SEC Settles with Adviser and Its Principal over Misleading Mutual Fund and Advisory Services Advertisements in Newsletters and on Websites

by Goodwin
Contact

The SEC settled public administrative proceedings against Navigator Money Management (the “Adviser”), a registered investment adviser, and its principal, Mark A. Grimaldi (the “Principal”), over advertisements in newsletters and on websites making claims about the success of the Principal’s investment advice and of a mutual fund the Principal managed (the “Fund”).  This article provides a high-level summary of the SEC’s detailed findings as set forth in the settlement order (the “Order”), which the Adviser and its Principal (together, the “Respondents”) have neither admitted nor denied.

Background

The Principal is the president, chief compliance officer, and majority owner of the Adviser which reported $115 million in “regulatory assets under management” in its most recent Form ADV and has approximately 600 advisory clients.  The Principal manages both the Adviser’s individual client accounts and the Fund.  The Principal also is the majority owner of the entity that published the Newsletters.  The Principal controls the content of the newsletters which are used to solicit clients for the Adviser and to solicit investors in the Fund.  The model portfolios described in the Newsletters are used to manage the Adviser’s client accounts.

Fund Advertisements

The Order found that the Adviser and its Principal made materially misleading statements concerning the Fund in Newsletter articles by (i) quoting the hypothetical performance of a similarly named model portfolio as the Fund’s; (ii) attributing performance of the aforementioned model portfolio to the Principal during a period when the Principal had no involvement with the model portfolio; and (iii) quoting the Fund’s relative Morningstar ranking in a way that omitted periods for which it had poorer relative performance; (iv) using a substantially inflated Morningstar ranking for the Fund; and (v) encouraging readers to invest in the Fund as way of achieving  investment results like those of the Adviser’s similarly named model portfolio at a time when the Fund and model portfolio “held very different securities.”

The SEC also found that certain advertisements for the Funds did not comply with the standardized performance presentation requirements of Rules 482(d) and 482(g) under the Securities Act of 1933, under which advertisements containing performance data must include the average annual total return, the “length of and the last day of the period for which performance is measured,” and must be “as of the most recent practicable date.”  The Order noted that in 2008, in connection with an examination, the SEC examination staff had notified the Adviser that the Newsletters could be considered advertisements for purposes of Rule 482.  

Model Portfolio Advertisements

The SEC found that the Adviser and the Principal made several materially misleading statements concerning certain model portfolios in the Newsletters, on a related website and in the Adviser’s Twitter account.  The Newsletters and website included a chart that with (1) a statement regarding the success of the Principal’s growth model relative to the S&P 500 for a period that included several years prior to the Principal’s involvement with the model portfolio and (2) incorrect claims that the two models shown in the chart had outperformed the S&P 500 in 2009.  The SEC also found that the Principal made misleading claims regarding the performance of another model relative to the S&P 500 on the Adviser’s Twitter account because the claim related to a period that included several years prior to the time the Principal became involved with the model.

Past Specific Recommendations

The SEC found that mentions of the Adviser’s prior securities recommendations in the Newsletters and on a related website violated Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”) governing advertisements by registered investment advisers.  Rule 206(4)-1(a)(2) makes it unlawful for an investment adviser to “publish, circulate, or distribute any advertisement which refers, directly or indirectly, to past specific recommendations of such investment adviser which were or would have been profitable to any person” unless certain conditions are met.  The SEC found that the Adviser did not meet the following conditions under the Rule for presenting past recommendations: (i) the Adviser did not provide a list of all recommendations by the Adviser within the past year with the name of the security and market prices, and (ii) the mentions of past recommendations were not accompanied by a legend stating: “it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.”  The SEC cited examples of mentions by the Adviser of successful past specific recommendations that were misleading because the Adviser failed to mention unsuccessful recommendations during the preceding year.

The Order noted that in 2008, in connection with an examination, the SEC examination staff had notified the Adviser that the Newsletters could be considered advertisements for purposes of Rule 206(4)-1.

Morningstar Claims

The SEC found that claims made in the Newsletters, on related websites, and in emails to potential Fund investors regarding a Morningstar ranking for the Adviser were materially misleading because: (i) Morningstar rates mutual funds, not investment advisers; and (ii) since February 2009, the Adviser had not been, as claimed, the investment manager of a mutual fund with a Morningstar five star rating.  The Order observed that in 2012 Morningstar notified the Principal that these claims were inaccurate and unauthorized.

Inadequate Policies Governing Advertisements

The SEC found that the Adviser’s written policies and procedures were not reasonably designed or implemented to ensure that the Newsletters and other advertisements and communications provided to prospective and existing investors did not contain any false or misleading information. The Order observed that the Adviser’s policies and procedures concerning advertisements “simply parroted” Rule 206(4)-1 and were not “specifically tailored to prevent advertisements in newsletters, client correspondence, or other communications with clients (e.g., Twitter or websites) from violating the Commission’s rules for advertisements by investment advisers or mutual funds.”

Violations

The SEC found the Adviser willfully violated, and the Principal willfully violated, aided and abetted and caused the Adviser’s violations of:

  • Section 17(a) of the Securities Act of 1933, which in general terms prohibits fraud and misrepresentations in the offer or sale of securities;
  • Sections 206(1) and 206(2) of the Advisers Act which generally prohibit fraudulent and deceptive practices by investment advisers;
  • Section 206(4) of the Advisers Act and, and Rule 206(4)-8 thereunder, which generally prohibit fraudulent and deceptive practices by investment advisers with respect to any investor or prospective investor in a pooled investment vehicle;
  • Rules 206(4)-1(a)(2) under the Advisers Act relating to past specific recommendations in advertisements by registered investment advisers; and
  • Rule 206(4)-1(a)(5) under the Advisers Act, which generally prohibits false and misleading advertisements by registered investment advisers.

The SEC also found that the Adviser and the Principal violated Section 34(b) of the Investment Company Act of 1940 (the “1940 Act”), which prohibits any person from making material misstatements in any record, such as investment company advertisements, required to be kept under the 1940 Act, because Rule 34b-1 under the 1940 Act deems any advertisement that omits information specified by Rules 482(d) and 482(g) to be materially misleading.

The SEC further found that the Adviser violated Rule 206(4)-7 under the Advisers Act, which governs registered investment adviser compliance programs.

Sanctions

The Principal agreed to pay a civil penalty of $100,000.  In addition to censure and a cease-and-desist order, the Respondents agreed to (1) establish internal procedures and controls reasonably designed to ensure the accuracy of representations regarding the Adviser, the Adviser’s recommendations and the Fund and (2) engage an independent compliance consultant.  In addition, the Respondents agreed to (a) mail or email a copy of the Adviser’s Form ADV, which incorporates the SEC’s findings in the Order, to each of the Adviser’s existing advisory clients, and post the entire Order on the homepage of the Adviser’s website and (b) post prominently on the home page of each website the text of the SEC’s litigation release concerning the Order, with a hyperlink to the entire Order, and maintain the posting and hyperlink on their websites for a period of twelve months from the entry of the Order.

In determining to accept the settlement, the SEC considered certain remedial acts undertaken by the Respondents.

In the Matter of Navigator Money Management, Inc. and Mark A. Grimaldi, SEC Rel. No. 33-9521 (January 30, 2014).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Goodwin | Attorney Advertising

Written by:

Goodwin
Contact
more
less

Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.