The Securities and Exchange Commission has been skeptical of registered investment advisers using advertisements. The default position is always that it’s likely to be fraudulent, deceptive or manipulative and therefore a violation of Section 206 of the Investment Advisers Act. The level of skepticism has been even higher for performance advertisements and even higher for performance advertisement of a predecessor.
That has lead to the problem of an investment adviser carrying over his or her performance when joining a new firm. Since this happens often, the industry has been able to get the SEC to commit to some clear standards.
The SEC has laid out a five part test for an advertisement that includes prior performance results of accounts managed by a predecessor entity
- The person or persons who manage accounts at the adviser were also those primarily responsible for achieving the prior performance results
- The accounts managed at the predecessor entity are so similar to the accounts currently under management that the performance results would provide relevant information to prospective clients
- All accounts that were managed in a substantially similar manner are advertised unless the exclusion of any such account would not result in materially higher performance,
- the advertisement is consistent with staff interpretations with respect to the advertisement of performance results, and
- the advertisement includes all relevant disclosures, including that the performance results were from accounts managed at another entity.
The latest guidance from the SEC on this involves a restructuring of an investment adviser firm. South State Bank owned South State Advisory and Minis & Co., each of which were separately registered as investment advisers. The Bank wants to merge Minis and South State Advisory together for some operational efficiency. This triggers the performance advertisement from a predecessor entity concerns.
The Bank proposed that Minis would merge into the other advisor, but operate as a division within it. The SEC said it was okay to keep the performance track record based on the facts.
- the Minis Division will operate in the same manner and under the same brand name as Minis
- the Minis investment personnel, as well as the management, culture, and processes that helped to give rise to Minis’ track record, will continue after the merger
- The same management team that currently manages Minis would manage the Minis Division
- the Minis investment committee would continue to have responsibility for the Minis Division’s investment decisions and recommendations
- Minis’ performance track record by the Minis Division would be accompanied by appropriate disclosure
Minis pointed out the obvious flaw in the SEC position with the performance track record. Personnel, management, culture and processes will evolve over time at any firm. Minis merely point out that none of those things are happening immediately as part of the restructuring.
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