SEC bars, fines advisory owner for misrepresenting GIPS compliance
By Stuart Gittleman, Compliance Complete
NEW YORK, June 3, 2014 (Thomson Reuters Accelus) -
Tuesday’s ruling, by SEC administrative law judge Cameron Elliot, may be the first formal SEC sanction against an adviser or an associated person for misrepresenting its compliance with GIPS, which is voluntary, although the SEC has sanctioned a firm that also invented a client with large investments with the firm. The SEC has warned that its examiners will focus on disclosures over fees, expenses and performance.
GIPS, which is published by the CFA Institute and is considered an advisory industry best practice, includes guidance for the calculation and reporting of investment performance results to prospective clients, as well as specific guidelines for performance advertisements that claim GIPS compliance, the judge said.
The SEC case against the owner, Max E. Zavanelli, and ZPR Investment Management, Inc., his firm, echoes allegations that Zavanelli settled in August 1987 without an admission or denial of liability. When the SEC filed similar charges last April, Zavanelli said he would vigorously defend himself and his firm. In addition to barring Zavanelli, who was also ZPR’s chief compliance officer during some of the relevant time, Elliot ordered him to pay $660,000 — the maximum first-tier fine for each of 11 misrepresentations in SmartMoney and Barron’s advertisements, ZPR newsletters or Morningstar reports.
Judge Elliot also fined ZPR $250,000, finding that its failings included not telling Morningstar the SEC was investigating its disclosures, and ordered Zavanelli and ZPR to cease and desist from violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-1(a)(5).
Judge Elliot found that Zavanelli wanted more institutional investments and that GIPS compliance “has become almost mandatory” for obtaining these investors. Although third-party verification of GIPS compliance has become “almost mandatory” for firms making this claim, Zavanelli continued making this claim even after he stopped using the third-party service he had previously used.
GIPS guidance broadly defines an “advertisement” to include, among other things, the firm’s website and any writing, except one-on-one presentations and individual client reports, that is distributed to retain or solicit clients. Ads claiming GIPS compliance must use standardized language to make the claim and must disclose whether performance returns are gross or net of fees, among other things.
GIPS requires ads that claim compliance and present performance results to present period-to-date composite results; and composite results for one, three and five-year annualized composite returns with the end-of-period date clearly identified; or five years of annual composite returns, or both.
Elliot found that several of the magazine ads did not include, among other things, period to date returns that would have revealed that the composite was increasingly underperforming its benchmark.
Lawyers representing Zavanelli and ZPR did not respond to a request for comment on the ruling, which they or the SEC Enforcement Division can appeal to the SEC, or the SEC can review on its own.
(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)