Asset Manager Fined $1.9 Million over Hypothetical Back-Tested Performance
The SEC fined a large asset manager $1.9 Million for failing to fully disclose that it used hypothetical back-tested performance data in advertisements. The SEC asserts that the respondent claimed that it could prove back to 1995 that its stock strategy combining fundamental and quantitative research outperformed either approach alone. Although the firm labeled such research as “hypothetical,” the SEC faults the firm for failing to disclose that its research was based on back-tested quantitative ratings for a time period before it generated its own quantitative models or research. Using the longer period helped boost the claimed outperformance. The outperformance data was used in marketing to institutional investors, RFP responses, and a white paper. The SEC also criticizes the compliance program because compliance personnel that reviewed the materials were not informed that the materials included back-tested data.
OUR TAKE: Do not market hypothetical, backtested performance. No amount of disclosure can ever insulate you from the SEC’s retrospective criticisms and analysis that you cherry-picked time periods or data. Also, compli-pros should note that marketing materials delivered solely to institutional investors are subject to the same rules as more widely-distributed marketing materials (with a few exceptions such as allowing presentation of gross performance together with net performance).