SEC Settles Charges with Investment Management Firm for Making False Performance Claims

The SEC settled charges with a Connecticut-based investment-managing firm that it "misled mutual fund investors and others with advertisements containing false historical performance data about AlphaSector, a major exchange-traded fund ('ETF') portfolio strategy."

The SEC investigation determined that the firm:

• publicized a "substantially overstated performance track record" as received from "a subadviser for mutual funds and other clients that followed its AlphaSector strategy";

• stated falsely in client presentations, marketing materials, SEC filings and other communications that the AlphaSector strategy had a performance history dating back to April 2001 and outperformed the SP 500 Index for several years;

• failed to take steps to determine whether subadviser F-Squared Investments, Inc.'s buy or sell signals were generated or used in any trading decisions from April 2001 to September 2008;

• had no records to support the calculation of the historical AlphaSector strategy track records that it then advertised;

• maintained no records to support the calculation of the historical AlphaSector strategy track records that it then advertised; and

• allowed its AlphaSector funds' assets to grow under management from $191 million at the end of 2009 to approximately $11.5 billion by 2013 during this period of "false and misleading advertisements."

The firm consented to the SEC's charges that it violated Investment Advisers Act Rules 204-2(a)(16) ("Books and Records to Be Maintained by Investment Advisers"), 206(4)-1(a)(5) ("Advertisements by Investment Advisers"), 206(4)-7 ("Compliance Procedures and Practices") and 206(4)-8 ("Pooled Investment Vehicles"). The SEC also found that the firm "caused certain mutual funds that it advised to violate Section 34(b) of the Investment Company Act" ("Destruction and Falsification of Reports and Records").

Without admitting or denying the findings, the firm agreed to pay $13.4 million in disgorgement, $1.1 million in prejudgment interest and an additional $2 million penalty.