When using a track record in marketing materials, compliance officers will focus on the numbers and how they are used to portray prior results. The Securities and Exchange Commission will also scrutinize these results when they inevitably stop by to exam registered fund managers.
Keeping the track record straight is even more difficult for a new firm. Inevitably the principals will want to market their successful investment activity at the legacy firm.
Old Ironsides Energy ran into this problem when marketing its Old Ironsides Energy II fund.
The Securities and Exchange Commission charged the firm with using misleading marketing materials that mischaracterized a large, legacy investment with strong, positive returns. Old Ironsides identified it as an early stage “direct drilling investment” over which Old Ironsides had
direct management in partnership with project operators in its legacy portfolio. However the investment was better characterized as in interest in a private fund advised by a third party.
As you might expect, the private fund’s returns were really good. Also, Old Ironsides Fund II would not be investing in private funds.
It’s not that Old Ironsides couldn’t include that private fund in its returns. It needed to better describe that investment so that potential investors could understand it.
I found it strange that the SEC also include a charge that Old Ironsides failed to implement its policies and procedures. The P&Ps included a provision that:
“prohibited the use of performance results in Old Ironsides’ marketing materials that were false or misleading, including any misleading depictions of investment performance in both form and content leading to direct or indirect implications or inferences arising out of the context of the marketing materials.”
The SEC found that the marketing materials were misleading so the P&Ps were not followed. Is the SEC trying to say that a firm should not have language like that in its P&Ps? Or is just another charge the SEC can pile on when ti finds something it doesn’t like?
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