The SEC instituted an enforcement proceeding against a syndicated radio host for false performance claims based on unsupported backtesting. The SEC described how the respondent marketed his various strategies by claiming that returns were backtested over several decades. The SEC charges that the respondent did not have sufficient supporting documentation. Moreover, the SEC alleges that the respondent utilized hypothetical inflation rates and REIT return rates that benefited the purported results, even though actual data was readily available. Also, the SEC alleges that the respondent failed to show the negative effects of re-allocations during the backtested periods. The SEC charges violations of the Adviser Act’s antifraud rules and the marketing rule.
OUR TAKE: Avoid using backtested performance data. Although the SEC has no rule specifically outlawing the practice, the burden of proof is very high (perhaps impossibly high) to prove that you have not misled investors.