Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



Investment Advisers - Using Performance Claims in Marketing?

Investment Advisers - Using Performance Claims in Marketing?

The SEC Expects Advisers to Substantiate Your Performance Claims

In a recent proceeding against an Investment Adviser, the SEC fined the respondent $1.9 million, entered a cease and desist order, and a censure and required the respondent to hire an independent consultant. According to the Commission, the investment company made “material misstatements and omissions” to clients and potential clients regarding presentation of hypothetical back-tested returns related to its blended research stock ratings, failed to disclose that certain quantitative rankings were determined by back-testing and some ratings were determined in real time, made some false claims about its record and failed to implement adequate policies and procedures.

This administrative action illustrates the following points for investment advisers presenting performance data in their marketing collateral:

  • Using hypothetical or back tested results can be a red flag that the SEC will investigate carefully.

  • Hypothetical or back-tested performance records should not be blended with actual performance and vice versa.

  • An investment adviser presenting such results needs to be able to substantiate the records shown and be able to prove that (a) the returns are calculated exactly as described and (b) all statements made about the returns and how they are calculated are accurate and truthful.

  • An Investment Adviser’s compliance staff needs to be qualified to understand investment strategies AND to be able to recalculate performance numbers.

  • Investment advisers need adequate policies and procedures for compliance review of marketing materials to detect any inaccuracies or potentially misleading statements.

Cohen & Buckmann attorney, Lauri London, was recently interviewed for Regulatory Compliance Watch for an article about the proceeding. Read the whole article here.(RCW has a paywall with 7 day free trial)