investigate Losses In UBS Willow Fund edit
Friday, April 26, 2013 09:46

Tags: compliance | fraud

Securities attorneys at Klayman & Toskes say they are investigating claims of UBS Financial Services customers who purchased the UBS Willow Fund, a private hedge fund formed in 2000. In October of 2012, investors were notified that the Fund would be liquidated. With the massive losses losses reportedly sustained by investiors in this UBS hedge fund, it's wise for RIAs to be aware of the case.

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According to a press release, "many investors were advised that the Fund was a safe, low risk product." The Fund has declined about 80%.



"K&T is investigating whether UBS adequately disclosed the risks associated with the Willow Fund," says the release, "as well as whether investors’ portfolios were over-concentrated in the Fund."


The individual brokers and advisors who sold the Willow Fund are not the target of this investigation.


K&T is looking into UBS’s conduct in connection with its marketing of the Fund to its customers, and whether the Willow Fund deviated from its disclosed strategy of investing in distressed debt and instead started speculating in foreign sovereign debt credit default swaps. It is believed that credit default swaps eventually led to the collapse of the fund, and caused investors to lose a substantial portion of their investment.



Accused By State Securities Regulators Of Falesly Advertising He Acted As A Fiduciary, Illinois Advisor Says He’s Done Nothing Wrong edit
Monday, March 11, 2013 13:52

Tags: Advisor businesses | compliance | fiduciaries | marketing

In a case that could have wide repercussions for financial advisors and consumers, the State of Illinois last week filed civil charges against a financial advisor that essentially alleges he advertised on his website that he was a fiduciary when he was really just trying to sell annuities. The advisor says the government has it all wrong.

“I categorically deny all of their allegations as deceitful half- truths,” says Richard Van Dyke, Jr. “The charges were instigated by a regulator at the Department of Securities that has been spearheading this unfairly. He’s taken obsessive interest in this and has had a history of going after RIAs that are also insurance-licensed.”

The case is unusual because advisors for years have made all sorts of claims on their websites about their intentions to do what it is in their clients’ best interest but are never prosecuted for misleading clients by not doing what’s in their best interest.

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For example, it’s not uncommon for advisors who are registered reps to say on their websites that they always put the interests of their clients first. Only fiduciaries, however, are legally obliged to do what’s in a client’s best interest. Registered reps are required to provide suitable advice to clients but do not have to put clients’ interests above their own. Similarly, it is not uncommon for registered reps to say they work with clients on a fee basis or even a fee-only basis, even if they generate most of their revenue on commissions.

“Between the time period of January 2012 through at least July 31, 2012, a virtual spokesman appeared when visitors first visit,” says the state’s lawsuit. “During the relevant time period, the virtual spokesman stated as follows: ‘If you want a successful financial plan these days, you need a financial advisor you can really trust. You need to know as much as you can about that person's credentials, background, and certification.

“’So on this site, you'll find third party reports about Dick Van Dyke such as the Better Business Bureau, Society of Certified Senior Advisors and the National Ethics Bureau's extensive 7-year background check,’” says the state, quoting from Van Dyke’s website. “’He believes in principles like full disclosure and transparency and he doesn't sell investments on commission which means he's on your side so you get to reach your goals first before he does.’ When's the last time an investment advisor put you first?"

Registered reps have not been prosecuted for making claims on their websites that blur distinctions with RIAs or ignore them totally. If successful in its prosecution, Van Dyke would become an example—in Illinois and perhaps beyond—of what registered reps cannot say about their obligation to clients.

Illinois is asking a judge to order Van Dyke to disgorge all of the commissions he has earned on replacement annuity sales, assess $100,000 in civil penalties, pay an additional penalty of $10,000 for each violation of a state law to protect senior citizens, and pay for the cost of prosecuting the case. Illinois Assistant Attorney General Rebecca Pruitt signed the 18-page complaint naming financial advisor Richard Lee “Dick” Van Dyke, Jr., and Dick Van Dyke Financial, Ltd. 


“Defendant Dick Van Dyke engages in a pattern of conduct whereby he gains the trust of senior citizens by holding himself out as an objective, knowledgeable and unbiased financial services expert for consumers facing retirement, when in fact his undisclosed agenda is to sell deferred annuities as a one-size-fits-all financial solution for senior citizens,” says the complaint filed in Illinois State Court in Sangamon County.

“Defendants' website employed multiple marketing strategies and statements to portray Defendant Dick Van Dyke as a financial services provider with specialized expertise in advising elderly consumers facing retirement in a full range of financial, legal, and tax, and related matters,” says the complaint. “For example, the Mission Statement on Defendants' website states: ‘Our Mission: Assist our clients in achieving their goals and objectives by integrating all aspects of their financial well-being; including estate, investment, insurance, legal, and tax strategies. We assist them in gaining clarity amidst a world of increasing complexity. We serve as our client's Financial Quarterback by assisting them with a successful team approach.’”

“Despite representations of providing a full range of financial and other services, since January 2012, Defendants Dick Van Dyke Financial, Ltd. and Dick Van Dyke have been licensed only as an insurance agency and producer respectively,” says the state’s lawsuit.

Van Dyke says he never claimed he would provide legal, tax and other advice beyond insurance. He says his site made it clear that he “:quarterbacks” outside professionals. Van Dyke also says that he did not claim to be an RIA after he withdrew his registration and that he updated his website to reflect this before the registration was withdrawn.

The case could also have wider implications because the state’s action is premised on its assertion that indexed annuities are securities. Indexed annuities, which are insurance products that have an equity component, are controversial because insurers have maintained they are not securities and that reps do not need a securities license to sell them. Van Dyke says indexed annuities are widely accepted as insurance and not securities products and that Illinois is alone in its effort to see them regulated as securities. The Illinois Securites Department in June 2011 issued an order treating indexed annuities as securities.
“The interesting thing is the state claims that indexed annuities are a security,” says Van Dyke. “It is not a security and I believe I will prevail and seek damages because they have no jurisdiction.”

Van Dyke sounds genuine in his claims that the state is unfairly prosecuting him and he may indeed make a bad example for regulators trying to enforce the distinction between how RIAs and brokers advertise.

Van Dyke says he was investigated after a complaint was filed against him by a competing financial advisor. The other advisor, says Van Dyke, is trying to get a widow to invest assets with him and has persuaded her stepchildren that Van Dyke is giving her bad advice. Van Dyke says neither the widow nor any of his other clients have made any complaints to the state and that he has never had a customer complaint or regulatory problem.

The state says Van Dyke claimed on his website that two executives were members of his “team” when, in fact, they are executives at an insurance marketing organization. Van Dyke says he exchanged more than 4,000 emails with the tow individuals doing research on products to assist clients.

The lawsuit also includes a seminar invitation that the state says was deceptive because it claimed to not be a sales seminar, an annuity presentation or a “free meal come-on to get you to buy something.” Van Dyke says his RIA at the time provided advice on securities and financial planning and that the invitation was not deceptive.

Van Dyke, 56, formerly ran a small chain of appliance stores and is well-known name in the community, though not related to the famous comedian and TV star who bears the same name. “I’ve been in this community all my life and would never do anything to jeopardize my reputation here,” he says.

Van Dyke says the state offered to settle the case if he would sign a consent decree, but that he turned down the offer. “We will win this hands down,” he says. “Look at my book and my reputation and you will see that I am a good guy and that you should consider working with me.

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