New RIA Owners Liable for Pre-Acquisition Misconduct
An investment adviser was fined and censured for the pre-acquisition conduct of the firm’s former principal that included misleading advertising. According to the SEC, the former principal used hypothetical backtested performance to claim that the firm’s investment models would have outperformed. The SEC asserts that he never disclosed that the models did not exist during the time periods displayed. Although the respondent purchased the firm in 2012 and the former principal no longer works at the firm, the SEC fined the firm $100,000 and required it to send the enforcement order to its clients.
OUR TAKE: Acquisitions do not wash away pre-transaction regulatory liabilities even if the former perpetrators are no longer employed. Firms must conduct deep-dive due diligence to make sure they don’t buy liability. Also, we remind firms not to market with hypothetical, back-tested performance data.