The SEC censured and fined an investment adviser and its principal for misleading advertisements that utilized hypothetical backtested performance. According to the SEC, the adviser continually updated its models but failed to fully disclose that the models’ out-performance resulted from these post hoc revisions. The SEC alleges that the respondents revised the models to specifically account for unforeseen events such as market movements. The SEC charges the firm and the principal, who also acted as the Chief Compliance Officer, with engaging in manipulative practices and for failing to implement a reasonable compliance program. As part of the settlement, the firm agreed to retain a dedicated Chief Compliance Officer and an outside compliance consultant.
OUR TAKE: As we have advised many times in the past: (i) do not advertise hypothetical backtested performance and (ii) retain a dedicated Chief Compliance Officer that has regulatory credentials. Also, rather than continue to bring these cases whereby a dual-hatted principal continues to fail as Chief Compliance Officer, the SEC should solve this pandemic by requiring all advisers to undergo periodic third party compliance reviews.