The SEC charged an investment adviser with using his radio show and other advertisements to mislead investors. The adviser advertised that he had been selected to host the radio show, when, according to the SEC, he actually paid to host and broadcast the show. He also claimed to hold a fictitious “Qualified Retirement Advisor” designation. The SEC also accuses the adviser of intentionally concealing his significant disciplinary history by failing to deliver Form ADV and using internet search suppression consultants to hide his background. As alleged, the adviser also failed to disclose compensation arrangements and conflicts of interests. The principal, who also served as the firm’s Chief Compliance Officer, is also charged with operating a compliance program with insufficiently tailored policies that the firm failed to implement.
The SEC has proposed a new investment adviser advertising rule that broadens the definition of “advertising,” more specifically regulates performance information, and allows certain testimonials and endorsements. Revised Rule 206(4)-1 would broadly include any communication distributed by any means that promotes advisory services or a pooled fund and prohibits any misleading or unsubstantiated statements. The new rule would also require all retail-directed advertisements to include one, five and ten-year periods when presenting performance information. Advisers would also be able to use testimonials so long as the adviser fully discloses whether the person is a client and whether compensation has been provided. The new rule would also require approval in writing by a designated employee before dissemination. The SEC said it may rescind current no-action letters. The SEC also proposed a new solicitation rule that would require additional disclosure about the solicitor but eliminate the current rule’s requirement to collect client acknowledgements. Both rules require at least a 60-day comment period.
We like that the SEC has modernized certain areas (e.g. testimonials) and has clarified how to present performance information. We believe that clearer rules help compliance professionals and reduce the likelihood of enforcement cases resulting from subjective standards.
Don’t make promises based on a promise. It appears that the respondent genuinely believed the money was coming, but, unfortunately, the third party never legally committed. As the old saying goes, “If wishes were fishes, we’d all have a fry.”
Just because you do not register with the SEC does not mean that you are exempt from its antifraud rules. Section 206 applies to any statement made by an investment adviser, whether registered or unregistered, that could defraud any client or prospective client.
Didn’t know that name-dropping could result in securities fraud? Any misstatement arguably relied upon by investors could give rise to Section 17(a)(2) charges of offering securities by means of an untrue statement of a material fact.
This case should be read by any potential client/investor enticed by a too-good-to-be-true investment pitch. It is unfortunate when legitimate investment managers have to compete for business against wrongdoers who outright lie about their performance.
SEC fined a large commercial bank for failing to disclose that it only
recommended hedge funds that paid a portion of the management fee back to the
bank. The bank marketed a robust due
diligence process conducted by a purportedly independent, in-house research
group performing a multi-step due diligence process to select hedge funds from
an “extremely large universe.” In fact,
the bank only recommended hedge funds that paid back management fees that it
called “retrocessions.” Although the
bank disclosed that it might receive revenue sharing and the amount actually received
from each hedge fund, the actual due diligence process did not comport with
marketing promises. The bank, which is
not a registered adviser or broker-dealer, was charged with violating the Securities
Act’s anti-fraud provisions (17(a)(2)).
Check the marketing team’s enthusiasm at the door. The SEC doesn’t allow firms an exception from the securities laws for product hype, regardless of how clients/investors may perceive the statements. Rather than caveat emptor (buyer beware), caveat venditor (seller beware) governs sales of securities products.
The SEC charged
an unregistered day trader for lying about his trading success and misappropriating
client funds. The defendant convinced clients to hire him by asserting that
that he had done very well as a day trader over several years and then promised
over 50% annualized returns. Once retained,
the trader did very poorly and siphoned client assets for personal
expenses. According to the SEC, he then
concealed his misconduct by delivering false account statements and implementing
a microcap wash sale scheme. The
defendant also faces criminal charges brought by the U.S. Attorney’s Office for
the Eastern District of New York.
Lying about your investment track record constitutes securities fraud, subjecting you to civil and criminal penalties. Do not make performance claims unless you can affirmatively support your claims with hard data.
The change here is allowing broker-dealers to provide the information to intermediary financial advisers and putting the burden on the intermediaries to prevent use directly with their retail clients. Regardless, we recommend against using hypothetical backtested performance data because of SEC concerns as well as the significant regulatory and disclosure limitations.