Investment Adviser Marketing, GIPS and Social Media February 11, 2014

1. Investment Adviser Marketing, GIPSand Social MediaFebruary 11, 2014 Amy Jones Guardian Performance Solutions LLC 836 57th Street Sacramento, CA 95819 (916) 282-2161 amy@compliantperformance.com Michael S. Caccese K&L Gates LLP One Lincoln Street Boston, MA 02111 (617) 261-3133 michael.caccese@klgates.com

2. Performance Advertising and Social Media • Legal Requirements • Common Violations • GIPS: Global Investment Performance Standards • Social Media

3. Legal Requirements • Advertisements are defined broadly • Includes communications designed to maintain existing clients or solicit new clients • Oral communications with a client/prospective client and tailored communications are NOT included • Plenty of guidance – statute, rule, no-action letters and enforcement • Limitations on advertising captured within general antifraud provision of the Investment Advisers Act (Section 206) • Rule 206(4)-1 provides specific limitations • Testimonials • Past specific recommendations (without additional disclosures) • Free services (unless truly free of any condition or obligation) • False or misleading statements (subjective determination; requires consideration of facts and circumstances) • Recordkeeping obligations (Rule 206(4)-2) apply

4. Legal Requirements: Performance • Performance advertising must be considered in the context of whether it is “false or misleading” • Does the presentation of performance imply (or cause the reader to infer) something about the adviser that would not be true if advertisement included all material facts? (Clover Capital) • Consider: • Market conditions • Gross vs. net performance • Reinvestment of dividends • Possibility of loss • Proper index/benchmark • Experience of all clients in strategy • Model performance can be used, if done in accordance with guidance

5. Common Issues • Providing past recommendations; using past recommendations to describe strategy • Portability - using performance results achieved at a prior firm • Gross vs. net performance • Advertising by private fund/hedge fund advisers • Using materials in non-US jurisdictions

6. Common Violations • Cherry picking recommendations • Presenting model or backtested performance data as actual performance data • Not presenting performance data net of fees • Reprinting articles or rankings discussing the investment adviser without making the appropriate qualifications and disclosures • Publishing performance data without maintaining records sufficient to substantiate claims • Aberrational performance – Aberrational Performance Inquiry Initiative

7. SEC’s Aberrational Performance Inquiry (“API”) Initiative • Joint effort of Enforcement, OCIE and RiskFin • Uses proprietary risk analytics to identify suspicious returns • Performance that appears inconsistent with investment strategy/benchmarks forms the basis for further scrutiny

8. API Enforcement Actions and Proceedings • In re GLG Partners, Inc. and GLG Partners, L.P. • Enforcement Action (Dec. 2013) • Finding violation of the Exchange Act and securities laws for: failure to maintain sufficient controls on asset valuation and failure to present material valuation information, to a 25% overvaluation of certain fund assets. This overvaluation resulted in misleading filings with the SEC. • Sanctions. Must retain an independent consultant to recommend new procedures and practices; Must initially adopt all recommendations from the independent consultant and submit to periodic certifications and tests of these new policies; disgorgement in the amount of $7,766,667; prejudgment interest of $437,679; civil penalties of $750,000. • In re LeadDod Capital Markets, LLC, et. al. • Enforcement Action (Sep. 2012) • Finding willful violation of the antifraud provisions Securities, Exchange and Advisers Acts for making material misrepresentations and omissions to hedge fund investors and prospects regarding: disciplinary history of the adviser’s principals, liquidity and percentage of illiquid assets, and failure to disclose certain related party transactions. • Sanctions. Barred from association with industry participants; disgorgement in the amount of $221,000; $130,000 in civil penalty; Respondent LaRocco permanently barred from appearing or practicing before the SEC as an attorney.

9. Pending Proceedings Relating to API Initiative • SEC v. Patrick G. Rooney and Solaris Management • Pending Action (Complaint filed Nov. 2011, N.D. IL) • SEC alleges that an adviser (through its principal) fraudulently changed a fund’s strategy (contrary to offering documents and marketing materials) by investing $3.6 million in a financially troubled microcap company of which the adviser’s principal was the Chairman, in addition to receiving undisclosed compensation from the microcap company. • SEC v. Michael R. Balboa and Gilles T. De Charsonville • Pending Action (Complaint filed Dec. 2011, S.D. NY) • SEC alleges defendants inflated a fund’s returns and NAV by influencing brokers to provide fabricated prices of the fund’s illiquid securities to independent valuators, resulting in overvaluation by at least $163 million, attraction of at least $410 million in new capital, deterrence of $230 million in redemptions and millions in inflated fees • SEC v. Yorkville Advisors, LLC, et. al. • Pending Action (Complaint filed Nov. 2012, S.D. NY) • SEC alleges an advisor’s founder and CFO falsely portrayed the adviser as managing a highly-collateralized investment portfolio and employing a robust valuation procedure, while misrepresenting safety/liquidity of hedge fund assets and supporting collateral, ignoring internal valuation policies, withholding information from auditors and collecting at least $10 million in excess fees based on inflated AUM. • Relief sought in each proceeding: • Claims under Section 17(a) of the Securities Act, Rule 10b-5 of the Exchange Act and Section 206 and Rule 206(4)-8 of Advisers Act. • Seeking: injunction, disgorgement, pre-judgment interest and civil penalties.

10. Investment Performance Portability • Un-linked • Persons responsible for performance at new firm were among those responsible at prior firm • Accounts managed the same • Accounts selected not cherry picked • Appropriate disclosure • Supporting records

11. Investment Performance Portability Linked • All “unlinked” conditions met • Solely responsible for performance at both firms (same investment decision makers) • GIPS - disclosure that performance is linked

12. Recordkeeping • Client communications and distribution lists • Copies of all written communication • No record of who sent to if sent to more than 10 recipients • Advertisements and Recommendations • All advertisements sent to more than 10 recipients • Document basis of all recommendations

13. Recordkeeping • Records to support performance calculations • “necessary to form the basis for or demonstrate the calculation of the performance” • Internal account statements and worksheets • Prepared contemporaneously • Third party records to substantiate claims • Retention periods • Necessary to support performance: • In articles • From prior firm

14. Adviser Use of Social Media: Considerations • Rule 206(4)-1: Advertising • Testimonial prohibition • Third-party content vs one way posts • Rule 206(4)-2: Recordkeeping • Difficulties related to dynamic/interactive nature • Rule 206(4)-7: Compliance Rule policies and procedures • OCIE’sRisk Alert (Jan. 2012) • FINRA Guidance

15. Social Media: Overview Develop a social media strategy, taking into consideration relevant business objectives and available resources Social media policies should be tailored to the business model of the firm Involve key departments in the development and implementation of policies and procedures Compliance, Legal, IT, Marketing/Communications, Customer Service, HR, Investor Relations Policies need to be updated as social media websites evolve over time

16. Social Media: Adviser-Generated Content Firm Websites and Social Media Accounts Content may be considered advertising and subject to advertising rules Consider restricting business-related use to pre-approved content Consider limiting the employees authorized to post content on firm websites and pages Firm may be perceived as having adopted third-party content as its own if such material is displayed on firm websites or profiles Employee Websites and Personal Social Media Accounts Allows for more “personal” interaction with clients/prospects Policies should clearly address what is prohibited/permitted Clearly identify employees who are permitted to make business-related communications from personal accounts Consider NLRB and state law limitations on an employer’s ability to restrict employee speech – make any limitations specifically aimed toward regulatory compliance Consider difficulty of monitoring and recordkeeping

17. Social Media: Third-Party Content Social Plug-Ins “Likes” (Facebook); “Recommendations” and “Endorsements” (LinkedIn); “Favorites” (Twitter) May be viewed as prohibited testimonials; context dependant Consider MA guidance – not testimonial if not solicited Messages and Comments Consider disabling third-party posts on adviser-sponsored sites If adviser permits or can’t block posts, consider disclaimers stating that the adviser does not endorse or approve any third-party post Links to Third-Party Materials and Websites Be aware that an adviser’s publication of a link may be viewed as an adoption or endorsement of linked material Consider FINRA guidance on adoption/endorsement No links if adviser knows or has reason to know the materials/sites contain false/misleading content Need process for vetting links, re-tweets, re-prints, etc.

18. GIPS: Overview • Global Investment Performance Standards administered by the CFA Institute • Voluntary, ethical principles for the reporting of investment performance results • Facilitate apples-to-apples comparison • Fair representation & full disclosure • Ensure accurate & consistent data • Foster industry-wide best practices and self-regulation • Enhanced internal controls as well as marketing benefits

19. GIPS: Overview • Fundamentals of Compliance • Input Data • Calculation Methodology • Composite Construction • Disclosures • Presentation and Reportings • Verification (recommended)

20. GIPS: Fundamentals of Compliance Define the Firm • Under GIPS Standards, a firm is defined as: • an investment firm, subsidiary, or division held out to the public as a distinct business entity • Compliance can only be achieved on a firm-wide basis, not product or composite • Required disclosure to disclose how a firm defines itself

21. GIPS: Fundamentals of ComplianceDefine Discretion • All discretionary portfolios included in at least one composite • Discretion is defined by the Firm. • Definition should be well documented and applied consistently

22. GIPS: Fundamentals of ComplianceComposite Construction • What is a composite? Aggregation of portfolios that represent an investment style, strategy or objective

23. GIPS: VerificationWhat is Verification and do I have to do it? • An independent third-party has reviewed your performance-measurement processes and procedures and opined that: • the investment firm has complied with all the composite construction requirements of the Standards on a firmwide basis; and • the firm’s processes and procedures are designed to calculate and present performance results in compliance with the Standards

24. GIPS: Updates2012 Handbook (3rd Edition) • Replaces the 2006 version • Includes: • 2010 edition of the GIPS Standards • Detailed discussion and application of each of the Standards • Select Q&A • All Guidance Statements issued prior to Dec. 31, 2012

25. GIPS: UpdatesGuidance Statement on Alternative Investment Strategies and Structures • Effective Oct. 2, 2012 • Aimed at “sticky” areas in applying standards to non-traditional asset classes • Applies to all firms, regardless of asset classes managed

26. GIPS: UpdatesGuidance Statement on Alternative Investment Strategies and Structures • Affects seven primary areas • Firm Definition: Firms must apply a “substance over form” principle • Composite Construction: Strategies with unique characteristics; creation of single portfolio composites may be necessary • Input Data: “Trade date” based on effective transfer of asset ownership • Valuation: Less frequent than monthly permitted (disclosure required); may deliver compliant presentations using estimated values • Performance Calculation: Net-of-fee returns may reflect deduction of highest model fee applicable to prospective client or intended recipient • Side Pockets: Standardized definition to be used for side-pocket discretion determinations • Disclosure: Presence, use and extent of leverage, derivatives and short positions; more detailed composite descriptions may be necessary

27. Policies and Procedures • Advisers Act • Rule 206(4)-7: Compliance Rule Policies and Procedures • Social Media • Usage • Monitoring • Recordkeeping • GIPS Standard 0.A.5 • Firms must document their policies and procedures used in establishing and maintaining compliance with the GIPS standards

28. Methods of Testing • General • Internal Audit • External Audit • Annual/Periodic Review • Forensic Testing

29. SEC v. GIPS (Some Notable Differences)

30. SEC v. GIPS (Some Notable Differences)

31. SEC v. GIPS (Some Notable Differences) “GIPS Supplemental” information should be accompanied by the following disclosure: This information is supplemental to the GIPS-compliant presentation included as part of this presentation.

32. SEC v. GIPS (Some Notable Differences)

33. FINRA vs. SEC

34. Questions?