The SEC recently instituted proceedings against a registered investment adviser and its founder, CEO and majority shareholder for allegedly making material misstatements and omissions regarding the amount of assets purportedly “managed” by the adviser.  The SEC also alleged that the firm and its CEO made material misstatements regarding clients’ investment returns, claiming that such returns placed the adviser in the “top 1%” of firms worldwide, and failed to disclose that the returns related to a model portfolio did not reflect actual client experience.

The adviser and its CEO are also charged with failing to adopt and implement adequate written policies and procedures related to the calculation and advertisement of assets managed and investment returns.

The SEC alleged that the firm and its CEO touted investment performance that significantly outpaced relevant benchmarks and misrepresented the amount of assets managed in order to “attract new clients . . . by creating the impression that they were larger and more successful players than they in fact were.”

The SEC also alleged that the CEO submitted the false performance information to Barron’s for consideration in the magazine’s rankings of independent financial advisers. Based on this allegedly misleading data, Barron’s ranked the CEO fifth in the category of “Top 100 Women Financial Advisors” and second in its listing of the “2011 Top Advisors” in Washington, D.C.  The SEC alleged that the misleading information was provided to Barron’s knowing that it would be reprinted and distributed to the public, including current and prospective customers of the firm.

Moreover, the SEC alleged that the CEO took steps to ensure that current and prospective clients were aware of these accolades—marketing emails were blasted, copies of certain of the Barron’s ranking issues were distributed to existing and prospective clients and the firm’s website was updated. The SEC also alleged that the CEO advertised the ranking and represented that model portfolio returns were actual returns on her weekly hosted radio show, ironically entitled “Financial Myth Busting.”  The SEC alleged, however, that a significant portion of the firm’s customer accounts were not invested in accordance with the model.

The SEC also alleged that the firm used an “off-the-shelf” compliance manual without tailoring its content to the firm’s specific operations, including compliance procedures related to review of advertising and other promotional content.  Moreover, the SEC alleged that even these inadequate policies were not implemented.

Among other things, the SEC charged the firm and the CEO with violations of sections 206(1) and (2) of the Advisers Act, which prohibit fraudulent conduct by an investment adviser.  The SEC also alleged violations of Rule 206(4)-1(a)(5) which precludes the use of false and misleading advertisements, and Rule 206(4)-7, the Advisers Act compliance rule.

Our Take

Once again, the staff is demonstrating its on-going focus on conflicts of interest and the need for advisers to ensure that such conflicts are appropriately identified and addressed in the firm’s compliance policies.  In particular, the action underscores the need for investment advisers to ensure that all employees—including the most senior employees —are adequately supervised with respect to public statements and other advertising regarding the adviser’s investment performance.