Former robo-advisor Emperor Investments has been censured and hit with a $25,000 civil penalty for telling customers it had beat the markets for 11 years when in fact it was only two years old and underperformed, the SEC said.

The firm ran afoul of the Securities and Exchange Commission with its website, which claimed that “Emperor portfolios have been able to outperform the market over the past 11 years.” The claim, however, was based on modeled returns, the SEC said. In fact, Emperor had been in operation for less than two years, during which time it underperformed the market, the SEC said in its administrative and cease-and-desist proceedings against the firm.

In addition, Emperor paid bloggers—a significant source of Emperor’s new clients—for referrals without disclosing the paid relationship to clients as required by law, the agency said.

Emperor settled the charges without admitting or denying guilt.

“Emperor’s dissemination of false and misleading advertising and marketing materials and performance data, along with its failure to comply with requirements concerning the payment of bloggers for client referrals, was caused, in part, by its ineffective compliance program,” the SEC said in its order.

Throughout its operation, from June 2018 until October 2019, the Delaware-based, Canada-headquartered robo-advisor worked with customers who were all based in America. Emperor terminated its registration with the SEC and ceased operations at the end October 2019 after previously reporting it had $621,000 in assets, the SEC said.

The case provides insight into the red flags the SEC is looking for with all registered advisor marketing and advertising. Emperor’s website stated that it had achieved an “average annual return of 16.86%” but that was misleading for two reasons, the agency said. 

“First, based on its own calculation, Emperor’s return was 5.03% during its period of actual operation, which it did not advertise. Second, Emperor’s purported average annual return of 16.86% was based on modeled testing, which used historical market data and implied Emperor began its operations in 2007 rather than 2018, which allowed the firm to project a hypothetical return, without disclosing that this performance was not actual and was based on modeled application of an investment strategy,” according to the SEC.

The agency also found it misleading that Emperor’s website stated, “Emperor's technology has been tested for 11 years and has outperformed our closest competitor since inception.”

The SEC also found that Emperor’s statement “misleadingly compared its modeled performance to the actual, 11-year performance of another unnamed robo-adviser. Emperor identified this unnamed robo-adviser as its closest competitor despite a significant difference in their respective assets under management,” the agency said.

Emperor also paid approximately $3,400 to bloggers for referring new clients and an additional approximately $12,500 for blogger reviews. The bloggers would often place an Emperor hyperlink in or near a favorable blog post about Emperor, the SEC said.

“Emperor made these payments based on the amount of assets deposited in new accounts from client referrals without the disclosure and documentation required under the Cash Solicitation Rule. Under that rule, Emperor was required to have a written solicitation agreement with the bloggers to whom it made cash payments for soliciting clients, to require that the bloggers provide certain disclosures to solicited clients, and to receive written acknowledgement of receipt of these disclosure documents by the solicited client when entering into any written or oral investment advisory contract. Emperor did not fulfill these requirements in conjunction with the referral program,” the SEC said.

The agency said that Emperor “willfully violated” the Advisers Act, which prohibits an investment advisor from engaging in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.”

The SEC noted that Emperor’s civil penalty of $25,000 was not higher because the firm “cooperated with the staff by providing timely, voluntary narrative responses to the questions posed by staff. Emperor met with the staff on multiple occasions and provided detailed factual summaries of relevant information. Emperor was extremely prompt and responsive in addressing staff inquiries. In addition, Emperor repaid fees to investors.”