SEC ALLOWS MARKETING MATERIALS TO INCLUDE TOP 5 AND BOTTOM 5 RECOMMENDATIONS
In a recent No-Action Letter, the SEC’s Division of Investment Management allowed an investment manager to distribute marketing materials to prospective clients that included past specific recommendations so long as the presentation also included an equal number of holdings that contributed most negatively to account performance. The manager utilized a mathematical tool that selected securities based on their weighting and performance to select the securities that had the most significant impact on a representative account’s performance. The relief’s conditions included that the manager show at least 10 holdings (at least five positive and negative), utilize consistent measurements periods, add proper disclosure so that the material is not otherwise misleading, and maintain applicable supporting documentation available for review by customers and the SEC.
OUR TAKE: The SEC does not often depart from its position that providing past specific recommendations to prospective clients is generally prohibited. This concept of using a mathematical model to show both positive and negative contributions provides managers a new avenue to show prospective clients how they contribute to performance.