NASAA Series 65, Uniform Investment Adviser Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesHard
An investment adviser (IA) advertises its advisory services using a website. According to the Investment Advisers Act of 1940 and associated rules, which of the following is a prohibited practice in IA advertising related to performance reporting?
- AShowing past performance results from a period longer than the last 5 years.
- BPresenting gross performance figures without disclosing the impact of advisory fees.
- CUsing charts and graphs to illustrate performance trends over time.
- DIncluding a clear disclosure that past performance is not indicative of future results.
Show answer & explanationAnswer & explanation
Correct answer: B. Presenting gross performance figures without disclosing the impact of advisory fees.
Presenting gross performance figures without disclosing the impact of advisory fees is a prohibited practice because it can be misleading. Performance figures must reflect the deduction of advisory fees and other expenses to accurately represent the client's actual return.
Why the other options are wrong
- A. There is no general prohibition on showing past performance for periods longer than 5 years, as long as it's not misleading and includes required disclosures.
- C. Using visual aids like charts and graphs is generally permissible, provided they are not misleading and accurately represent the data.
- D. This is a required disclosure, not a prohibited practice. It helps manage client expectations.
IA Advertising - Performance Reporting
Investment adviser advertising rules require that performance figures be presented fairly and not be misleading. This includes accurately reflecting the deduction of advisory fees and other expenses, and providing clear disclosures about past performance.
- Performance must be net of fees.
- Disclosures about market conditions and limitations are required.
- Past performance is not indicative of future results must be stated.
- Hypothetical performance has strict limitations.
Memory trick: Performance Ads: Show Net, Disclose, Don't Be Deceptive!