SEC Warns Firms to Adhere to Standards
March 5, 2001
The Securities and Exchange Commission's most recent letter to industry CFO's warns investment advisers and managers against falsely claiming that their performance history is in compliance with industry standards.
The SEC's annual so-called "Dear CFO" letter, issued Feb. 14, also clarifies and provides guidance on several other issues.
There has been an increase in advisers falsely claiming that their performance history is 100 percent compliant with performance standards set out by the Association for Investment Management & Research, said John Capone, chief accountant with the SEC. If advisers are advertising that they comply with the standard, they should be compliant with all aspects of it, not just certain parts, because the SEC is watching this issue closely, he said.
The occurrence of this type of infraction is becoming more commonplace, he said.
"It's fairly prevalent that when [advisers make] advertising claims that they are AIMR compliant, they may not be making the full required disclosures that AIMR suggests," Capone said.
That is important to fund companies because the sub-advisers they choose may be misrepresenting their performance history, which is included in the fund's prospectus, said Tony Evangelista, a regulatory compliance consulting leader with PriceWaterhouseCoopers of New York. Evangelista helped draft the SEC's first Dear CFO letter several years ago.
"I think people are looking to get an edge in their product," he said. "They may choose to claim AIMR compliance just to keep up with the competition when they know that they may be pushing the envelope a little bit in respect to full compliance."
The performance presentation standards developed by the association are a voluntary set of standards that recommend how managers and advisers disclose past performance in fund prospectuses and other documents. The standard is designed to maintain the integrity of investment managers, according to the association. To comply with them, managers and advisers need to meet all of the requirements, the association said.
However, some advisers have been claiming they comply with the standards when in fact, they do not, Capone said.
The SEC cited two investment advisers in September 1999 for misrepresenting themselves as being compliant with the standards, according to SEC filings.
Besides for violating several provisions of the Investment Advisers Act of 1933, Engebretson Capital Management of Newport Beach, Calif. was fined $100,000 because it "distributed false and misleading documents, which significantly overstated ECMI's performance results," according to an SEC filing.
"The materials also misrepresented that ECMI's performance results were
prepared in accordance with standards promulgated by the Association for Investment Management and Research," the filing said.
In the same month, an administrative action was brought against Schield Management Company of Denver. Among other allegations, the SEC claimed Schield "misrepresented information in its advertisements about its compliance with certain standards for presentation performance data ..." according to another SEC filing.
The issue has become an area of considerable concern to the SEC and it is closely watching performance claims, Capone said.