Dear Valued Client,

We recently settled a dispute with the SEC regarding certain discrepancies in the back-tested performance of our Tactical Rotation Index from 2000 to 2010.

Before we launched our index in 2010, we hired a reputable third-party index provider to calculate the hypothetical performance over the prior decade.  Unfortunately, as described in more detail in the order, the SEC determined that the back-tested calculation contained three types of error.

  • Most of the errors related to the failure to apply our model rules appropriately in certain months. The SEC concluded that we failed to oversee the work of the index provider.
  • The SEC also determined that our back-tested calculation should have mimicked our post-launch calculation more closely. Our live period calculation used month-end prices for trading, but generated signals for those trades two days earlier.  The back-tested calculation only used month-end closing prices.
  • In addition, the SEC believed that we should have disclosed the use of the Goldman Sachs Commodity Index (GSCI) in calculating the performance of one of our asset classes for a portion of the back-tested period. The SEC did not attribute any significant impact to the use of the GSCI index.

These failures resulted in both understatements and overstatements during the back-tested period, but overall inflated advertised performance.  That said, the SEC acknowledged that our corrected back-tested performance still exceeded benchmarks and provided down-side protection.  The advertising errors did not impact the actual performance of your investment in the strategy.

We are committed to compliance.  As soon as we learned of the potential issues, we removed the inaccurate back-tested calculations from our advertisements.  Before the SEC issued its order, we also hired a new compliance firm.  The SEC credited our cooperation and our corrective actions.  Going forward, we will be working with our new compliance firm to enhance our processes and improve our disclosures.

We welcome the opportunity to discuss any of these issues with you.  Thank you for your continued support and trust.

Sterling Global Strategies


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