Adviser Sanctioned by SEC for Sub-Adviser False Performance

 

On November 16, 2015 the Securities and Exchange Commission (“SEC”) issued administrative and cease and desist proceedings against Virtus Investment Advisers, Inc. (“Virtus”) for marketing “materially inflated, and hypothetical and back-tested, performance track record” of one of its sub-advisers, F-Squared Investments, Inc. (“F-Squared”), to certain advisory clients and mutual fund shareholders. F-Squared had been sanctioned by the SEC in December 2014 for the same.

According to the SEC’s Order, Virtus had issued marketing materials and its wholesalers gave presentations that reflected that F-Squared performance was “live” in spite of the firm’s concerns about the performance calculations, and the fact that the Financial Industry Regulatory Authority (“FINRA”) has informed Virtus that such was back-tested and therefore could be misleading.

The SEC also sanctioned Virtus for violating, among others, Rule 206(4)-7 and Rule 204(2) of the Investment Advisers Act of 1940, stating the following:

“Specifically, Virtus’s compliance policies and procedures with respect to performance advertising and the retention of books and records supporting the performance or rate of return of managed accounts in performance advertisements addressed Virtus’s obligations with respect to advertising the performance of Virtus’s clients’ accounts but not the performance obtained by other advisers or sub-advisers in performance advertisements directly or indirectly circulated or distributed by Virtus.”

In addition to the cease and desist order, Virtus was censured and fined a total of $15.5 million in disgorgement, interest and penalties.

In light of this case, Chief Compliance Officers should consider taking the following steps:

  • Determine whether the extent of due diligence being performed is adequate when showing performance of other advisers and investment products (including mutual funds, private funds etc.);
  • Confirm that books and records are on file to substantiate all performance used in marketing and advertising;
  • Ensure accompanying disclosures in marketing and advertising are detailed and complete, especially if using hypothetical, or even model performance; and
  • Review and test current policies and procedures regarding marketing activities to verify they are appropriate and adequate.

CCLS can help with any or all of the above, and we also offer marketing review services. For information, please contact us at info@corecls.com or (619) 278-0020.