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.