Investment Advisory Firms Fined For Endorsing False Claims

The U.S. Securities and Exchange Commission (SEC) announced penalties worth $2.2 million on 13 investment advisory firms. They were alleged of violating the securities law by spreading false claims made by F-Squared Investments Inc., which was one of the largest marketers of investment products using exchange-traded funds (ETFs).

Major Firms Charged in the Case

The penalties imposed by the SEC ranged from $0.1–$0.5 million, depending upon the fees earned by the firms from its AlphaSector-related strategies. The highest fine was agreed to be borne by the California-based, AssetMark Inc.

The firms found guilty include a unit of BB&T Corporation (NYSE:BBT) , Banyan Partners, Shamrock Asset Management and Hilliard Lyons. All of these firms agreed to bear $0.2 million each as penalty.

Notably, the investment advisers neither consented nor denied the allegations. Instead, they consented to receive the orders finding that they have violated Sections 204 and 206(4) of the Investment Advisers Act, 1940.

However, per a spokesman of the AssetMark, the company immediately removed the misleading F-Squared Investments’ information on becoming aware of the fraud and later removed it from its platform. Further, the spokesman of Hilliard Lyons stated that the company stopped offering F-Squared Investments’ products in 2013 and the SEC has not alleged the company of losing its client’s money by investing in those products.

Allegations

The SEC investigation on investment advisers found that the 13 firms acknowledged and negligently relied upon the claims made by F-Squared Investments that its AlphaSector strategy for investing in ETFs had outperformed the S&P Index for several years. Moreover, the firms advertised these claims while recommending the investments to their own clients, without having adequate documentation to substantiate the same.

Andrew J. Ceresney, Director of the SEC Enforcement Division, stated “When an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact. These advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.”

The violation is suspected to have taken place between 2001 and 2008. Later in 2014, F-Squared Investments admitted that the outperformance that was being advertised was only its back-tested performance which was substantially inflated to attract more clients. The company agreed to pay $35 million to settle the SEC charges.

Regulatory Burden

The SEC Asset Management Unit continues to investigate and pursue similar enforcement actions against other advisers that potentially misled investors and others with advertisements containing F-Squared Investments’ false historical performance data. In the current regulatory scenario, firms should start being cautious about the information being supplied by them to their clients and maintain appropriate documentation.

Over the past few months, the SEC’s stringent regulations have subjected banks to heavy regulatory costs. In Aug 2016, Apollo Global Management, LLC’s (NYSE:APO) private equity fund advisers were charged for disclosure and supervisory failure while a Goldman Sachs (NYSE:GS) trader was barred from the securities industry when found guilty of fraud. Earlier in Jun 2016, Merrill Lynch, a Bank of America Corporation (NYSE:BAC) unit, was penalized for misleading its investors.