The staff of the SEC’s Division of Investment Management (the “Staff”) provided no‑action relief to a registered adviser seeking to include information in advertising materials on how its best performing and worst performing security selections affected the performance of an investment strategy the adviser provides to its clients. Rule 206(4)-1(a)(2) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), prohibits a registered adviser from using any advertisement that refers to past specific recommendations that were or would have been profitable unless the advertisement includes or offers to furnish a list of all the adviser’s recommendations with specified information for each recommendation. The Staff has previously provided no-action relief from the prohibition in Rule 206(4)-1(a)(2) to allow an adviser to use an advertisement that contained information regarding the performance of selected securities recommendations provided they were chosen based on “objective, non‑performance based criteria consistently applied.”
The current no‑action relief broadens the scope of permitted securities recommendations presentations by allowing an ad to show securities recommendations selected based on their performance, albeit subject to a number of conditions. For an identified investment strategy, an adviser must select no fewer than ten individual holdings from a representative account, consisting of an equal number of (a) holdings that most positively contributed to the account’s return for the period and (b) holdings that most negatively contributed to the account’s return for the period. Holdings must be selected solely on the basis of a calculation that multiplies a holding’s weight in the portfolio for the period by its rate of return for that period. The presentation must provide both the average weight of the holdings during the period and the contribution of the holdings to the representative account’s return. The presentation of that information and number of holdings shown must be consistent from period to period. The advertisement must disclose how to obtain (a) the methodology for selecting the securities shown and (b) a list showing the contribution of each holding in the representative account to that account’s performance during the period. The best and worst performing holdings must be shown on the same page with equal prominence, with legends disclosing that the holdings identified do not represent all of the securities purchased, sold or recommended for advisory clients, and past performance does not guarantee future results. An adviser that uses advertising containing past specific securities recommendations in reliance on the no‑action relief must maintain specified supporting documentation for each ad and make it available for inspection by SEC personnel. The no‑action relief cautions that an advertisement complying with its terms must, nevertheless, also comply with the general anti‑fraud provisions of the Advisers Act and its rules.