Three Firms Fined for Marketing Hypothetical Third Party Performance

from Cipperman Compliance Services, LLC

The SEC censured and fined three more investment advisers in connection with marketing F-Squared’s misleading hypothetical performance information. One of the firms agreed to pay $8.75 Million in disgorgement, fines, interest and another agreed to pay over $700,000, while the third firm, which has ceased its business, agreed to pay a $200,000 fine. The SEC alleges that the firms incorporated misleading F-Squared-provided performance information into their marketing materials without conducting adequate due diligence into the performance claims, despite significant red flags such as hypothetical backtested performance, outlier returns, lack of actual performance history, and lack of data transparency. The SEC charged the firms with failing to implement adequate compliance policies and procedures to verify third party performance claims and maintain required records. The defunct firm, which also sponsored a registered mutual fund, was also charged with several Investment Company Act violations including violations of Section 15, which requires a shareholder-approved written agreement with all sub-advisers. The SEC has previously brought several cases related to incorporating misleading F-Squared performance (see http://cipperman.com/2016/08/29/sec-fines-13-advisers-for-failing-to-verify-third-partys-performance/).

OUR TAKE: Investment advisers must adopt and implement procedures to test performance claims made by third parties, and firms can’t claim ignorance and innocence if the third party refuses to provide backup data. Also, we do not believe firms should ever use hypothetical backtested performance data, because the SEC usually alleges that such information is too misleading.

https://www.sec.gov/litigation/admin/2017/33-10443.pdf
https://www.sec.gov/litigation/admin/2017/34-82244.pdf
https://www.sec.gov/litigation/admin/2017/ia-4823.pdf

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