Sometimes even the big players need to learn a lesson about disclosure. Morgan Stanley Smith Barney and Citigroup Global Markets found this out the hard way when they each settled charges from the SEC that they made false and misleading statements about a foreign exchange trading program they sold to investors.
The SEC has made no secret about its focus on how advisers and their sub-advisers represent investment performance. Recent agency settlements with advisory firms highlight the need for advisers to take necessary steps so they do not find themselves in the crosshairs.
The U.S. House of Representatives last month passed a bill that would, among other things, ease the prohibition against use of testimonials and past specific recommendations in advertisements. But dont make plans to change your marketing materials anytime soon. The chances of the Senate acting on the pending legislation, as well as the President signing it, in the remaining months of 2016 appear to be slim to none.
Advertising returns are what they are. Advisers that seek to make them appear greater than what they are risk running afoul of the SEC enforcement police.
When the SEC in July 2013 adopted Rule 506(c), allowing general solicitation of private offerings, there were a number of concerns, including whether the new rule would open the door to fraudulent offerings, as well as whether advisers to private funds would use the rule at all, given the conditions attached to it. Now we have some answers.
Just who can invest in hedge funds, private equity funds and other investments seen as risky may change in the near future. The SEC is collecting public comments on staff recommendations that would change the definition of an "accredited investor" in Regulation D of the Securities Act of 1933.
The SEC has made no secret that adviser advertising is an area it pays close attention to. The agency is always looking for advertising practices it feels may mislead investors. High on the list of such practices are how an adviser presents past performance and past recommendations.
How do you define performance backtesting in advertising? Not through a Commission Opinion on an enforcement appeal, according SEC commissioners Michael Piwowar and Daniel Gallagher. The two commissioners on dissented from a Commission Opinion that upheld an administrative law judges ruling against an adviser accused of providing fraudulent misrepresentations to prospective clients.
Dont think the SEC wont notice a firm that puffs up its assets under management and/or any exaggerated returns it promises investors. Puffery in such cases will likely result in exposure and enforcement action.
A lie backed by an algorithm is still a lie.