MiFID 2; Investor Protection and Fair Advertising Rules.
Many details concerning the MiFID 2 regulation have yet to be clarified by ESMA and AFM the coming months as a part of the “Level III” regulation. A topic that is however lacking altogether in MiFID 2, but which is important for both the private client and his asset manager are fair, honest and clear rules on how to communicate and advertise about investment results. A missed opportunity in MiFID 2? The recent scandal about the VW diesel emission should have been a “wake up” call for the EU legislator!
To predict future legal developments in the EU regarding investor protection is a difficult task, but you will get probably a hint when you have a closer look at what is happening on the other side of the Atlantic. The Securities and Exchange Commission of the United States (“SEC”) issued a new Risk Alert (*) in September this year covering the theme Advertisements and Investor Protection.
When we will see a severe down turn in the financial markets in the coming years, this Risk Alert has the intention to highlight the changes of legal complaints and lawsuits by the “bruised” investors. What are the issues at risk? The Advertising Rule prohibits an investment advisor or asset manager from publishing any advertisement that contains any untrue statement of material fact or that is otherwise false or misleading.
Below you find the most frequent mentioned deficiencies:
Misleading Performance Results. For example, observed firms that presented performance results without deducting management fees. Or advertisements that compared results to a benchmark without a disclosure that the advertised strategy materially differed from the composition of the benchmark to which it was compared.
- Cherry-Picked Profitable Stock selection. Ads that included only profitable stock selections or recommendations in presentations, client newsletters, or on their websites.
- Misleading Selection of Recommendations. Investments firms that disclosed past specific investment recommendations that may have been misleading because they included only certain, and not all, recommendations, in order to illustrate a particular investment strategy,
- Misleading Use of Third Party rankings or Awards. For example, advertisements that referred to fund managers receiving high rankings in various publications, but those publications were issued several years prior and the rankings were no longer applicable.
- Testimonials. Are the client testimonials on your website real and verifiable?
To further improve the level playing field for the industry and a further strengthening of the Investor Protection, clear advertisement rules in the EU will be a gain for the credibility of the financial sector. Unfortunately, this is not addressed in MiFID 2.
December 19, 2017
(*) The Risk Alert focuses on certain deficiencies issued to advisers during the Touting Initiative regarding non-compliance with Rule 206(4)-1 of the Investment Advisers Act