## Facts

- Van Kampen Investment Advisory Corp. (a registered investment adviser) served as adviser to the Van Kampen Growth Fund, a newly formed mutual fund series.
- In 1996, the fund’s first full calendar year, it invested primarily “seed” capital provided by affiliates and reported a 61.99% total return, receiving a top category ranking from a third-party rating service.
- Alan Sachtleben, the adviser’s Chief Investment Officer for Equity Investments, initiated a study showing that a substantial portion of the fund’s 1996 return was attributable to purchases of “hot” initial public offerings (IPOs).
- Sachtleben did not provide the study’s results to the fund’s board of trustees when the board met in January 1997 to review performance and approve a public offering, and he also did not share the information with certain senior officers of the adviser and the fund’s distributor.
- The fund’s distributor circulated marketing materials touting the 61.99% return and top ranking without disclosing the material contribution of hot IPO allocations.
- The fund’s prospectus and a semiannual report filed with the SEC likewise omitted disclosure that hot IPOs materially affected the reported performance.
- The fund opened to the public on February 3, 1997; by March 14, 1997, it raised about $109 million and its net assets increased from roughly $1.1 million to $110.1 million.
- The SEC instituted an administrative proceeding resolved by offer of settlement, with respondents consenting to findings and relief without admitting or denying most findings.

## Issues

1. Whether an investment adviser’s nondisclosure that exceptional performance was materially driven by hot IPO allocations constitutes a fraudulent or deceptive practice under Investment Advisers Act § 206(2).
2. Whether a mutual fund’s prospectus, SEC-filed report, and performance advertising that present returns and rankings while omitting the material role of hot IPOs contain materially misleading omissions under Investment Company Act § 34(b).
3. Whether the adviser and its CIO breached disclosure-related duties to the fund and its board by withholding performance-attribution information relevant to approving a public offering and marketing the fund.

## Decision

- The SEC found that Van Kampen Investment Advisory Corp. willfully violated Advisers Act § 206(2) and Investment Company Act § 34(b) by failing to disclose to the board and investors that hot IPOs materially contributed to the fund’s 1996 performance while permitting performance promotion without that context.
- The SEC found that Sachtleben caused and aided and abetted the violations by initiating and receiving the hot-IPO attribution study and failing to communicate its results to the board and relevant senior management before the public offering and related disclosures.
- The SEC ordered both respondents to cease and desist from present and future violations of Advisers Act § 206(2) and Investment Company Act § 34(b).
- The SEC imposed remedial sanctions, including civil penalties and compliance-related undertakings directed to performance advertising and disclosure controls.

## Legal Principles

- Advisers Act § 206(2) reaches an adviser’s course of conduct that operates as a fraud or deceit on a fund client or prospective investors, including omissions of material facts needed for full and fair disclosure.
- Under Investment Company Act § 34(b), disclosures can be materially misleading even when performance figures are numerically accurate, if omitted context is necessary to prevent the presentation from misleading investors.
- When past performance is materially affected by non-scalable or non-repeatable factors (such as allocations to hot IPOs in a seed account), failure to disclose that fact can be material to board and investor decision-making.
- Personnel with access to material performance-attribution information may be liable for causing and aiding-and-abetting violations when their nondisclosure contributes to misleading board presentations, SEC filings, or advertising.

## Conclusion

The SEC concluded that promoting a mutual fund’s exceptional seed-period performance and rankings without disclosing the material role of hot IPO allocations—and withholding that information from the fund’s board—constituted actionable misleading omissions under Advisers Act § 206(2) and Investment Company Act § 34(b), warranting cease-and-desist relief and sanctions.


In re Van Kampen Inv. Advisory Corp., Inv. Co. Act Rel. No. 23996 (SEC Sept. 8, 1999)