Inaccurate Performance Information Leads to SEC Charges
WHAT HAPPENED?
The SEC recently settled with a registered investment adviser that posted false statements and misleading performance data on its public website. The adviser also had referral relationships with bloggers but did not make required investor disclosures about these connections.
The violations stemmed from advertisements made about an automated robo-advising service. The ads used modeled numbers that implied the firm was operational for over 11 years, instead of using actual performance data from the firm’s only two years in business. These numbers falsely reflected that the adviser outperformed the market for over a decade, when the firm had underperformed based on its benchmark, the S&P500.
While the misleading marketing was published, the firm also engaged several bloggers to make favorable posts about the adviser with hyperlinks to the firm’s website. The adviser made payments to bloggers totaling over $12,500, based on how much money new clients invested with the firm. The adviser did not comply with related solicitation rules or properly disclose its referral relationship with the bloggers.
The firm’s policies and procedures supposedly required review of marketing materials and stated the firm did not pay referral fees to third parties; however, the firm did not implement these provisions. Because the firm published the misleading marketing materials and failed to comply with solicitation rules, the SEC charged the group with violating anti-fraud provisions of the Advisers Act. The firm cooperated with the SEC and agreed to pay a fine of $25,000.
WHAT DOES THIS MEAN FOR ME?
Potential harm to investors and subsequent violations of the Advisers Act could have been avoided if the firm had proper compliance controls in place. The adviser may have utilized a templated compliance manual that was not customized to its operations or business model, creating gaps in its compliance program. Adherence to a set of best practices like the Global Investment Performance Standards (GIPS®) and use of a fully integrated compliance manual could have saved the adviser the time, expense, and risks of its regulatory violations.
If your firm advertises performance information or engages in a referral program with third parties, these operations should be addressed in your compliance manual and be monitored and periodically tested. Advisers should remain mindful of the SEC’s new Marketing Rule, which includes additional cash solicitation amendments and will go into effect late next year.
Contact Fairview Investment Services with questions about the Marketing Rule, solicitation requirements, your firm’s compliance manual, and provisions of the Advisers Act. If you have specific questions about the GIPS standards or other performance related inquires, reach out to our affiliate, Fairview Performance Services.
