Though SEC scrutiny of performance results in fund marketing materials is nothing new, a recent settlement order suggests that the Commission continues to closely examine representations in marketing materials with respect to past investment performance.

Old Ironsides Energy, LLC, a Boston-based registered investment adviser, agreed to pay a $1 million penalty to settle SEC charges alleging a material misstatement in its fund marketing materials. In particular, the adviser’s marketing materials allegedly “identified a large, legacy investment with strong, positive returns as an early stage direct drilling investment” (“DDI”) over which the adviser “had direct management in partnership with project operators, when it was actually an investment in a private fund advised by a third party.”

According to the SEC order, the adviser’s marketing materials stated that the fund in question “would only invest in DDIs” and two other types of investments, and that “investments in other private funds would not be part of the investment strategy.” The marketing materials allegedly defined DDIs, in relevant part, as “direct investments in oil and gas leases and wells.”

The adviser’s marketing materials also purportedly provided a “track record” for the adviser’s “legacy portfolio,” a portfolio of oil and gas investments that the advisers’ principals had managed for a previous employer. The track record allegedly listed among early stage DDIs an investment “that was managed by a third-party” unaffiliated with the adviser and therefore “did not meet the marketing materials’ definition of a DDI.” The investment had an ROI of 10.9x, the highest of any early stage DDI in the adviser’s legacy portfolio. The materials allegedly “omitted information regarding how the investment’s fund structure and the role of the third-party adviser differed” from the others in the track record.

According to the SEC order, “the marketing materials’ omission was significant for several reasons, including that the returns on the private fund investment improved the performance for Legacy Portfolio DDIs, and the marketing materials provided that [the fund] would invest in DDIs and stand-alone private equity investments, but not in other private funds.” Although the settlement order only hinted at it, it can be inferred that the SEC viewed the mischaracterization of one profitable indirect investment (and thus including it in the adviser’s track record) while correctly characterizing others (and thus excluding them) as a form of cherry picking, allowing the adviser to boost its advertised performance. Though the settlement order observed that the adviser had a policy in place that prohibited the use of false or misleading performance results in fund marketing materials, the SEC found that the adviser had failed to implement it.

In addition to a $1 million civil penalty, the SEC order censured the adviser and required it to cease and desist violating Investment Advisers Act Section 206(4) and Rules 206(4)-1 and 206(4)-7 thereunder. In line with our previous guidance regarding marketing materials, this settlement serves as a potent reminder that, while advisers under certain circumstances and subject to certain requirements may use predecessor performance results in their marketing materials, advisers must ensure that all representations regarding past performance are completely accurate and do not omit material facts. Advisers and their chief compliance officers should also periodically review whether their personnel are following their policies and procedures.

We have added this order to our database tracking SEC enforcement actions involving private fund advisers, available here.

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Photo of Joshua M. Newville Joshua M. Newville

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and…

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and criminal investigations. In addition, Josh advises registered investment advisers and private fund managers on regulatory compliance, SEC exams, MNPI/insider trading and related risks.

Before joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry. His prior experience with the SEC provides a unique perspective to help asset managers manage risk and handle regulatory issues.

Photo of Adam L. Deming Adam L. Deming

Adam Deming is an associate in the Litigation Department and a member of the firm’s Appellate and Product Liability groups, and Asset Management Litigation team. He focuses on complex commercial litigation in federal and state courts, covering a broad spectrum of business disputes…

Adam Deming is an associate in the Litigation Department and a member of the firm’s Appellate and Product Liability groups, and Asset Management Litigation team. He focuses on complex commercial litigation in federal and state courts, covering a broad spectrum of business disputes touching on corporate governance, fiduciary obligations, financial services, securities and insolvency. Adam has also represented clients in appeals spanning various areas, including consumer products, life sciences, bankruptcy, labor relations, patent and constitutional law.

Prior to joining Proskauer, Adam served as a law clerk to the Honorable Patty Shwartz on the United States Court of Appeals for the Third Circuit. Adam was also an associate in the New York office of an international law firm. Adam graduated cum laude from the University of Pennsylvania Law School, where he was the managing editor of the Journal of Constitutional Law and an Arthur C. Littleton Fellow instructor in legal writing.  Before law school, Adam was a Teach for America Corps Member in New Orleans, Louisiana, where he taught middle school English for three years.