The Securities and Exchange Commission has charged Atlas Financial Advisors, an Oroville, Calif.-based registered investment advisor with about $106 million in client assets, for violations of its marketing rule and books and records provision. It’s the latest in several enforcement actions in the last year related to the marketing rule that took effect in 2021.
The SEC’s order found Atlas advertised its “Portfolio Shield” investment strategies with false and misleading statements about their hypothetical performance, according to the regulators’ claims.
The SEC found Morningstar did not verify nor validate the strategies’ hypothetical performance despite Atlas’s claims that it did. Instead, an Atlas employee used a Morningstar software tool to calculate the hypothetical performance.
The regulator also says that Atlas failed to disclose the fact that the performance was calculated from model portfolios that did not “consistently follow the strategies’ advertised investment formulas.” They were advertised as “formula-based” strategies that involved investments in a distinct set of ETFs. But the model portfolios that it used to calculate the hypothetical performance included ETFs that were not disclosed as potential investments.
In addition, Atlas advertised gross but not net hypothetical performance to mass audiences without the proper policies and procedures.
Further, the SEC found a staff member violated the RIA’s own compliance requirement to conduct client business before personally trading the same or similar securities.
Atlas has agreed to a cease-and-desist order, a censure and a civil penalty of $175,000. The firm will review and update its policies and procedures to ensure its ads comply with the marketing rule.
Atlas representatives did not return a request for comment prior to publication.
The SEC’s updated ad rule was passed in late 2020, with a compliance deadline of late 2022. The rule clarified how firms could use testimonials and endorsements in advertising and the kind of performance metrics firms could use in marketing materials; it particularly curtailed how registrants could use hypothetical performance in ads.
The commission settled its first ad-rule-related charges in August 2023, accusing Titan Global Capital Management of making misleading statements about hypothetical performance metrics related to its crypto strategy.
The commission has continued to settle with firms in fits and starts, including nine RIAs that paid more than $1.2 million to settle charges last September. The fined firms included Integrated Advisors Network, Richard Bernstein Advisors and Abacus Planning Group, paying $325,000, $295,000 and $150,000, respectively (the other six firms are paying five-digit penalties).
To date, the SEC has unveiled three risk alerts related to the marketing rule; the most recent release in April indicated SEC examiners continued to find violations, including advisors who falsely claimed they were “free of all conflicts."
