SEC sues asset managers for using untested, error-filled quantitative investment models

Abstract

Purpose

To explain actions the US Securities and Exchange Commission (SEC) brought on August 27, 2018, against a group of affiliated investment advisers and broker-dealers for what the SEC considered misleading and insufficient representations and disclosures, insufficient compliance policies and procedures, and insufficient research and oversight concerning the use of faulty quantitative models to manage certain client accounts.

Design/methodology/approach

Explains the SEC’s findings concerning the advisers’ and broker-dealers’ failure to confirm that certain models worked as intended, to disclose the risks associated with the use of those models, to disclose the role of a research analyst in developing the models, to disclose the use of volatility overlays along with the associated risks, to determine whether a fund’s holdings were sufficient to support a consistent dividend payout without a return of capital, and to take sufficient steps to confirm the advertised performance of another investment manager whose products they were marketing. Provides insight into the SEC’s position and offers key takeaways.

Findings

These cases are significant for advisers who use quantitative models to implement their investment strategies in the management of client accounts and signal the SEC’s continued focus on investment advisers’ compliance with disclosure obligations to discretionary account investors.

Practical implications

Each manager should consider its own facts and circumstances, and should consult with counsel, in assessing how and to what extent to incorporate the SEC’s conclusions in crafting disclosure and other communications with investors on matters such as adequate representations, testing and validation of models, disclosure of errors, and verifying performance claims.

Originality/value

Practical guidance from experienced securities lawyers.

Citation

Cohen, W.E., Marshall, R.D., Yacker, A.C. and Zinman, L.A. (2019), "SEC sues asset managers for using untested, error-filled quantitative investment models", Journal of Investment Compliance, Vol. 20 No. 1, pp. 44-46. https://doi.org/10.1108/JOIC-01-2019-0004