Articles Tagged with Marketing

On December 21, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Hedgeable, Inc., a registered investment adviser.  Hedgeable utilizes a “robo adviser” program, which it offers to individuals, small business owners, trusts, corporations, and partnerships through both its website and social media.  The SEC’s Order alleges that from about 2016 through April 2017, Hedgeable made various misleading statements in advertising and performance data.  Hedgeable submitted an offer of settlement in order to resolve the proceeding.

According to the Order, Hedgeable launched a so-called “Robo-Index” to present comparisons of its performance against that of two unaffiliated robo advisers.  These comparisons were featured on both Hedgeable’s website and various social media sites.  The SEC found that Hedgeable’s method of preparing the Robo-Index had significant material issues.  For example, the SEC found that data from 2014 and 2015 only featured data from a small pool of Hedgeable client accounts and excluded over 1,000 other client accounts.  The SEC alleged that, because of the small sample sizes, the data likely reflected “survivorship bias,” stemming from the fact that the sample size likely only contained clients who received higher than average returns compared to Hedgeable’s other clients.  The SEC also determined that Hedgeable’s calculation methods did not correctly estimate expected returns for a standard client of the other two robo advisers.  Hedgeable allegedly produced the data in the Robo-Index using estimations of the other robo advisers’ trading models rather than using the robo advisers’ actual models. Continue reading

The F-Squared Investments matter continues to have far-reaching consequences for those investment advisers who used F-Squared’s falsely inflated and improperly labeled backtested performance results in advertisements. As discussed previously, in November of 2015 Virtus Investment Advisers was fined $16.5 million for including the false and misleading performance results in its own advertisements and filings with the Securities Exchange Commission (“SEC”). More recently, the SEC charged Cantella & Co. (“Cantella”), a Boston-based investment adviser that licensed F-Squared’s Alpha Sector strategy, with securities violations for employing F-Squared’s false track record in its marketing materials.

F-Squared is an investment adviser that creates and markets index products using exchange-traded funds (“ETFs”). It sub-licenses these indexes to various unaffiliated investment advisers who manage assets pursuant to those indexes. In 2014 F-Squared admitted in a settled SEC administrative proceeding that it had materially misrepresented the performance results of its largest ETF strategy, AlphaSector, by labeling these results as actual results from a seven-year period when they were in fact hypothetical results derived through backtesting. In addition, F-Squared claimed that the strategy had outperformed the S&P 500 Index from 2001 to 2008 when in fact the hypothetical data contained a calculation error that falsely inflated results by 350 percent. F-Squared agreed to pay disgorgement of $30 million and a penalty of $5 million to settle the claim.

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Earlier this month, the Securities and Exchange Commission (SEC) filed a civil lawsuit against four individuals who are alleged to have defrauded seniors through so-called “Free Dinner” investment seminars conducted by their investment adviser firm.  The SEC alleged that Joseph Andrew Paul and John D. Ellis, Jr., who managed and jointly owned Paul-Ellis Investment Associates, LLC (PEIA), created materially false and fraudulent marketing material in order to induce Florida residents to attend the “Free Dinner” seminar.  More specifically, the SEC alleged that the marketing materials included performance return statistics that were not consistent with the actual track record of the firm, but rather had been copied and pasted from another advisory firm’s website.

The individuals were also alleged to have recruited James S. Quay of Atlanta, Georgia and Donald H. Ellison of Palm Beach, Florida, who allegedly used the false material to mislead seniors who responded to the “Free Dinner” invitation.  The SEC further alleges that Mr. Quay used an alias, Stephen Jameson in order to conceal his true identity.  Mr. Quay was previously involved and was held liable in an enforcement action brought by the SEC in 2012.  Before that, Quay was an active sales agent in a multi-million dollar Ponzi scheme operated by an attorney in Atlanta, Georgia. According to the SEC, Quay was also convicted of tax fraud in 2005.

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More and more brokers and investment advisers are becoming familiar with the applicable social media regulations, including those described in FINRA Regulatory Notice 10-06, to put into place procedures that permit the wide use of social media for marketing purposes. These social media sites are proving an invaluable way to create and build client relationships, referral networks and other marketing opportunities. While this guidance was welcomed by firms, much of FINRA’s guidance is proving incomplete, as broker-dealers struggle to find ways, for example, to implement procedures to comply with FINRA’s record-keeping and other requirements.

Subject firms wishing to employ greater social media need to make sure that they follow FINRA’s requirements and those of the Exchange Act, the Investment Adviser’s Act and applicable state law. The most important factor is, of course, full, accurate, fair, complete and honest disclosures particularly on those pages that are permanent as opposed to transient messages. As FINRA made clear, all social media records, even Tweets and Facebook wall postings, must be maintained by the firm as part of their supervision. Additionally, a firm needs to set a written social media policy and follow the policy thoroughly.

From a compliance standpoint, for entities subject to FINRA rules, it is important to realize that blog posts, websites, banner ads, bulletin boards and static content on social media sites are considered advertisements under Rule 2210 and thus subject to the detailed requirements of that rule, including principal review or approval prior to posting for publication. This includes profile, background and wall information.
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