Compliance on the Charles: Boston Regional Summit

June 14- | The Harvard Club of Boston

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No Mulligan for Noncompliant RIA Whose Employees Received Masters Tickets

The 2017 Masters Golf Tournament reminds us of an SEC enforcement action that was settled on February 8, 2017. The action was brought against a Minnesota-based Registered Investment Adviser (“RIA”) that disseminated marketing materials containing the statement that the firm had never once taken so much as a nickel from an investment manager. In fact, the RIA’s gift policy permitted acceptance of gifts from investment managers, and certain employees accepted tickets to the Masters Golf Tournament in 2012 and 2013.

The RIA’s marketing materials claimed that the firm strictly enforced its Code of Ethics. These materials stated that the RIA actively guarded against actual or potential conflicts of interest and assured clients and prospects that all employees must adhere to its Code of Ethics to keep their jobs. The RIA’s Code of Ethics prohibited the acceptance of anything of value worth more than $100 from any person providing or seeking to provide services to clients and/or the firm. Despite that prohibition, a few of the RIA’s employees received tickets to the Masters worth more than $100 from the same investment manager.

The SEC alleged that the RIA’s marketing materials were misleading, because the firm did permit employees to accept gifts under certain circumstances. Furthermore, the SEC observed that the RIA failed to discipline the employees who violated the gift policy by accepting gifts worth more than $100 without pre-approval.

Because the SEC found other compliance problems at the firm, the Commission did not give the RIA a mulligan on its disciplinary scorecard. The SEC alleged that the RIA had circulated marketing materials containing misleading performance data. The RIA had developed a chart that supposedly showed the performance of its historical investment manager recommendations. Those recommendations were both hypothetical and backtested, which was not disclosed in the vast majority of marketing materials. Furthermore, the RIA did not retain books and records to substantiate the performance illustrated in the chart.

In addition, the SEC charged that the RIA’s misleading marketing materials, as well as its deficient books and records, were caused in part by the firm’s inadequate compliance program. The RIA had no written policies and procedures relating to the review of marketing materials or the advertisement of performance returns. Although the RIA had implemented a written policy regarding accepting gifts, it conflicted with statements made in marketing materials.

The SEC determined that the RIA violated several sections of the Investment Advisers Act and its rules. The enforcement action can be found at https://www.sec.gov/litigation/admin/2017/ia-4647.pdf.

Les Abromovitz