The SEC has instituted enforcement proceedings against the director of an adviser’ mutual fund asset allocation program in connection with misleading performance claims. The SEC says that the respondent utilized backtested hypothetical performance information and combined it with real audited data to show a 7-year performance track record. The SEC alleges that the backtested data significantly inflated performance as compared to the audited performance information. The SEC charges that the respondent’s firm could not substantiate the hypothetical performance and did not account for portfolio changes. Also, the SEC charges that the respondent misled clients by referring to the data as “historical” rather than “hypothetical.”
OUR TAKE: Although the staff has never specifically outlawed the use of backtested hypothetical performance presentations, they typically assert (during exams and enforcement actions), that such information is per se misleading. It is just very difficult to add enough disclosure to use such information without somehow misleading clients.