Ask chief compliance officers what keeps them up at night and you’ll find the approval of marketing materials, social media communications, and other forms of advertising rank high on the list.
Two factors have combined to cloud best practices for investment advisers who want to advertise, a murky area that the U.S. Securities and Exchange Commission’s has been working diligently to clarify.
First, the SEC’s existing advertising rules for investment advisers best reflect the way the world was in 1961, when the rules were last updated. Over the years, the SEC has relied on publishing guidance letters and other materials to help bridge the regulatory gap created by the evolution of such social media as Facebook, Twitter, and YouTube.
A second factor is the pending overhaul of the SEC’s investment adviser advertising rule. Last November, the Commission announced proposed amendments to its somewhat arcane regulations. The comment period closed in January. Updated rules that foster a “fair and balanced” approach and revised guidelines on the reporting of performance information could be adopted and published by the SEC later this year.
The Case of Louis Navellier
Industry veterans may recognize the name Navellier & Associates, an investment advisory firm that has published a series of heralded stock selection newsletters by firm founder and chief investment officer Louis Navellier for more than 20 years.
In February, the SEC was granted a partial summary judgment based on a complaint the Commission filed against Navellier for fraudulent advertising in 2017. The complaint alleged Navellier & Associates breached its fiduciary duties through the use of marketing materials that included false and misleading statements regarding the performance of the firm’s Vireo AlphaSector investment strategies.
The Peril of False Advertising
Specifically, the SEC alleged that Navellier falsely stated the Vireo AlphaSector strategies and the performance track record from 2001 to 2008 were real when, in fact, the strategies had not even existed during that period and the strategies’ track record was based on back-tested performance. At the time, the firm had more than $3 billion in assets under management that have since dwindled to $1 billion.
The court’s summary judgment found the defendants knew there were misleading statements regarding fund performance in Navellier’s marketing materials. The firm was found to have had performed inadequate due diligence, yet had failed to inform their clients.
Specifically, when performing its due diligence on the AlphaSector strategies, and while marketing and selling Vireo AlphaSector to its clients and prospective clients, Navellier ignored and concealed several red flags that the performance track record of Vireo AlphaSector was not based on live trading since 2001—as the strategies’ model manager, F-Squared Investments, Inc., had represented—and that the track record was substantially inflated.
Navellier continued to sell the Vireo AlphaSector investment strategies without removing the false and misleading statements once they became known. To complicate matters, Navellier allegedly sold the Vireo line of business in 2013 for $14 million without correcting the misrepresentations they made once they realized the firm’s actions could bring SEC charges.
Interestingly, Louis Navellier now markets investment opportunities that target retirees through what he refers to as Project Mastermind and what he claims is an anticipated gain of 1,288% in a year’s time.
Points to Ponder
“Firms want to differentiate themselves and use advertising and social media,” said Kurt Nuñez, a compliance consultant with Core Compliance & Legal Services. “But they’re often not aware of what is required and what is prohibited when it comes to advertising.”
Nuñez said current guidance on SEC advertising rules can be found in many publications, including recent no-action letters. And, as always, the burden is on investment advisers to know the rules, provide true and accurate information, and be able to provide adequate backup at all times.
Confused about the do’s and don’ts of the SEC’s presently evolving advertising rules? Our experts can answer your questions. Contact us today online or at (619) 278-0020.