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SEC Fines Investment Adviser for False/Misleading Advertising

Saturday, April 21, 2018

Pursuant to an order issued April 16, 2018, the SEC (“Commission”) has fined registered Investment Adviser Arlington Capital Management, Inc. (“Arlington”) $125,000 for making false and misleading advertisements in violation the Investment Advisor’s Ac to 1940.

During the time period at issue, Arlington utilized a variety of model portfolios under the banner of Arlington’s “Proactive Asset Allocation Strategy” (“PAAS”). Arlington’s computer models used proprietary indicators which Arlington regularly adjusted in light of past results–as the SEC’s order notes, “each new iteration of the PAAS model was implemented in order to improve return or reduce volatility based on back-tested historical results.”

Unfortunately, at the same time that Arlington sought to improve the accuracy of its model based on historical data, the firm also advertised “hypothetical” model performance, not based on the actual performance results but rather the results of historic data being filtered through the firm’s hind-sight-adjusted model. Thus, Arlington’s performance advertising reflected the performance that would have resulted if the firm’s hindsight-adjusted models had been in place during the historical time frame in reference (though of course, they were not). Moreover, according to the SEC, “in all [emphasis added] advertisements, Arlington failed to disclose that the represented performance results were derived using models that had been adjusted over the years with the benefit of hindsight.”

Arlington disseminated advertising in a variety of formats– in PowerPoint presentations, on Arlington’s website, and in weekly updates provided through audio, video, or print media. According to the SEC, “some of the advertisements did not disclose that the performance results were based on hypothetical, back-tested portfolios.” Additionally, though “Some advertisements did disclose that the results were hypothetical and the result of back-testing, but in the case of print advertisements, these disclosures lacked prominence and clarity and were in a much smaller typeface that was difficult to read and/or appeared at the end of the advertisement rather than on the same page as the performance data.”

Section 206(2) of the Adviser Act prohibits an Adviser from engaging “in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” Further, section 206(4) of the Advisers Act both prohibits Advisers engaging in “any act, practice, or course of business which is fraudulent, deceptive, or manipulative,” and authorizes the SEC to make rules enforcing the section’s prohibitions. SEC Rule 206(4)-1(a)(5), specifically, governs advertisements by investment advisers.

Importantly, though the SEC did order Arlington to pay $125,000 civil penalty as a result of the firm’s violations of the above named statutes/rules, the Commission also took into consideration the remedial efforts undertaken by the firm, in conjunction with its newly hired compliance consultant, when “determining to accept the Offer” of settlement submitted by Arlington. Please click here to read the complete order.

Whether you are just getting started or attempting to clean up your act, our advertising specialists at Red Oak can review your advertising materials for compliance with the Advisers Act and other applicable rules. If you need any assistance with your advertising review or any help implementing written policies and procedures that will adequately address your advertising compliance needs, please call us at 888.302.4594 or email us at sales@redoakcompliance.com, and we will be happy to assist.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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