Firm Charged Over $2 Million for False and Misleading Statements
SEC Releases
Introduction
An RIA was charged on June 30th for false and misleading statements made to investors.
As the SEC continues its main goal of protecting investors and ensuring fair markets, Firms that mislead their investors about risks and conflicts of interests are likely to face penalties.
While the regulatory storm of the previous five years has calmed, investigations and enforcements have continued forward.
What Was Discovered?
According to the SEC:
- An options trading strategy was created for multiple Funds managed by the RIA over two years.
- Investors were told that their risk profile from daily loses was “consistent” from day to day, and that the strategy had research and testing that mitigated risk.
- The strategy generated income by using margins to sell out-of-the money options on S&P 500 futures contracts.
- While this strategy had risks, the investors were given reassurance despite models showing that loss exposure equaled or exceeded the entire value of the Fund on an almost daily basis for two years.
- During one particularly volatile day for the markets, the Fund had over $1 billion in trading losses.
- While the Company Officers were enjoined and given civil penalties totaling $700,000, disgorgements were also ordered for a total of over $2 million with almost $1 million in interest.
Vigilant’s Conclusion
Firms may be tempted to minimize their discussion of risks in regulatory documents and marketing materials, especially when they believe their strategy has a high chance of success.
However, failing to account for risks of a strategy, especially when disclosing and discussing these risks with investors, can cause significant liability for Advisers if significant losses occur.
This is why it is important to have an efficient yet thorough Marketing Review Process that allows compliance professionals to make objective assessments of the claims being made about your strategies.
Reach out to us today to discuss how you can mitigate regulatory risk in your disclosures and marketing materials.