SEC playing hardball with managers fudging on RFPs

WASHINGTON — The SEC is cracking down on investment advisers that misrepresent their records in responses to requests for proposals from pension funds and other institutional investors.

Industry analysts said the crackdown — demonstrated by settlement agreements in a pair of recent SEC enforcement actions — makes clear that all written communications from investment advisers are now subject to SEC scrutiny.

"So any time you put something in writing, it's fair game for the SEC to come in and look at it," said David Tittsworth, executive director of the Investment Adviser Association, Washington.

In the first case, the SEC announced on May 9 that it had agreed to settle a variety of charges against Hutchens Investment Management Inc., a Concord, N.H.-based quantitative value equity manager that the SEC said had $200 million in assets under management. Among the SEC's charges was that Hutchens misstated its asset turnover rate — derived by dividing the purchases or sales of securities, whichever is smaller, by the average value of portfolio securities — in responses to RFPs from prospective clients.

Separately, on June 6, the SEC announced it had agreed to settle charges against CapitalWorks Investment Partners LLC, San Diego, a convertible bond manager the SEC said had $736 million in assets under management.

The SEC had charged that CapitalWorks had failed to notify potential and existing clients in responses to RFPs and other communications that it had been cited for deficiencies in a previous SEC action. Those deficiencies were "related to CapitalWorks' advertising, marketing and performance, custody of client assets, assignment of advisory contracts and internal controls," according to the SEC. In addition, the agency said CapitalWorks didn't adopt written procedures to comply with the Investment Advisors Act. The firm is the first cited in an SEC enforcement action for violating the written procedure compliance rule, government attorneys said.

As part of their settlements of the cases, each company was fined $40,000, with a top principal from each firm required to pay another $25,000. In addition, the firms agreed to hire independent consultants to ensure compliance with SEC regulations.

"Since the SEC began its investigation more than four years ago, we have worked tirelessly to ensure that all compliance issues have been addressed and that our firm is well-positioned for the future in today's increasingly complex regulatory environment. We feel that it is in the best interest of our clients and our company to put this matter behind us," according to a statement from Hutchens.

Mark J. Correnti, CapitalWorks' director of client service and marketing, did not return repeated telephone calls seeking comment.

Kathryn B. McGrath, an attorney for the law firm of Mayer, Brown, Rowe & Maw LLP, Washington, said the cases demonstrated that the SEC believes responses to RFPs must meet the same standards of truthfulness that advertisements and official adviser reports must meet.

"They (the SEC) got on them, not just for defrauding prospective clients but for failing to have compliance policies and procedures in place," Ms. McGrath said.

Gene Gohlke, associate director of the SEC's Office of Compliance Inspections and Examinations, said the cases underscored that advisers should provide truthful information in marketing materials.

"It stands for the proposition that advisers ought to make sure that they're conducting a good risk analysis and developing policies to address the compliance risks that are present in their business," Mr. Gohlke said.