SEC Continues Its Pursuit of Firms That Licensed F‑Squared Indices

In yet another reminder that fund managers must be scrupulously accurate when making performance claims – and must perform appropriate due diligence when using the track records of third-party advisers – the SEC recently commenced an enforcement action against an investment adviser and its principal (collectively, the Defendants). The SEC’s complaint alleges that the Defendants breached their fiduciary duties and committed fraud by using materially misleading marketing materials created by F‑Squared Investments, Inc. (F‑Squared) for F‑Squared’s “AlphaSector” strategies. Worse, the SEC claims that the Defendants continued to use those materials after the investment adviser’s principal learned that the materials contained fraudulent performance claims, and later sold the business to avoid potential liability for advertising a fraudulent track record. This article summarizes the complaint. For other enforcement actions stemming from third-party advisers licensing F‑Squared’s products, see “SEC Settlements Highlight Need for Managers to Verify Performance Claims of Others Prior to Use” (Sep. 22, 2016); and “Hedge Fund Managers May Be Liable for Performance Claims of Others” (Mar. 3, 2016).

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