Investment Adviser Settles Charges for False Advertisements
Commentary by Rachael Hashmall
An investment adviser settled SEC charges for (i) making false statements in advertisements, (ii) advertising misleading model performance, (iii) being unable to substantiate performance shown in its advertisements and (iv) failing to enter into written agreements with people it compensated for endorsements. The adviser also committed recordkeeping and compliance violations.
According to the Order, on its website and on various social media sites, the firm falsely claimed that "unlike clients of other investment advisers ... [the firm] does not 'charge clients twice;'" the SEC found that individual clients paid both a fund management fee and an advisory fee. The SEC found that the firm claimed falsely that (i) money invested with the firm "is never commingled with other clients the way it is with mutual funds" and (ii) certain factsheets on its public website depicted misleading model portfolio performance. The SEC also found that the firm advertised its Price to Full Cash Flow Dow Portfolio, which showed back tested performance results for the years 1950 to 2009, prior to the strategy’s commencement in 2011. The SEC stated that while advertising hypothetical performance, the firm failed to adopt and implement policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience.
In addition, the SEC found that the firm (i) paid two unaffiliated accounting firms for endorsements to obtain clients through referrals without a written agreement; (ii) made misleading statements about its performance to its registered investment company client - which were incorporated in the client’s prospectus; and (iii) did not maintain copies of advertisements that appeared on its website, nor did it maintain books and records demonstrating the calculation of performance in its advertisements. The firm also failed to conduct an annual review of its compliance policies and procedures and failed to implement them.
As a result, the SEC determined that the firm violated Advisers Act Sections 206(4) and 206(2) ("Prohibited transactions by investment adviser"), 204 ("Reports by investment advisers") and Rules 206(4)-1 and 204-2(a) thereunder and Section 34(b) of the Investment Company Act ("Unlawful representations and names").
To settle the charges, the firm agreed to (i) a censure, (ii) cease and desist from committing or causing any mentioned violations and (iii) pay a civil money penalty in the amount of $100,000.
Commentary
In this case, the firm was hit with more severe penalties than four other advisers who were also charged with Marketing Rule violations on the same day. Two things stood out here to differentiate this adviser from the others: (i) the charges brought were much more than hypothetical performance posted on a public website with no policies and procedures; here, the adviser allegedly made false and misleading statements in multiple instances, failed to keep proper records, and did not enter into proper agreements; and (ii) it appears the remedial actions were taken after the adviser was contacted by the SEC (although the SEC did take into account certain remedial steps promptly taken by the adviser once contacted).
It's also worth noting that many of the cited offending actions and inactions were taken in 2021 – almost three years before this enforcement action was settled. Advisory firms are encouraged to conduct a comprehensive review of their marketing materials and practices from time to time to ensure they align with the SEC’s Marketing Rule, and further consider proactive steps to address these issues.