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News August 16, 2004 Issue

SEC’s Philly Office Launches Performance Advertising Sweep

The SECís Philadelphia District office has launched a mini-sweep focusing on advisersí use of performance advertising. The August 3 sweep letter asks for all marketing materials containing performance information sent to current, former, and prospective clients during 2001, 2002, and 2003. It also asks for third-party questionnaire responses submitted during that period, RFP responses during 2003, a database of client account information, and other materials. Responses are due back by August 27.

One consultant speculated that the staff may have targeted advisers that reported very high performance to databases such as Nelson and Mobius (see last yearís case against Oxford Capital Management). Itís also possible that the office is focusing on false claims of AIMR compliance in RFP responses and consultant questionnaires.

Crowell & Moring partner Stephanie Monaco noted that it was interesting that the request went back to 2001. "If you stop to think about it, 2001 would be the first calendar year where the performance for 2000 would be used." In 2000, many advisersí performance dropped after the tech bubble burst. And thatís when one would expect to see "the worst practices and the most shenanigans" in performance advertising, she observed. "I think that is why they picked such a long examination period."

Donít be surprised if your firm receives a letter even if it is not within Phillyís jurisdiction. Last spring, OCIE headquarters instructed different SEC regional offices to conduct different national sweeps. Each of the offices has been instructed to "drill down kind of hard," according the consultant. "Everyoneís pretty frustrated right now," he added, noting that advisers used to be able to count on a consistent four to five year inspection cycle. Now, he said, even firms that recently underwent a comprehensive inspection are being hit by the mini-sweep exams.

Between the October 5 compliance program deadline and the new sweep, added Monaco, "the SEC has single-handedly wrecked the summer vacations of everybody in this business."