Adviser Accused of Stretching the Truth on AUM Calculation 

The SEC has commenced enforcement proceedings against an investment adviser for inflating assets under management and investment returns and then lying to SEC Enforcement investigators about how it arrived at the inflated AUM figure.  According to the SEC, the respondent claimed over $2 Billion in AUM so that it could be highly ranked in Barron’s and then used its ranking for marketing.  The respondent also touted the AUM in a radio show.  To substantiate the claims, the respondent claimed that the firm managed cash of three companies with which the principal had a relationship.  The SEC could not verify any significant advisory relationship after contacting the purported clients.  The SEC argues that the “[i]nformal and uncompensated conversations about what entities might want to do with assets (which are not held in any account serviced by the brokerage or advisory firm) cannot meaningfully be described as the management of those assets.”

OUR TAKE: While the calculation of AUM can be subjective, firms should not count uncompensated assets and undocumented services for assets held outside any brokerage account related to the adviser.  Also, advisers must understand that private statements or responses made with the understanding that the recipient will disseminate that information constitute advertisements under the Advisers Act.  Finally, don’t lie to SEC Enforcement investigators.