SEC Fines Adviser for Misleading Clients on Faith-Based Investment Strategy
February 16, 2022
In an ESG-related enforcement case that signals more to come, the SEC has settled charges against a New York-based digital adviser that was found to have misled retail investors in connection with its claims that it provides investment advisory services in compliance with Shari’ah law. The adviser offered an automated trading platform that claimed it would purchase only Shari’ah compliant securities for its clients based on their self-identified risk tolerance. In an example of the SEC’s insistence that advisers “say what you do and do what you say” in the ESG context, the SEC charged that the adviser had failed to adopt and implement written policies and procedures reasonably designed to address its Shari’ah advisory decision-making processes and compliance reviews and oversight. Despite representations to clients, the adviser “had no written policies and procedures addressing how it would assure Shari’ah compliance on an ongoing basis or how it would calculate and report the purification of unpure income.”
The adviser was also found to have misrepresented to existing and prospective clients that it offered proprietary Shari’ah-compliant funds when no such funds existed. It represented to clients that it would “continuously monitor and periodically rebalance” their accounts, but, according to the SEC, it had no rebalancing policy and did not conduct a periodic rebalancing. In addition, the SEC charged that the adviser failed to disclose conflicts related to the launch of an affiliated ETF for which it used funds from its discretionary sale of clients’ equity securities to seed the ETF. According to the order, the adviser failed to adopt and implement written policies and procedures with respect to its marketing materials, selection and inclusion of its proprietary ETFs in its client portfolios, and the full and fair disclosure of related conflicts.
The adviser was found to have violated the Advertising Rule, the Compliance Program Rule, and antifraud provisions and was ordered to pay a fine of $300,000 and retain an independent compliance consultant to review and report on its remedial efforts.