Les Abromovitz
Has Your Web site Entangled You in Compliance Problems?

Here's how to get disentangled.

May 21, 2009
by Les Abromovitz

Originally published in the CPA Insider e-newsletter.

A Web site is a great way for CPA, PFPs (certified public accountants who are personal financial planners) to market financial planning and investment advisory services. The rules governing registered investment advisers (RIAs), however, are quite strict and your Web site may entangle you in compliance problems.

Rule 206(4)-1 under the Investment Advisers Act of 1940 regulates advertisements, including Web sites. The goal of Rule 206(4)-1 is to prevent false or misleading advertisements. Web sites must not contain any untrue statement of a material fact. Furthermore, the content must not be false or misleading in any way. Although Rule 206(4)-1 applies only to investment advisers registered with the SEC, state rules usually contain similar prohibitions.

Watch Out for Testimonials

CPA, PFPs do not always maintain a separate Web site describing the financial planning and/or wealth management services they offer. The danger of failing to maintain a separate Web site is that content that describes the pure accounting side of the business may be inappropriate for an RIA’s use. For example, Rule 206(4)-1(a)(1) prohibits ads that refer “directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.” A client endorsement located on the Web site’s accounting pages might be construed as a testimonial for the RIA. Even posting the results of client surveys on a Web site might violate the prohibition against advertisements containing testimonials.

Even if a PFP has a separate Web site to market advisory services, there may still be an inadvertent violation of the rule against testimonials. If the Web sites are linked to each other, an SEC or state securities examiner might view the content of the accounting Web site to be an advertisement for the advisory firm. One possible solution is for each Web site to be separate and distinct with no hyperlinks joining them. Furthermore, the accounting Web site should not promote the firm’s advisory services in any way.

If Web site marketing for accounting and advisory services is intertwined in any way, the most conservative approach is to remove all testimonials from the CPA Web site. In addition, the RIA’s compliance department should scrutinize the other content on the accounting Web site to ensure that it does not violate Rule 206(4)-1.

Avoid False or Misleading Content

Investment advisers must stay away from the marketing hype that is so common on Web sites for other products and services. Overstating qualifications, expertise, experience and previous investment success may lead securities regulators to believe that the content of an adviser’s Web site is false or misleading. Furthermore, clients are likely to be dissatisfied if the adviser creates high expectations and doesn’t meet them. Dissatisfied clients are far more likely to complain to regulators or hire an attorney. At a minimum, inflating clients’ expectations and then not meeting or exceeding them can damage an adviser’s reputation. RIAs should avoid using superlatives when describing their firm and must never make brash, unsubstantiated statements about their abilities.

Too many advisers use language that clients might interpret as a guarantee. PFPs should refrain from statements indicating that their investment strategy or approach to investing is a sure thing. They should not imply that their money management methods are risk free or that clients are sure to reach their investment goals or exceed a particular benchmark.

Bios on a Web site also should be restrained and may not be false or misleading in any way. Fees, education and experience must be consistent with how they are described in Form ADV, an adviser’s disclosure document. A PFP’s bio should clearly distinguish accounting experience from time spent as a financial planner or money manager. For example, saying that the firm has been in business for decades may be misleading if the RIA was established years after the accounting entity came into existence.

Credentials used by firm members may sometimes be viewed as false or misleading. An advisory Web site should make clear if an investment adviser representative (IAR) is an inactive CPA. IARs should also avoid designations that imply they have special expertise in counseling senior investors. Although the PFS designation is well respected by securities regulators and may be mentioned in almost all marketing materials, the SEC has warned consumers about far less meaningful credentials such as “senior specialist.” Thus, although PFPs can advertise their expertise and experience in advising senior investors, they should avoid ads claiming that they are uniquely qualified to do so.

Take Out the Web site Trash

To avoid entanglement in compliance problems, investment advisers must take out the Web site trash on a regular basis. Advisers should exercise caution before posting materials on their Web site and must review them regularly to ensure that they continue to satisfy regulatory requirements. Too many advisers launch a Web site and then ignore it from that point forward. Even if the content met regulatory standards initially, it may become false or misleading over time if not updated frequently. If information on a Web site becomes stale, it may come to violate Rule 206(4)-1.

Advisers have been criticized in deficiency letters for misstating their assets under management. An adviser may not realize that its Web site misstates the firm’s assets under management. Sometimes, these inaccuracies are contained in old newsletters or articles that remain posted on the Web site. An ignored Web site also might refer to IARs who are no longer with the firm. Outdated performance results can also cause problems. An examiner may question why an adviser has not updated its performance advertising, especially if more recent results aren’t as impressive. Performance advertising is scrutinized by regulators, so it’s imperative that advisers be extremely careful and follow all of the rules.

Aside from the compliance problems caused by using old information on a Web site, it also makes a bad impression on potential clients. These potential clients may become skeptical if an adviser hasn’t added new content for many months or the latest press release is several years old. They are likely to be frustrated if links are no longer active. A neglected Web site offers little in the way of educational value and is unlikely to generate traffic.

High-tech Compliance Problems

High-tech marketing tools can cause compliance problems. An adviser’s blog is an advertisement that must comply with Rule 206(4)-1. Even a PFP’s writing on someone else’s blog may be construed as an advertisement for the advisory firm if the RIA is referred to in any way. A URL address might be false or misleading. It is also possible for a firm’s meta tags and key words to violate Rule 206(4)-1. Messages sent to multiple clients using a PDA might also be a form of advertising that must comply with Rule 206(4)-1.

Some advisers have added DVD presentations to their Web sites. Before incurring that expense, however, advisers should make sure the content, graphics and images have been reviewed for compliance purposes.

Final Words to Consider

From the compliance standpoint, it’s important for advisers to remember that they are building a Web site, not an Internet waste basket. A sparse advisory Web site is a better option than one that is filled with content that will get the firm in trouble with regulators.

To avoid problems, the firm’s compliance department should approve all Web site content before it is posted. Web site and marketing gurus that the firm hires should be made aware that absolutely no content is to go online without approval from the designated compliance person. Furthermore, an adviser’s chief compliance officer or a designee should monitor the Web site regularly to make certain that the content remains fresh. This oversight should be spelled out clearly in an adviser’s policies and procedures.

Although a professional Web site brings some degree of credibility to an adviser, it also adds to the firm’s visibility. A competitor might notice a compliance problem and make a complaint to the SEC or state regulators. Regulators respond to anonymous complaints and they often trigger an examination. No PFP wants to be accused of weaving a web of deceit

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Les Abromovitz, an attorney, has conducted hundreds of compliance reviews of investment advisory Web sites and marketing materials. He is the author of Growing Within the Lines: The Investment Adviser’s Advertising and Marketing Compliance Guide (National Underwriter 2008), as well as several personal finance books. Les has been a frequent speaker on investment adviser compliance issues at a number of national conferences.