• Skip to primary navigation
  • Skip to main content
Logo
Open search bar
  • About
    • Todd Cipperman
    • Why Choose Us
  • Services
    • Money Managers
    • Registered Funds
    • Private Equity
    • Broker-Dealers
    • CyberSecure - Funds
  • In The News
  • Outsourced CCO
  • Client Engagement
  • Resources
    • Helpful Information
    • Regulatory Exams
    • Executive Interviews
    • Blog
    • Podcasts & Videos
    • Best Practices
  • Contact Us

Our Take Blog

Home
Our Take Blog
Wrap Program Exec Barred from Industry for Using Hypothetical Backtested Performance

Wrap Program Exec Barred from Industry for Using Hypothetical Backtested Performance

The head of a firm’s mutual fund wrap group was barred from the industry for marketing misleading hypothetical backtested data that inflated model performance.  The SEC charges that the firm used hypothetical backtested data without sufficient records to support performance it claimed exceeded the S&P 500 index.   The SEC also says the firm grafted prior hypothetical performance onto later audited composite performance, thereby making an inference of long-term performance that exceeded the index.  Although the firm did indicate that the older performance was not audited or actual, the SEC claims that the firm violated the securities laws by failing to keep records justifying the hypothetical backtested performance, calling such performance “historical”, and failing to disclose the limitations.  The SEC charged the respondent with aiding and abetting violations of the Advisers Act’s antifraud rules because as a “representative of registered investment advisers”, the respondent “owed a duty to exercise the utmost good faith in dealing with clients, a duty to disclose all material facts, a duty to employ reasonable care to avoid misleading clients, and a duty to disclose all conflicts of interest.”
OUR TAKE: Don’t use hypothetical backtested data.  Although the practice is not explicitly prohibited, the staff has consistently charged that firms do not have sufficient data to support performance claims.  Also noteworthy is the SEC asserting that investment adviser representatives, and not just their firms, have a duty of full disclosure.

http://www.sec.gov/litigation/admin/2013/34-69816.pdf

Back to Top
logo
480 E. Swedesford Road, Suite 220, Wayne, PA 19087
610-687-5320
LinkedIn Twitter
© 2020 Marlivia Properties LLC