February 2, 1989
TO: INVESTMENT ADVISER MEMBERS NO. 7-89
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 7-89
RE: SEC SANCTIONS ADVISER FOR VIOLATIONS OF PERFORMANCE
ADVERTISING RULES
__________________________________________________________
On December 27, 1988, the Securities and Exchange
Commission brought proceedings against an investment adviser for
violations of, among other things, a recent position taken by the
Division of Investment Management concerning the investment
adviser performance advertising rule. A copy of the
administrative proceeding is attached.
According to the SEC order, the adviser provided a market
timing service for its clients. The SEC order states that the
adviser (1) published advertisements that failed to disclose that
the application of the adviser's timing signals to hypothetical
investments in certain mutual fund combinations produced
substantially different and, except for one fund, lower
performance results than had been advertised; (2) advertised that
the total gain and the compounded annual gain of a hypothetical
investment in an unnamed mutual fund with the adviser's
conversion signals applied were greater than they actually were;
and (3) inaccurately advertised that the performance of a
hypothetical investment in an unnamed mutual fund with the
adviser's timing signals applied was superior to the performances
of other indices to which this hypothetical investment's
performance was compared.
Moreover, the SEC's order stated that the adviser willfully
violated Rule 206(4)-1(a)(5) by directly and indirectly
publishing, circulating or distributing an advertisement that was
misleading because the adviser failed to deduct advisory fees
when computing and displaying the adviser's investment
performance. (For additional discussion of this issue, see
Memorandum to Investment Adviser Members No. 42-88 and Investment
Adviser Associate Members No. 43-88, dated October 3, 1988.)
Robert L. Bunnen, Jr.
Assistant General Counsel
Attachment