SEC Sweep Results in 13 Enforcement Actions Against Advisers for Advertising a Third-Party’s False Performance Claims

On August 25, 2016, the SEC issued press release 2016-167 detailing the results of an enforcement sweep leading to settlements with thirteen investment advisers for advertising a third-party’s false performance claims.

These cases stem from the 2014 enforcement case with F-Squared Investments over the performance of their AlphaSector Strategy.  In the 2014 settlement with the SEC, F-Squared admitted to misrepresenting the performance of the strategy from 2001 to 2008 as actual performance when, in fact, it was hypothetical back-tested performance.  Moreover, according to the settlement order, the performance figures were inflated due to implementing signals in advance of the signal criteria actually being triggered.  F-Squared provided performance data to investment advisers for which it acted as a sub-adviser as well as a separate account manager.

In the SEC release, Andrew J. Ceresney, Director of the SEC Enforcement Division stated, “when an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact.”  He further stated “these advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.”

The thirteen advisers were found to be in violation of Rule 206(4)-1(a)(5) of the Investment Advisers Act of 1940, as amended (“Advisers Act”) for circulating misleading advertisements.  They were also found to be in violation of Rule 204-2(a)(16) of the Advisers Act for lacking books and records relating to the documentation to form the basis for the performance claims.  The monetary penalties ranged in amounts from $100,000 to $500,000 and were tied to the amount of fees received from the advertised strategy.

The fallout of enforcement cases due to F-Squared’s performance misrepresentations is reflective of the current regulatory environment.  Notably, these cases outline violations covering not only advertising rules, but also books and records, and due diligence requirements.  With that in mind, advisory firms should consider taking steps to ensure that their advertising and marketing efforts are in conformance with all applicable regulations and employees are adequately trained on compliance.

CCLS consultants are very well versed in SEC rules covering these areas and more.  For information on how we can help or if you have questions, please contact us at info@corecls.com or call (619) 278-0020.