The financial advice industry is among the most highly regulated in the country. At times, the advice business can seem like a never-ending struggle to satisfy demanding bureaucrats.
In some cases, the actions of regulators can seem heavy-handed, arbitrary and even unfair. Recently, a group of asset managers and securities firms were fined a total of $2.2 million by the Securities and Exchange Commission.
Their offense? They accepted at face value the performance claims of the now-defunct
investment firm, F-Squared. Those claims, for the firm's AlphaSector strategy, were based on back-testing and not actual historic performance. The firm claimed the strategy, which was for exchange-traded funds, had outperformed the S&P 500 Index for several years.
In assessing the recent fines, which ranged from $100,000 to $500,000 for each of the 13 firms, the SEC didn't say the firms had any advance knowledge that the claims were anything but legitimate. But the agency argued the firms were negligent for not sufficiently vetting F-Squared's inflated track record.
“When an investment adviser echoes another firm's performance claims in its own advertisements, it must verify the information first, rather than merely accept it as fact,” Andrew Ceresney, director of the
SEC's Enforcement Division, said in a statement.
While some may argue that the fines in this case seemed harsh, especially when there was no apparent intent on the part of these firms to deceive anyone, the punishment was justified. The clients who were led astray by these firms were not paying F-Squared for advice, they were relying on the advice of the asset managers and securities firms they employed. If the firms decided to take shortcuts — and in this case it certainly seems like they did — they should be held accountable.
CASE FOR DUE DILIGENCE
If nothing else, the case should be a reminder to everyone in the advice business to conduct as much due diligence as possible on every product or service they offer and advertise to the investing public. That's because one day they, too, may be questioned by the SEC — and they'd better have the right answers and proof to back up their claims.
(Related read: Industry, adviser groups raise concerns about SEC's business continuity proposal )
