We at APX Stream have some longstanding roots in the compliance community.
Recently, we came across several anonymous threads from the Investment Advisors Forum Investment Advisors Forum in the National Society of Compliance Professionals website.
The discussion is eye-opening for any investment manager whose attitude towards their data distribution strategy is anything less than highly professional and strategic.
How Databases See Themselves
Investment Metrics describes itself, in part:
“… By leveraging our unique insights into global asset allocation trends, performance benchmarks, asset flows, plan sponsor and style universe performance, we power the global institutional investment community to make more informed, data-driven investment decisions.”
Similarly, eVestment describes itself:
“… eVestment brings transparency and efficiency to the global institutional market, equipping managers, investors and consultants to make data-driven decisions, deploy their resources more productively and ultimately realize better outcomes.”
To be blunt, each of these databases helps subscribers to make purchase decisions.
That’s marketing. No way around it.
How do the Compliance Folks see Data Distribution?
The answers in the post were interesting. One person observed (emphasis ours),
“Not all databases are created equal, and there is no hard and fast rule as to whether a database for the institutional marketplace constitutes advertising without a fact-specific analysis.
However, during our SEC review, the examiners made it clear that consultant databases would generally be considered advertising, especially if this was an avenue through which you obtained new clients.”
“During a recent SEC exam, the SEC staff asked about our advertising/marketing policies and procedures as it related to the consultant databases. Later they verbally commented that we should ensure that we are complying with these policies and that we should be monitoring the information that is view-able on these databases.
They all but said that the databases should be considered advertising.”
And What Does the SEC Care About?
Misleading advertising and marketing. Untruthful statements. Deceptive practices.
As you know, whether you intended to deceive or bamboozle is irrelevant to the SEC. The SEC is concerned with things as they are, not as they are intended.
Now, look at your data distribution practices.
Really look carefully.
How many data points contradict each other? In how many areas is your disclosure brief or nonexistent? In our experience, we see too many examples of discrepancies that will eventually catch the eye of the SEC, including:
Firm AUM and the sum of product AUM in discrepancy.
This is an ongoing project we’ve undertaken in conjunction with Investment Metrics. If a firm represents that they have $10 billion in AUM, but when we sum up the total reported AUM of their products, it only comes to $5 billion, there’s a 50% discrepancy.
Now, there are often legitimate reasons for such discrepancies. If you’re BlackRock or Merrill Lynch or Vanguard, regulators might not be all that interested, as firms this size have complex businesses that make such discrepancies unsurprising.
But you aren’t, in all likelihood, any of these firms. And because AUM is a datapoint that’s completely unverifiable externally, massive discrepancies will eventually draw the eye of the SEC. And if there’s other potentially deceptive issues with your data, you can count on an audit.
Reporting Gross Returns, and Not Net.
Fees, fees, fees. Claiming 8% annualized returns over 5 years sounds great, but if fees and charges aren’t included, well, that’s a different story. Report both numbers. It’s clearer, with greater transparency and honesty.
Data that’s not reconciled.
13.6% vs. 1.36%? As they say, this is a problem that’s self-evident.
Dodgy Personnel Descriptions.
“Tom Smith is our Portfolio manager.” “Tom Smith is our CFO.” “Tom Smith is our CCO.”
How many employees is that? In actuality, Tom Smith is one employee wearing too many hats. But to some firms, Tom Smith is 3 employees. That’s hugely problematic, as it goes directly to the firm’s ability to effectively manage investments, keep the firm’s operations humming along, and keep the firm out of compliance hell.
At the end…
In Star Wars: The Force Awakens, Han Solo says to Finn, “You got another problem... Women always figure out the truth. Always.”
o does the SEC.
And serious prospects.
It’s just easier to be honest, up front, and transparent about who you are, what you do, how well you do it, and why.