A California-based registered investment advisory (RIA) firm, Atlas Financial Advisors, has agreed to pay $175,000 to settle allegations that it violated the Securities and Exchange Commission (SEC)’s marketing rule.
The SEC accuses the firm of making false and misleading claims about the performance of its investment strategies, including using hypothetical results derived from backtested market data that predated the implementation of the strategy in question.
Atlas, headquartered in Oroville, Calif., manages $106 million in assets according to its most recent Form ADV regulatory filing. While the firm has neither admitted to nor denied the SEC’s findings, it agreed to the settlement to resolve the matter. Atlas did not immediately respond to requests for comment on the settlement.
The case highlights growing SEC enforcement actions under the marketing rule, which was adopted in December 2020. Registered investment advisors were required to comply with the rule starting November 2022. This regulation modernized advertising guidelines for investment advisors, allowing features such as endorsements and testimonials, but maintained strict standards for truthfulness and accuracy in marketing.
The SEC alleges that Atlas used backtested data to promote an investment strategy called Portfolio Shield, which misrepresented its historical performance. The firm also claimed that its performance metrics were “verified by Morningstar” and that Morningstar provided monthly detailed reports on the strategy. However, the SEC states that Morningstar did not verify Atlas’ calculations nor issue reports on Portfolio Shield. Instead, an Atlas employee used a Morningstar software tool to generate hypothetical performance data that the firm then advertised.
Additionally, the SEC contends that the model portfolios used to showcase the Portfolio Shield strategy did not adhere to the advertised investment formulas. According to the settlement order, Atlas falsely claimed that Portfolio Shield “at all times” invested in exchange-traded funds (ETFs) that employed a “systematic options overlay.” In reality, the SEC asserts that since the marketing rule’s compliance date, Portfolio Shield strategies neither utilized options overlays nor invested in ETFs with such features.
The SEC’s marketing rule permits the use of hypothetical performance data in advertisements under strict conditions, requiring appropriate disclosures and relevance to the financial situation of the intended audience. However, hypothetical performance data cannot be included in general marketing materials meant for a broad audience. According to the SEC, Atlas violated this provision by publishing hypothetical performance data on its public website without the required context and disclosures.
Furthermore, the SEC states that Atlas presented gross hypothetical performance figures instead of the net performance data required by the marketing rule. This omission could mislead prospective clients about the potential returns of the firm’s strategies after accounting for fees and expenses.
The SEC’s enforcement action underscores the importance of compliance with the marketing rule, which emphasizes transparency and accuracy in advertising. Advisors must ensure that claims about investment performance, particularly those involving hypothetical data, are truthful, properly disclosed, and aligned with the marketing rule’s requirements. The Atlas settlement serves as a cautionary tale for RIAs navigating these updated regulations.
For wealth advisors and RIAs, this case underscores the need to prioritize compliance when presenting performance data and other marketing materials. Firms should routinely review their advertising practices to ensure alignment with regulatory expectations and avoid the risk of enforcement actions.
