Risk & Compliance

Investment Advisers Fined Over F-Squared Ads

The SEC says 13 firms negligently relied on F-Squared's false performance claims about an ETF product in promoting it to their customers.
Matthew HellerAugust 26, 2016

The U.S. Securities and Exchange Commission has fined 13 investment advisory firms a total of $2.2 million for spreading the false performance claims made by the now-defunct F-Squared Investments about its flagship product.

F-Squared was one of the largest marketers of investment products using exchange-traded funds before it filed for bankruptcy last year. An SEC enforcement review found that the 13 firms repeated F-Squared’s false performance claims in emails to customers, including that its AlphaSector strategy for investing in ETFs had significantly outperformed the S&P 500 index from 2001 to 2008.

To settle the charges, the firms agreed to pay fines based on the fees each of them earned from AlphaSector-related strategies, with the $500,000 levied against AssetMark Inc. of Concord, Calif., being the largest.

“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 J. Ceresney, director of the SEC Enforcement Division, said in a news release. “These advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.”

AlphaSector is a customized model for allocating investors’ assets in ETFs, stocks and bonds. F-Squared launched its first AlphaSector index in October 2008 and ultimately sub-licensed about 75 indexes to asset management entities.

In December 2014, it agreed to pay $35 million to settle SEC charges that it defrauded investors through false performance advertising about AlphaSector.

According to the SEC, the ads disseminated by AssetMark and other investment firms failed to disclose that the AlphaSector track record for the period April 2001 to September 2008 was hypothetical and back-tested.

“The firms repeated many of F-Squared’s claims while recommending the investment to their own clients without obtaining sufficient documentation to substantiate the information being advertised,” the SEC said.

BB&T Securities, Banyan Partners, Hilliard Lyons, Ladenburg Thalmann Asset Management, and Shamrock Asset Management all agreed to pay fines of $200,000, while the other seven firms agreed to pay $100,000.