SEC Staff Warns against Performance Claims "Too Good to Be True"

The SEC Office of Investor Education and Advocacy ("OIEA") issued guidance to help investors understand advertised performance claims and warned against claims that sound "too good to be true."

In an investor bulletin, OIEA said firms may present performance information in various ways, and encouraged investors to understand the performance metrics being used prior to making an investment decision. OIEA urged investors to use caution when an investment opportunity seems "too good to be true." Specifically, OEIA advised investors to closely consider (i) fees and expenses, (ii) whether the investment is financial feasible, (iii) current market conditions and (iv) the firm's investment methodology.

OIEA also provided strategies for assessing the reliability of a firm's performance claims, including:

• monitoring for potentially misleading data including cherry-picking or misleading statements such as guaranteed returns;

• comparing "back-tested" performance to actual historical performance; and

• comparing the firm's performance to a benchmark such as the S&P 500 Index.

OIEA emphasized that while historical performance data should factor into investment decisions, "past performance does not necessarily predict future results" and investors should investigate how a firm's performance is calculated and presented in order to assess the reliability of performance claims.