SEC Penalizes Investment Advisory Firms for Spreading False Performance Claims

September 02, 2016

Reading time : 3 minutes

The U.S. Securities and Exchange Commission (SEC) recently fined thirteen investment adviser firms for promoting performance information for a third party investment product that the SEC alleges the investment adviser firms knew, or should have known, was false. At the heart of the enforcement actions were claims made by a third party money manager who purported to have a time tested investment program that consistently and greatly exceeded standard market returns. The SEC alleged that in fact, the mathematical algorithm underlying the investment program had only been in existence a short period of time and the third party money manager was using selective, back-tested (“hypothetical”) data to promote its new program. Compounding the problem, the investment performance calculations contained an error that further inflated the product’s artificial performance statistics. Despite being notified of the calculation error and knowing the algorithm’s investment performance data was not from actual accounts, the SEC alleged that third party money manager claimed in marketing materials given  to investment adviser firms and investment adviser firm clients that the data was genuine. Click here to read the SEC enforcement action on the third party money manager.

Although some of the investment adviser firms in the SEC enforcement action had asked the third party money manager to verify its claims, ultimately all thirteen investment adviser firms ran afoul of SEC for failing to sufficiently verify the money manager’s assertions. This was true even of investment adviser firms who disclosed the third party source and back tested (“hypothetical”) nature of the data to their customers in the investment adviser firms’ own marketing materials, since they also made available to customers the money manager’s original marketing claims. Other investment adviser firms relied directly on the money manager’s assertions or upon reports generated by other parties that were based solely on information provided by the third party money manager and not independently verified. In its press release, the SEC noted that investment adviser firms have a duty to sufficiently and independently verify investment performance related claims the investment adviser firm will pass on to its clients or otherwise rely on when making investment advisory recommendations. Without admitting or denying the SEC’s charges, the thirteen investment adviser firms individually consented to penalties totaling $2.2 million. Click here to read the SEC press release.

To the extent that  your investment adviser firm utilizes investment performance marketing materials obtained from third parties, RIA Compliance Consultants encourages you to review your disclosures and due diligence and record keeping procedures with regard to performance marketing claims and materials. If your investment adviser firm needs help developing policies and procedures to support your investment performance advertising and marketing practices click here to schedule an introductory call with our team.

Posted by Bryan Hill
Labels: Advertising, Enforcement, SEC, Uncategorized