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INVESTMENT ADVISER AND MUTUAL FUND ADVERTISING

April 18, 2000

Pamela J. WilsonHale and Dorr LLP

How to Tell if a Communicationis “Advertising”

How to Tell if a Communicationis “Advertising”

A communication is advertising if it

• Is in writing, on tape or in a broadcastmedium;

• Is addressed to more than one person; and

• Offers mutual fund shares or anysecurities–related investment advisory service

A communication is advertising if it

• Is in writing, on tape or in a broadcastmedium;

• Is addressed to more than one person; and

• Offers mutual fund shares or anysecurities–related investment advisory service

How to Tell if a Communication is“Advertising”

How to Tell if a Communication is“Advertising”

Rule of Thumb

• If the only rational purpose of material ismarketing, it may be advertising

• When in doubt, treat a communication asadvertising

Rule of Thumb

• If the only rational purpose of material ismarketing, it may be advertising

• When in doubt, treat a communication asadvertising

Examples of AdvertisingExamples of Advertising

• Marketing brochures

• Paid advertising in periodicals and otherpublications

• Television, radio or other broadcastadvertising

• Internet web sites

• Marketing brochures

• Paid advertising in periodicals and otherpublications

• Television, radio or other broadcastadvertising

• Internet web sites

Examples of AdvertisingExamples of Advertising• Form letters and mass mailings

• E–mail messages that are sent to multiplerecipients

• Audio or video tapes of marketingpresentations

• Slides used in marketing presentations

• Form letters and mass mailings

• E–mail messages that are sent to multiplerecipients

• Audio or video tapes of marketingpresentations

• Slides used in marketing presentations

Examples of AdvertisingExamples of Advertising• Press releases and some interviews

• Reprints of third party publications

• Questionnaires from independent ratingservices

• Press releases and some interviews

• Reprints of third party publications

• Questionnaires from independent ratingservices

Examples of AdvertisingExamples of Advertising• Performance presentations used for more

than one prospective client

• Telemarketing scripts

• Internal or dealer use only material thatactually reaches clients or fund investors

• Performance presentations used for morethan one prospective client

• Telemarketing scripts

• Internal or dealer use only material thatactually reaches clients or fund investors

Items that are NOT AdvertisingItems that are NOT Advertising• In person, telephone or other oral

conversations

• Customized responses to advisory clientquestionnaires

• Responses to advisory client and fundinvestor requests for information

• In person, telephone or other oralconversations

• Customized responses to advisory clientquestionnaires

• Responses to advisory client and fundinvestor requests for information

Even items that are not advertising are subject to SECanti-fraud rules and enforcement action

Even items that are not advertising are subject to SECanti-fraud rules and enforcement action

Items that are NOT AdvertisingItems that are NOT Advertising• Regular account or fund shareholder

statements and reports sent only to existingclients or shareholders

• But NOT not to solicit new business from orsell other funds to prospective or existingclients or shareholders

• Regular account or fund shareholderstatements and reports sent only to existingclients or shareholders

• But NOT not to solicit new business from orsell other funds to prospective or existingclients or shareholders

Items that are NOT AdvertisingItems that are NOT Advertising• Fund shareholder reports with performance

information for only those periods covered bythe financial statements

• Academic articles that discuss a portfoliomanagement methodology, but do not offeradvisory services or fund shares

• Fund shareholder reports with performanceinformation for only those periods covered bythe financial statements

• Academic articles that discuss a portfoliomanagement methodology, but do not offeradvisory services or fund shares

SEC Restrictions on the Contentof Adviser Advertising


Don’t put the following in advertising

• Testimonials or offers to provide testimonials (Thiscan include photographs)

• A selective list of fewer than all clients withoutdisclosing the “as of” date, the basis for selection(which can’t be performance) and that listing doesn’timply clients’ recommendation of adviser


• Testimonials or offers to provide testimonials (Thiscan include photographs)

• A selective list of fewer than all clients withoutdisclosing the “as of” date, the basis for selection(which can’t be performance) and that listing doesn’timply clients’ recommendation of adviser

SEC Restrictions on the Content ofAdviser Advertising



• “Cherry picking:” performance data about selectedpast specific investment recommendations

• Any suggestion that a graph, chart, formula orother device for selecting securities may be reliedon by investors, unless accompanied by aprominent warning about the limitations of usingthese devices


• “Cherry picking:” performance data about selectedpast specific investment recommendations

• Any suggestion that a graph, chart, formula orother device for selecting securities may be reliedon by investors, unless accompanied by aprominent warning about the limitations of usingthese devices




• Any suggestion that a product or service isfree, unless it is true and there areabsolutely no strings attached

• Statements of fact or opinion which cannotbe documented or proved (even if you aresure they are true)


• Any suggestion that a product or service isfree, unless it is true and there areabsolutely no strings attached

• Statements of fact or opinion which cannotbe documented or proved (even if you aresure they are true)




• Prohibited representations aboutcompliance with AIMR standards

• Performance information that does notcomply with SEC requirements


• Prohibited representations aboutcompliance with AIMR standards

• Performance information that does notcomply with SEC requirements



You may include in in advertising

• Accurate portfolio composition data such asindustry, sector and country weights

• Accurate information about the adviser’spersonnel, history, business philosophy andportfolio management strategies andmethodologies


• Accurate portfolio composition data such asindustry, sector and country weights

• Accurate information about the adviser’spersonnel, history, business philosophy andportfolio management strategies andmethodologies




• Performance of indices or any otherfinancial statistics (other than actual ormodel account performance) withdisclosure of the “as of ” date and thesource


• Performance of indices or any otherfinancial statistics (other than actual ormodel account performance) withdisclosure of the “as of ” date and thesource



You may include in advertising an entire list ofrecommendations for at least one year, accompaniedby:

• Name of each security

• Date and whether recommendation was to buy, sell orhold

• The security’s price on the recommendation date, the tradedate and as of a recent date

• That future recommendations may not be profitable orperform as well as past recommendations

You may include in advertising an entire list ofrecommendations for at least one year, accompaniedby:

• Name of each security

• Date and whether recommendation was to buy, sell orhold

• The security’s price on the recommendation date, the tradedate and as of a recent date

• That future recommendations may not be profitable orperform as well as past recommendations

Fund Advertising: NASD ConductRule 2210 and SEC Rule 156


Don’t include:

• Exaggerated, unwarranted or misleadingstatements or claims about

– Management skill or techniques

– Characteristics or the investment quality of thefund

– Degree of risk involved

– Effects of government supervision

Don’t include:

• Exaggerated, unwarranted or misleadingstatements or claims about

– Management skill or techniques

– Characteristics or the investment quality of thefund

– Degree of risk involved

– Effects of government supervision



Don’t include:

• Any express or implied projection orpromise of future performance

• Any statement of material fact that is untrueor otherwise misleading

Don’t include:

• Any express or implied projection orpromise of future performance

• Any statement of material fact that is untrueor otherwise misleading



You must include:

• Any statement needed to preventinformation from being false or misleading

• The name of the NASD member who is thefund’s distributor or selling dealer

You must include:

• Any statement needed to preventinformation from being false or misleading

• The name of the NASD member who is thefund’s distributor or selling dealer



You must include disclosure that:

• The net asset value and principal value ofthe fund’s shares will fluctuate

• The fund’s shares when redeemed may beworth more or less than their original cost

You must include disclosure that:

• The net asset value and principal value ofthe fund’s shares will fluctuate

• The fund’s shares when redeemed may beworth more or less than their original cost



You may include:

• Performance data, if it is not misleading andis accompanied by a warning that it is basedon historical results and may not indicatefuture results

• Performance rankings that comply with IM2210-3 of NASD Regulation

You may include:

• Performance data, if it is not misleading andis accompanied by a warning that it is basedon historical results and may not indicatefuture results

• Performance rankings that comply with IM2210-3 of NASD Regulation



You may include:

• Comparisons to other types of investmentsor indices, if accompanied by anexplanation of

– The purpose of the comparison

– Any material differences between investingin fund shares and the compared investment

You may include:

• Comparisons to other types of investmentsor indices, if accompanied by anexplanation of

– The purpose of the comparison

– Any material differences between investingin fund shares and the compared investment

Fund Advertising: SEC Rule 134Fund Advertising: SEC Rule 134Don’t include:

• Any fund performance data

• Any information not expressly listed in Rule134

Do include this legend:

Don’t include:

• Any fund performance data

• Any information not expressly listed in Rule134

Do include this legend:

For more complete information about the fund, including charges andexpenses, please send for a prospectus from [name]. Read it carefully

before you invest or send money.

For more complete information about the fund, including charges andexpenses, please send for a prospectus from [name]. Read it carefully

before you invest or send money.

Fund Advertising: SEC Rule 134Fund Advertising: SEC Rule 134

You may only include:

• A general description of the fund

• Investment objectives, investment policiesand primary investments

• Whether the fund is diversified

• Fund’s methods of operations


• A general description of the fund

• Investment objectives, investment policiesand primary investments

• Whether the fund is diversified

• Fund’s methods of operations



• Services offered by the fund

• Names of the fund’s adviser, distributor andprincipal officers

• How long the fund and/or adviser have existed

• Recent aggregate net asset value of the fund orall funds in the same group


• Services offered by the fund

• Names of the fund’s adviser, distributor andprincipal officers

• How long the fund and/or adviser have existed

• Recent aggregate net asset value of the fund orall funds in the same group



• Information about economic conditions,retirement plans or investor goals

• Any logo or graphic design

• Attention getting headlines


• Information about economic conditions,retirement plans or investor goals

• Any logo or graphic design

• Attention getting headlines


Don’t include:

• Any information that doesn’t appear in thefund’s prospectus or SAI

• Any non-conforming performance data,including non-standard yield or distributionrates

• Any application form to buy fund shares

Don’t include:

• Any information that doesn’t appear in thefund’s prospectus or SAI

• Any non-conforming performance data,including non-standard yield or distributionrates

• Any application form to buy fund shares


Do include this or a similar legend:Do include this or a similar legend:

A prospectus containing morecomplete information may be

obtained from [name]. Aninvestor should read the

prospectus carefully beforeinvesting.

A prospectus containing morecomplete information may be

obtained from [name]. Aninvestor should read the

prospectus carefully beforeinvesting.


Do include, for money market funds, aprominent statement that:

• An investment in the fund is neither insurednor guaranteed by the U.S. government and

• There is no guarantee that the fund will beable to maintain a stable net asset value of $1per share

Do include, for money market funds, aprominent statement that:

• An investment in the fund is neither insurednor guaranteed by the U.S. government and

• There is no guarantee that the fund will beable to maintain a stable net asset value of $1per share

Fund Sales Literature:SEC Rule 34b-1


Don’t include:

• Any information that is misleading or thatcontradicts the fund’s prospectus or SAI

• Any non-conforming performance data, unless it isaccompanied by the standard SEC total return andyield figures

DO say that the sales literature must be accompaniedor preceded by the fund’s prospectus

Don’t include:

• Any information that is misleading or thatcontradicts the fund’s prospectus or SAI

• Any non-conforming performance data, unless it isaccompanied by the standard SEC total return andyield figures

DO say that the sales literature must be accompaniedor preceded by the fund’s prospectus



You may include:

• Any truthful information that is not misleadingin the context of the sales literature

• Performance data that complies, or isaccompanied by data that complies, with SECstandards, if accompanied by required legendsand disclaimers

You may include:

• Any truthful information that is not misleadingin the context of the sales literature

• Performance data that complies, or isaccompanied by data that complies, with SECstandards, if accompanied by required legendsand disclaimers

Using Performance Data inAdviser Advertising


Disclosure required in all performanceadvertising

• The investment objectives and strategies ofthe accounts whose performance is shown

• The periods covered by the performancefigures


• The investment objectives and strategies ofthe accounts whose performance is shown

• The periods covered by the performancefigures




• All relevant differences and similaritiesbetween the adviser’s accounts and any indexincluded for comparison purposes

• Whether performance data reflects thereinvestment of dividends and interest


• All relevant differences and similaritiesbetween the adviser’s accounts and any indexincluded for comparison purposes

• Whether performance data reflects thereinvestment of dividends and interest




• If the potential for profit is suggested, a warningconcerning the possibility of loss

• Effect of material market or economic conditionson the performance shown

• That past performance is not an indication of futureperformance


• If the potential for profit is suggested, a warningconcerning the possibility of loss

• Effect of material market or economic conditionson the performance shown

• That past performance is not an indication of futureperformance



Deducting advisory fees and expenses fromperformance figures:

SEC requirement: Except in one–on–onepresentations, performance figures must be

presented net of the actual (or highest applicable)fees, expenses (other than custody fees) and

brokerage commissions a client paid or would havepaid


SEC requirement: Except in one–on–onepresentations, performance figures must be

presented net of the actual (or highest applicable)fees, expenses (other than custody fees) and

brokerage commissions a client paid or would havepaid




• The inclusion of gross performance withnarrative disclaimers does not satisfy thisrequirement

• If the adviser does not charge a uniform rate toall clients, it may deduct from actual or modelperformance the highest applicable fee rate thatcould be imposed for that type of account


• The inclusion of gross performance withnarrative disclaimers does not satisfy thisrequirement

• If the adviser does not charge a uniform rate toall clients, it may deduct from actual or modelperformance the highest applicable fee rate thatcould be imposed for that type of account




• Gross performance data may accompany netperformance data in advertising but no moreprominently than net performance data coveringthe same periods


• Gross performance data may accompany netperformance data in advertising but no moreprominently than net performance data coveringthe same periods

Using Actual Performance Data inAdviser Advertising

Using Actual Performance Data inAdviser Advertising

• Generally, performance data for a particulartype of account should reflect theperformance of all similarly managed clientaccounts

• Advisers may not “cherry pick” just thebetter performing accounts

• Generally, performance data for a particulartype of account should reflect theperformance of all similarly managed clientaccounts

• Advisers may not “cherry pick” just thebetter performing accounts

Using Actual Performance Datain Adviser Advertising

Using Actual Performance Datain Adviser Advertising

It is okay to exclude accounts for the followingreasons

• The excluded accounts are unrepresentative oftypical client accounts

• The excluded accounts have dissimilar or atypicalinvestment policies or sizes

• The excluded accounts have not been under theadviser's management for the period covered by theperformance data

It is okay to exclude accounts for the followingreasons

• The excluded accounts are unrepresentative oftypical client accounts

• The excluded accounts have dissimilar or atypicalinvestment policies or sizes

• The excluded accounts have not been under theadviser's management for the period covered by theperformance data

Additional Disclosure Requiredfor Actual Performance

Advertising

Additional Disclosure Requiredfor Actual Performance

Advertising• That the performance results represent the

performance of all or selected client accounts

• If the results represent the performance offewer than all accounts, the basis for, andeffect on performance of, selecting theaccounts whose performance is shown

• That the performance results represent theperformance of all or selected client accounts

• If the results represent the performance offewer than all accounts, the basis for, andeffect on performance of, selecting theaccounts whose performance is shown

Additional Disclosure Needed forModel Performance Advertising


• The limitations inherent in model results,including that the results do not reflectactual trading or the impact of materialeconomic and market factors on theadviser’s decision–making process foractual client accounts

• The limitations inherent in model results,including that the results do not reflectactual trading or the impact of materialeconomic and market factors on theadviser’s decision–making process foractual client accounts



• Any material changes in the model orstrategy during the performance period andthe effect of these changes on the resultsshown

• Do not use retroactive changes in themodel to improve past performance results

• Any material changes in the model orstrategy during the performance period andthe effect of these changes on the resultsshown

• Do not use retroactive changes in themodel to improve past performance results



• Any material differences between the modeland the current investment strategies actuallybeing used or offered by the adviser

• Material differences in performance betweenthe model and actual results achieved by theadviser’s client accounts

• Any material differences between the modeland the current investment strategies actuallybeing used or offered by the adviser

• Material differences in performance betweenthe model and actual results achieved by theadviser’s client accounts

Disclosure Required for“Backtested” Model Performance Disclosure Required for“Backtested” Model Performance

• That the advertised results do not representthe results of actual client trading

• But were achieved through the retroactiveapplication of a model constructed on thebasis of historical data and designed with thebenefit of hindsight

• That the advertised results do not representthe results of actual client trading

• But were achieved through the retroactiveapplication of a model constructed on thebasis of historical data and designed with thebenefit of hindsight

Disclosure Required for“Backtested” Model PerformanceDisclosure Required for“Backtested” Model Performance

• That the model may not perform as wellwhen applied prospectively

• Note: Although not prohibited, backtestedresults are a frequent subject of enforcementproceedings and should therefore be eitheravoided or used with extreme caution

• That the model may not perform as wellwhen applied prospectively

• Note: Although not prohibited, backtestedresults are a frequent subject of enforcementproceedings and should therefore be eitheravoided or used with extreme caution

One–on–One Presentations ofGross Performance Data


• You may present gross performance data inone–on–one presentations to clients who havethe opportunity to ask questions and understandthe significance of gross performance figures

• You may present gross performance data toconsultants who agree to use it only inone–on–one presentations with their clients

• You may present gross performance data inone–on–one presentations to clients who havethe opportunity to ask questions and understandthe significance of gross performance figures

• You may present gross performance data toconsultants who agree to use it only inone–on–one presentations with their clients



• Presentations are not one–on–one unless theyare in person (as opposed to the mailing ofwritten materials)

• Seminars and presentations to more than oneprospective client at a time are notone–on–one presentations

• Presentations are not one–on–one unless theyare in person (as opposed to the mailing ofwritten materials)

• Seminars and presentations to more than oneprospective client at a time are notone–on–one presentations

Required Disclosure forOne–on–One Presentations of

Gross Performance Data


Gross Performance Data• That results do not include advisory fees

• That a client’s return would be reduced by feesand other expenses

• That the adviser’s fee schedule is described inPart II of the adviser’s Form ADV (even ifactual fee rates are also included in the writtenmaterials)

• That results do not include advisory fees

• That a client’s return would be reduced by feesand other expenses

• That the adviser’s fee schedule is described inPart II of the adviser’s Form ADV (even ifactual fee rates are also included in the writtenmaterials)


Gross Performance Data


Gross Performance Data• An example, in the form of a table, chart,

graph or narrative, showing thecompounding effect of the highest fee aclient could be charged for that type ofaccount

• An example, in the form of a table, chart,graph or narrative, showing thecompounding effect of the highest fee aclient could be charged for that type ofaccount

Fund Performance Advertising

• Complying with fund advertising rules leadsto automatic compliance with most adviserperformance advertising requirements

• All fund performance advertising shouldsay that past performance is not anindication of future results

Money Market FundPerformance Advertising

Any quotation of yield should:• Identify length of and last day in period• Be computed in accordance with SEC

formula and be either:– Current yield– Current plus effective yield for the same

period and with equal prominence

Performance Advertising byOther Funds

• Only standard SEC yields and tax equivalentyields may be shown in stand-aloneadvertising--not distribution rates

• But, to assist with shareholder tax planning, arecorded telephone yield tape may disclose thescheduled date and dollar amount of expecteddividends and distributions

Performance Advertising byOther Funds

• Standard SEC total return must be shown for 1,5 and 10 year (or shorter life of fund) periodsthrough the last calendar quarter

• The maximum applicable sales charge must bedisclosed

Using Performance of RelatedAccounts in Fund Advertising

SEC no-action letters allow inclusion in fundadvertising of performance for thefollowing types of accounts:– A portfolio that was rolled over into a

registered fund and was not created as anincubator fund (allowed by NASD also)

Using Performance of RelatedAccounts in Fund Advertising

SEC no-action letters allow inclusion in fundadvertising of performance for thefollowing types of accounts:– A substantially identical fund, non-fund

account or group of accounts managed by thesame adviser (would be allowed by a proposedNASD rule)

Common Adviser AdvertisingViolations in Recent Cases


• Overstatement of assets under managementor years in business

• List of representative clients that includesonly a particular type of client comprisingonly 10% of adviser’s clients

• Testimonials from unnamed persons

• Overstatement of assets under managementor years in business

• List of representative clients that includesonly a particular type of client comprisingonly 10% of adviser’s clients

• Testimonials from unnamed persons



• Presenting composite performance thatincludes only the best performing accountswithout disclosing this

• Failing to deduct fees from performancefigures, failing to disclose that fees are notdeducted or falsely stating that fees arededucted

• Presenting composite performance thatincludes only the best performing accountswithout disclosing this

• Failing to deduct fees from performancefigures, failing to disclose that fees are notdeducted or falsely stating that fees arededucted



• Representing model or backtested performanceas actual performance, not identifyinglimitations of model performance and showingmodel performance that is superior to actualperformance without saying so

• Failing to disclose that performance reflects thereinvestment of dividends

• Representing model or backtested performanceas actual performance, not identifyinglimitations of model performance and showingmodel performance that is superior to actualperformance without saying so

• Failing to disclose that performance reflects thereinvestment of dividends



• Reporting fictitious performance results

• Falsely representing that performance figuresare audited or AIMR compliant

• Making misleading comparisons with theperformance of market indices

• Failing to keep supporting records

• Reporting fictitious performance results

• Falsely representing that performance figuresare audited or AIMR compliant

• Making misleading comparisons with theperformance of market indices

• Failing to keep supporting records

Top 10 Tips for AdvertisingCompliance Personnel

• Develop a comprehensive filing system forall marketing material. Know whatmarketing material your firm is circulating!

• Maintain backup records for all advertisingmaterial (i.e. numerical data forperformance calculations)


• Check your web-site regularly and conductyour own periodic oversight of advertisingand sales practices

• Provide training to your marketing staff onthe current policies in effect. Establishcompliance checklists and/or guidelines


• Supervise the process for distributingmarketing materials

• Make sure that all material is current andthat all 482 advertisements are consistentwith the prospectus and SAI

• Establish a self-audit program formarketing


• Make sure that you are informed of anyshareholder complaint that relates toadvertising

• Establish written policies and procedures• Review all questionnaires that are filled out

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