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Adviser and Principals Fined and Censured for Misleading Marketing Materials

The SEC sanctioned and fined an adviser, its President/CCO, and its Business Development Director for marketing hypothetical backtested performance and presenting past specific recommendations.  The respondent presented index-based performance going back to 1999, even though the firm was founded in 2006.  Although some of the marketing materials disclosed that they contained hypothetical performance information, the SEC faults the firm for failing to warn that all performance data was hypothetical.  Moreover, disclosure, when included, often occurred on different pages from the performance data.  The SEC also asserts that the firm advertised profitable investment decisions without including a list of all profitable and unprofitable decisions for the same period.  The firm’s President/CCO was charged with aiding and abetting violations of the compliance rule (206(4)-7) because he did not follow the firm’s compliance manual when approving the violating marketing materials.

OUR TAKE: First, do not use hypothetical, backtested performance.   Our opinion is that no amount of disclosure will satisfy the SEC staff.  Second, do not advertise past specific investment recommendations without an investment lawyer or compli-pro approving the extensive disclosure required.  Third, the CEO (or any other senior exec) should not serve as the Chief Compliance Officer. The CCO should be an independent position solely dedicated to compliance.

 

http://www.sec.gov/litigation/admin/2015/ia-4283.pdf

http://www.sec.gov/litigation/admin/2015/34-76528.pdf