SEC Announces $16.5 Million Fine Related to Use of Subadviser Performance

November 20, 2015

On November 16, the U.S. Securities and Exchange Commission (“SEC”) announced that an investment adviser agreed to pay $16.5 million to settle charges that it made false performance claims by negligently relying on performance provided by a subadviser. According to the SEC, the adviser advertised the subadviser’s substantially overstated performance track record to mutual fund investors and others, without performing the appropriate due diligence to validate the performance provided by the subadviser. The SEC also noted that the adviser did not have the books and records to support the advertised performance.

Many firms have subadviser relationships in which client assets are allocated to other managers and performance of those assets is obtained directly from the subadvisers. While using performance provided by subadvisers is a common practice, an adviser using a subadviser’s performance should conduct appropriate due diligence on that performance to substantiate the accuracy of the information provided by the subadviser. The adviser also must maintain books and records to support the performance information. When advertising performance — whether its own or performance provided by a subadviser — the adviser is still responsible for meeting all performance advertising requirements, which include, among other things, the ability to support the reported track record.

In light of the SEC's continued scrutiny of performance returns, ACA recommends that firms perform a detailed review of the calculation methodologies and procedures supporting the performance provided by subadvisers or other third parties, to ensure that such methodologies align with the disclosures accompanying the subadviser’s reported performance. In addition, firms must ensure they have books and records to support such performance.

ACA offers Focused Performance Reviews to assist firms in validating investment performance. The Focused Performance Review includes a review of the appropriateness of the calculation methodologies underlying investment performance, the adequacy of supporting books and records, and the completeness of accompanying disclosures. The Focused Performance Review helps firms prepare for regulatory scrutiny by strengthening the tools used to demonstrate global capabilities across strategies and the controls in place to govern how performance is produced.

If you have questions on the SEC’s recent performance-related enforcement case, or would like more information on our Focused Performance Reviews, please contact:

Karen Foley
Managing Director
ACA Performance Services
(212) 951-1030
kfoley@acacompliancegroup.com