Small Adviser Pays $45,000 to Settle SEC Charges it Misstated Assets
A small San Francisco-based adviser has agreed to pay a $45,000 civil penalty and hire a consultant to settle SEC charges that it distributed "materially false and misleading" advertisements that misstated the firmís assets under management (AUM). The advertisements consisted of questionnaires, surveys, and other communications sent to third-party companies that publish reports and databases about advisers, including Nelson Information, Callan Associates, Effron-PSN, and Checkfree Investment Services. The SEC also alleged that the adviser violated the Advisers Act books and records rule by failing to keep copies of those communications.
According to the SECís September 30 order, Groh Asset Management and founder and owner, Roger Groh, were alerted to the AUM issue in 1997, after drawing a deficiency letter comment in a routine SEC exam for overstating AUM information to ranking publications and databases. In response to the deficiency letter, Groh promised that he would notify the databases of the correct AUM information and revise his firmís marketing materials.
However, alleged the SEC, the firm continued to provide the companies with incorrect AUM information. For example, the SEC claimed that the adviser reported to Effron that its "International Big Cap" composite had $40 million and $30 million in assets during two months in 2000, when the adviserís books and records showed less than $22 million in assets as of the dates of the two reports.
In addition to the fine, the firm and Groh agreed to be censured and to cease and desist from future violations. The firm agreed to retain a consultant to review its procedures around AUM reporting and recordkeeping. The consultant also will provide annual reviews of all of the firmís advertising materials reflecting AUM for a five-year period after the recommendations in its initial report have been implemented. Groh also agreed to deliver a copy of the SECís order to all existing clients and all new clients for the next year.
A call to Groh for comment was not returned.
NRS senior consultant Keith Marks says that his group is "always talking with people" about the AUM issue. His advice: go back and read the instructions in Form ADV. "Advisers donít see seem to reference the Form ADV instructions on calculating assets under management often enough," he said. In his experience, the most common mistake is for advisers that refer clients to third-party advisers on a non-discretionary basis to count those assets towards their own AUM.