Correction on Form U5 Leads to SEC Action for Improper Performance Claims

February 15, 2012

The United States Securities and Exchange Commission (“SEC”) recently issued an order instituting cease-and-desist proceedings against an investment adviser representative for misstating performance numbers on performance reports distributed to clients.  According to the SEC’s order, the representative overstated client performance numbers and understated losses on individual portfolio performance reports provide to his clients.  The investment adviser representative is now barred from associating with another investment adviser firm and required to pay a civil penalty of $60,000.

Prior to the order, the principals of the investment adviser representative’s employing firm discovered allegedly inaccurate performance reports and, after completing their internal review, terminated the representative.  However, the principals did not originally report the internal review on the representative’s Form U5.  The Form U5 is the official form used by investment adviser firms and broker/dealer firms to notify regulators of a licensed individual’s termination from the firm.  Several months later, after receiving advice from a consultant, the principals amended the Form U5 to fully disclose the reason for termination.  This amendment to the Form U5 drew the attention of the SEC who initiated an investigation resulting in the order.

Communications with clients is always a top focus during SEC routine examinations and the SEC’s investigation into this matter is another example of the close scrutiny placed on performance claims whether they are in marketing materials or individual reports provided to clients.  If you need guidance on the performance advertising rules and other marketing rules and regulations, RIA Compliance Consultants will be conducting a webinar, Performance Advertising for Investment Advisers, on Thursday, March 15. Additionally, if you need help implementing performance reporting procedures or reviewing performance advertising materials, RIA Compliance Consultants would be happy to assist you; click here to schedule a time to speak with one of our compliance consultants.

Posted by Bryan Hill
Labels: Form U5, Performance Advertising, SEC