Reviewing the actions filed against other fund managers by the Securities and Exchange Commission helps me see what the SEC thinks are bad actions. When I started reading the case against Twenty Acre Capital I was hoping to gain some insight into the Marketing Rule.
Twenty Acre is a registered investment adviser and advises a private fund. Twenty Acre presented performance returns, as one does, in the marketing materials for the fund. The Marketing Rule applies. [Advisers Act Rule 206(4)-1 Release No. IA-5653 (Dec. 22, 2020) (effective May 4, 2021)]
The Marketing Rule prohibits and adviser from publishing an advertisement that would
“(1) Include any untrue statement of a material fact, or omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it was made, not misleading; … or Include or exclude performance results, or present performance time periods, in a manner that is not fair and balanced.”
See Advisers Act Rule 206(4)-1(a)
Twenty Acre published “performance returns that were experienced by a single limited partner that had invested in the Fund at inception and was eligible for all Fund investments.” That sounded like this might be an insightful look at performance advertising. This one investor’s performance differed from the Fund’s overall performance because some IPO investments the Fund had made were credited to the investor’s capital account in greater proportion than other investors’ capital accounts. The investors that didn’t get the IPO investments were restricted by FINRA Rules 5130 and 5131.
Twenty Acre didn’t note that the performance presented was just for the one investor and not the fund as a whole. Of course, that seems like a mistake. But an enforcement action seemed like a lot for failing to footnote.
Then I read the difference and spit coffee all over my computer screen. The one investor achieved a 44.8% net performance in 2021. [Fantastic return!] Comparatively, the fund as a whole achieved a -5.7% return. [That is not fantastic.]
Okay, so that was more than not including a footnote. That’s a $100,000 fine.
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