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RECURRING PROBLEMS IN SEC EXAMINATIONS

As the agency reviews social media behavior among financial professionals, it has found a number of issues that surface in the course of its exams. Advisors who are involved with social media need to pay closer attention to these areas, since regulators have identified them as trouble spots:

Cherry-Picking Composites/Accounts – Advisors who promote their performance need to avoid the selection of accounts with outsized performance records that would lead investors to assume such results are the norm. Likewise, avoid choosing beneficial time periods for reporting results or hiding important caveats in small print.

Comparing Performances to Inappropriate Indices – Benchmark a growth fund with other growth funds, for example, instead of yield from a Treasury bond.

Representing Model or Back-tested Performances as Actual – Disclosures that relate the distinction should be clearly displayed. Such data also should only be provided to sophisticated clients who understand the material.

Portability of Performance – The ability of an investment advisor to cite as his own performance the performance of a predecessor firm or a firm at which the advisor's portfolio managers previously managed accounts is closely monitored. Be clear about what share of a particular measurement of performance can be attributed to your own effort.

Inaccurate Assets under Management – Regulators frown on inflating the amount of investments managed by your practice.

False GIPS Claims – Financial firms cannot misrepresent their results as complying with Global Investment Performance Standards (GIPS), created by the CFA Institute.

Not Presenting Net-of-Fccs Performance Data – Portfolio results that include only gross gains without subtracting what fees were charged to obtain the results are also frowned upon (especially if such results happen to be posted on websites).

In the wake of the financial crisis of 2008 and the Bernie Madoff scam that led to bankrupt retirements, both regulators and investors have sharpened their attention to investor protection issues. And the new digital world will likely present new opportunities to detect breaches in investor protection areas. So as firms and financial professionals venture into social media, remember to protect prospective clients in the same way you would want to be protected.

 
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